M/S VIJAYA BANK ,BANGALORE vs. ADDITIONAL COMMISSIONER OF INCOME TAX LTU , BANGALORE

O R D E R Per: Laxmi Prasad Sahu, A.M.

These are cross appeals filed by the assessee and Revenue against the order of the CIT(A)-14, Bengaluru dated 31.12.2018 for AY 2015-16.

2. The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 912,36,87,935/- u/s 36(1)(vii) being the non-rural write off by the bank.

3. The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 565,92,40,708/- u/s 36(1)(viia).

4. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance of Rs. 58,30,00,000/- u/s 36(1)(viii).

5. The learned Commissioner of Income Tax (Appeals) erred in holding that Rs. 1,38,11,847/- paid to NPCI is in the nature of technical and managerial service covered u/s 194J of the Income Tax Act.

6. The learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs 5,16,000/- paid to RBI.

7. The learned Commissioner of Income Tax (Appeals) erred in holding that provisions of Section 115JB are applicable to the bank.

2. The Ld. CIT(A) held in law in confirming the method of calculation adopted by the assessee in computing the eligible quantum of provision for bad debts u/s 36(l)(viia) relating to rural advances. 2.1 The Ld. CIT(A) erred in failing to appreciate that the phrase in Rule 6ABA(a)-'the amounts of advances made by each rural branch as outstanding at the end of the last day of each month' signifies that the eligible quantum should necessarily relate to 'fresh / incremental advances' of rural branches. 2.2 The Ld. CIT(A) erred in failing to read the words 'advances made' and 'outstanding at the end of the last day of each month' in conjunction. 23 The Ld. CIT(A) failed to appreciate that by accepting the computation of the assessee, the same sums of rural advances, finding a place in the opening value at the start of the year or repeatedly considered for deduction u/s 36(l)(viia).

3. The Ld. CIT(A) erred in law in confirming that the assessee is eligible for provision for depreciation on investments with regard to HTM Category.

3.1 The Ld. CIT(A) failed to appreciate that directive provided by the CBDT Instruction No. 17 dated 26.11.2008 (F No. 228/3/2008-ITA-lll) which held that 'investment classified under HTM category need not be marked to mark and are to be carried at acquisition cost'. 3.2 The Ld. CIT(A) failed to appreciate the guidelines issued by RBI which holds that diminution of value of investment in HTM Category cannot be allowed.

4. The Ld. CIT(A) erred in law in failing to uphold the disallowance u/s 14A r.w.r Rule 8D. 4.1 The Ld. CIT(A) erred in law to accept the computation of disallowance adopted by the assessee, which is redundant consequent to the insertion of Rule 8D from A.Y. 2008-09 onwards. 4.2 The Ld. CIT(A) failed to appreciate the latest decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. reported in (2018) 91 taxmann.com 154(SC), wherein it was held that even in case of stock-in-trade, tax free income should result in disallowance u/s 14A to the extent attributable and proportionate to the quantum of tax-free income. 4.3 The Ld.CIT(A) erred in failing to take cognizance of the essential finding of the Hon'ble Supreme Court in the case of Maxopp Investments Ltd (supra) which overruled the decision of the Punjab & Haryana High Court in the case of State Bank of Patiala reported in (2017) 78 taxmann.com 3 to hold that the test of dominant intention applied by P& H High Court are to be discarded.

5. For those and other reasons that may be adduced at the time of hearing, it is humbly pleaded that the Order of CIT(A) be set aside and that of the Assessing Officer be restored and thus render justice.”

5. Aggrieved by the above order, the assessee filed appeal before the CIT(A). The CIT(A) granted partial relief to the assessee vide order dated 31.12.2018.

6. Aggrieved by the above order of the CIT(A) both assessee and Revenue are in appeal before the Tribunal on the above mentioned grounds.

8. Ground No. 1 is general in nature and requires no adjudication.

9. Ground No. 2 relates to disallowance of bad debts written off under Section 36(1)(vii) of the Act. The facts are that the assessee has claimed a sum of Rs.14.96 crores as bad debts written off in the computation of income u/s. 36(1)(vii) of the Act. It was noticed from the P&L account that nowhere the bad debt was debited. As per the P&L account the assessee bank has debited a sum of Rs.819.62 crores as provisions and contingencies which included provision for NPA of Rs.800.22 crores. The entire provisions and contingencies were added back while computing the income. In the computation of income, the assessee has claimed bad debts written off of a sum of Rs.712,36,87,935 and claimed as deduction u/s. 36(1)(vii) as under:-

(i) Deduction u/s. 36(1)(vii) for bad debt written off Rs.791.20 crores Less: Amount written off by rural branches in respect of which deduction u/s. 36(1)(viia) was claimed in earlier years Rs. 63.87 crores ---------------------- Bad debts write off Rs.727.32 crores (ii) Deduction u/s. 37(1)(vii) in respect of Rs.200.00 crores new advances

Provision for NPA debited into P&L account Rs.791.20 crores

Bad debt write off u/s. 36(1)(vii) claimed in Computation of income Rs. 14.96 crores

Provision for bad and doubtful debts u/s. 36(1)(viia) Rs.519.90 crores

“1. The alleged claim of bad debts written off is nothing but prudential write off by the bank as per RBI circular and disclosure norms.

2. There is no actual write off of bad debts as irrecoverable as the same is provision for NPA created as per RBI guidelines and the adjustments are taking place only in balance sheet and it was claimed in different version i.e. write off of non rural provisions / prudential write off /head office write off etc.

4. The alleged bad debt written off of Rs. 727,32,96,587/- was not debited into the P&L account, as 'bad debts written off' except for an amount of Rs. 14,96,08,652/-, and rather it was the adjustment taken place at balance sheet. It was prudential write off.

7. It is a clear cut case of double deduction on the provision of NPA i.e. once u/s 36(1)(viia) and further u/s 36(1)(vii) of the IT Act by making incorrect submissions.”

13. On appeal, the CIT(A) upheld the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.

15. After going through entire material placed before us, we notice that similar issue has been decided by the coordinate bench of the Tribunal in assessee’s own case for AY 2014-15 (supra) and held as under: -

“11. The assessee had claimed Rs.282,18,79,407/- as bad debts written off in the computation. The AO rejected the claim of the assessee to the extent of Rs.279,60,53,018/- on the ground that – i) Accounting entries merely represented disclosure as per RBI guidelines. ii) Bad debts written off was not debited to P&L account iii) As the bad debt had not exceeded the credit balance of provision created in earlier years u/s 36(1)(viia), no deduction can be allowed as per the provisions of the Act.

12. The assessee made a detailed submissions before the CIT(A) in the appeal filed against the order of the AO contending that since sec. 36(1)(viia) applies to rural advances, it is only the rural debts which has to be adjusted against the provision allowed. The assessee further submitted that insertion of Explanation 2 to sec. 37(1)(vii) has not been changed the legal position in this case.

14. Aggrieved by the order of the CIT(A), the assessee has raised the issue before us.

16. We have heard the rival submissions and perused the materials on record. We noticed that the coordinate bench of this Tribunal in assessee’s own case (Supra) has held that “9.3 We heard the parties and perused the record. We notice that the co-ordinate bench has considered an identical issue in the assessee’s own case for AY 2010-11 in ITA No.1284/Bang/2016 dated 05-01-2018 and it has been decided in favour of the assessee with the following observations:- “5. Ground No.2 - Bad Debts written off u/s.36(1)(vii) 5.1 In this ground (supra), the assessee challenges the disallowance of bad debts written off by it u/s.36(1)(vii) of the Act. In the order of assessment, the Assessing Officer disallowed the assessee's claim as he was of the view that it was only a prudential write off since the individual accounts were not squared off. The Assessing Officer also observed that the write off was not debited to the assessee's profit and loss account. On appeal, the learned CIT (Appeals) rejected the assessee's contentions that the said bad debts are written off by debit in the profit and loss account under the head 'Bad Debts Written Off Account' under the code 163301, as he was of the view that unless the individual debts are squared off, the entries in the books of account cannot be accepted as reliable. In coming to this finding the learned CIT (Appeals) relied on the decision of the Hon'ble Apex Court in the case of Southern Technologies Limited (2010) 320 ITR 577 (SC). 5.2.1 Before us, the learned Authorised Representative of the assessee submitted that the assessee bank has written off the debts by debiting the same to the 'Bad Debts Written Off Account' under the GL Code 163301 which is part of the profit and loss account and recoveries made in written off accounts are credited to the profit and loss account and offered to tax. According to the learned Authorised Representative, it is only in respect of accounts written off that the assessee bank can credit the recoveries to the profit and loss account and in the case of live accounts any recovery is credited to the debtors account. Therefore, the very fact that the recoveries are credited to the profit and loss account shows that the corresponding debts have been written off. It was submitted that the detailed accounting entries passed by the assessee bank with regard to the write off has been extracted at pages 31 and 32 of the order of assessment. The learned Authorised Representative drew the attention of the Bench to page 32 of the paper book in which the reconciliation of Gross Advances as per Branch Books and net advances as per Balance Sheet as on 31.3.2010 of the Bank has been carried out (placed at page 135 of the Annual Report for the year under consideration). It is submitted that the net advances as shown in the Balance Sheet tallies with the statement appearing at page 32 of the paper book, thereby establishing the fact that bad debts written off are reduced from the advances at the time of preparation of the Balance Sheet. The learned Authorised Representative also drew our attention to page 25 of the paper book, which is a part of Form 3CD wherein at clause 20, it is clearly mentioned that recoveries of Rs.91,89,44,840 made against bad debts written off have been credited to the profit and loss account and reduced form the advances in the Balance Sheet. In support of the assessee's claim for write off of bad debts, the learned Authorised Representative placed reliance on the decision of the Hon'ble Apex Court in the assessee's own case i.e. Vijaya Bank Vs. CIT (2010) 323 ITR 166 (SC).

5.2.2 The learned Authorised Representative contended that the reliance placed by the authorities below on the decision of the Hon'ble Apex Court in the case of Southern Technologies Limited (supra) is not applicable as the facts in this cited case are totally different. It is submitted that the cited decision has been noted by the Hon'ble Apex Court in the assessee's own case (supra) and after noticing the said decision, the Hon'ble Court held that the provision debited to profit and loss account and reduced from advances would amount to write off. 5.3 Per contra, the ld. CIT, DR placed reliance on the findings rendered by the authorities below on this issue. It was contended that since the assessee's bank had not closed the individual debtors accounts at the Branch Level, there cannot be any write off. 5.4 In rejoinder, the learned Authorised Representative for the assessee bank submitted that there is no requirement to close the individual debtors account at the branch books, as has been held by the Hon'ble Apex Court in the assessee's own case. In this regard, the learned Authorised Representative also placed reliance on the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2009- 10 in dt.22.7.2016. 5.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The facts on record indicate that the assessee bank has debited the bad debts written off to the account 'Bad Debts Written Off Account' (GL Code 163301) which is part of the profit and loss account and has reduced the write off from Gross Advances in the Balance Sheet. The authorities below disallowed the write off on the ground that the individual accounts are not squared off at the branch level. We find that this issue of write off has been settled by the Hon'ble Apex Court in the assessee's own case reported in 2010 (323 ITR 160) (SC), wherein at paras 8 & 9 thereof it was held as under : "8. Coming to the second question, we may reiterate that it is not in dispute that s. 36(1)(vii) of 1961 Act applies both to banking and non- banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the P&L a/c to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the AO is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee- bank to close each and every individual account of loans and advances or debtors as a precondition for claiming deduction under s. 36(1)(vii) of 1961 Act. This view has been taken by the AO because the AO apprehended that the assessee-bank might be taking the benefit of deduction under s. 36(1)(vii) of 1961 Act, twice over. [See order of CIT(A) at pp. 66, 67 and 72 of the paper book, which refers to the apprehensions of the AO]. In this context, it may be noted that there is no finding of the AO that the assessee had unauthorisedly claimed the benefit of deduction under s. 36(1)(vii), twice over. The order of the AO is based on an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of s. 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the AO to call for details of individual debtor's account if the AO has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed.

9. Before concluding, we may refer to an argument advanced on behalf of the Department. According to the Department, it is necessary to square off each individual account failing which there is likelihood of escapement of income from assessment. According to the Department, in cases where a borrower's account is written off by debiting P&L a/c and by crediting loans and advances or debtors accounts on the asset side of the balance sheet, then, as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the loans and advances account and not to the P&L a/c which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower's account individually, then the repaid amount in subsequent years will be credited to the P&L a/c on which the assessee-bank has to pay tax. Although, prima facie, this argument of the Department appears to be valid, on a deeper consideration, it is not so for three reasons. Firstly, the head office accounts clearly indicate, in the present case, that, on repayment in subsequent years, the amounts are duly offered for tax. Secondly, one has to keep in mind that, under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the P&L a/c of the head office, which is ultimately what matters, then, there would be a mismatch between the rural branch accounts and the head office accounts. Lastly, in any event, s. 41(4) of 1961 Act, inter alia, lays down that, where a deduction has been allowed in respect of a bad debt or a part thereof under s. 36(1)(vii) of 1961 Act, then, if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to be profits and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered. In the circumstances, we are of the view that the AO is sufficiently empowered to tax such subsequent repayments under s. 41(4) of 1961 Act and, consequently, there is no merit in the contention that, if the assessee succeeds, then it would result in escapement of income from assessment." & 1839/Bang/2018 Page 12 of 41 5.5.2 Respectfully following the aforesaid decision of the Hon'ble Apex Court in the assessee's own case reported in 323 ITR 166 (supra), we hold that the assessee bank is eligible to claim and be allowed write off of the bad debts u/s.36(1)(vii) of the Act and we therefore reverse and delete the disallowance made by the Assessing Officer in this regard. Consequently, Ground No.2 of the assessee's appeal is allowed.” 9.4 We notice that the Ld CIT(A) has followed the decision rendered by the coordinate bench in assessee’s own case and deleted the disallowance of bad debts u/s 36(1)(vii) of the Act. Accordingly we do not find any reason to interfere with his order passed on this issue”

17. Respectfully following the decision rendered by the coordinate bench in assessee’s own case, we allow the appeal in favour of the assessee. Accordingly, this ground of the assessee is allowed and the disallowance made u/s.36(1)(vii) is deleted.”

“7. We shall now take up the appeal filed by the assessee. The first issue urged by the assessee relates to the disallowance of bad debts claimed u/s 36(1)(vii) of the Act applying the proviso to sec. 36(1)(vii) of the Act to nonrural/urban advances also, while the contention of the assessee is that the proviso to sec.36(1)(vii) shall apply to rural advances only for categories of bank like that of the assessee, who has claimed deduction under clause (a) of sec. 36(1)(viia) of the Act.

7.1 The assessee claimed a sum of Rs.146.28 crores bad debts, which consisted of bad debts relating to rural branches Rs.1.12 crores and the non-rural branches Rs.145.16 crores. The AO noticed that the bad debts written off was not debited to Profit and Loss account. The AO also noticed that the new provision created during the year was Rs.210.54 crores, out of which the assessee had claimed a sum of Rs.112.19 crores as deduction u/s 36(1)(viia) of the Act. Accordingly, the AO took the view that the assessee is claiming deduction both u/s 36(1)(vii) and 36(1)(viia) of the Act. The assessee submitted that the bad debts claimed by it included prudential write off of Rs.134.86 crores. The AO expressed the view that the Prudential write off is not eligible for deduction u/s 36(1)(vii) of the Act, since it is not actual write off. He then relied upon the decision rendered by Hon’ble Supreme Court in the case of Southern Technologies vs. ACIT (352 ITR 577)(SC), wherein it was held that the mere making of provision for NPA cannot be considered as write off u/s 36(1)(vii) of the Act. He also relied upon the decision rendered by Hon’ble Kerala High Court in the case of CIT vs. Hotel Ambassador (2002)(253 ITR 430)(Ker), wherein it was held that the deduction u/s 36(1)(vii) of the Act only if the assessee debits the same into the accounts as irrecoverable. Accordingly, the AO took the view that the amount of bad debts claimed by the assessee was mere provision and not actual write off. Before the AO, the assessee had placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT (2010)(320 ITR 166 (SC)) to reiterate that it is entitled for deduction u/s 36(1)(vii) of the Act. The AO expressed the view that the issue considered by Hon’ble Supreme Court in the case of Vijaya Bank (supra) related to category of “Loss Assets”, which is required to be provided @ 100% of the outstanding amount. He further expressed the view that the Hon’ble Supreme Court did not consider the question viz., Whether the provision for non-performing assets created by the assessee bank by debiting P & L a/c and crediting the provision account would comply with the requirement of actual write off of ‘bad debts” as mentioned in sec. 36(1)(vii) of the Income tax Act? Accordingly, the AO held that the assessee cannot place reliance on the decision rendered by Hon’ble Supreme Court in the case of Vijaya Bank (supra). Accordingly the AO held that the amount of Rs.145.16 crores was mere prudential write off and hence not allowable as deduction. He also held that it is a clear case of double deduction, i.e., once u/s 36(1)(viia) and again u/s 36(1)(vii) of the Act. Accordingly he disallowed the claim of bad debts of Rs.145.16 crores relating to non- rural advances. 7.2 The Ld CIT(A) did not agree with the view expressed by AO. He followed his decision rendered in the earlier year in the assessee’s own case and held that the assessee’s case is covered by the decision rendered by Hon’ble Supreme Court in the case of Vijaya Bank 323 ITR 166. It is pertinent to note that in AY 2013-14, the Ld CIT(A) had held as under:- “6.5 Conclusion:- a) It seen that the write off at the branch (Rs.101.72 cr.) & HO level (Rs.90.65 cr) together amounting to Rs.192.37 crores was debited to Provision account (which is part of the accounts of the assessee) which has the effect of reducing the advances in the balance sheet. b) It is clear from the working of net advances and submissions that the assessee bank has not only debited provision a/c to the extent of bad debts, it simultaneously reduced the amount of loans and advances at the year end. In other words, the amount of loans and advances at the year end in the Balance sheet is shown as net of bad debts written off. We also notice that the revenue has not filed appeal challenging the above said decision of Ld CIT(A) and hence this view of Ld CIT(A) on this issue has attained finality. 7.3 The Ld CIT(A), however, proceeded to examine this aspect from another angle, i.e., he took the view that the AO has not examined the claim of write off ‘non-rural bad debts” of Rs.145.16 crores in terms of the proviso to sec. 36(1)(vii) read with 36(1)(viia) of the Act. Before Ld CIT(A), the assessee submitted that the “provision for bad and doubtful debts” (PBDD) allowed u/s 36(1)(viia) of the Act is related to rural debts only and hence, in terms of the proviso to sec. 36(1)(vii), only rural debts written off as bad should be adjusted against the PBDD allowed u/s 36(1)(viia) of the Act. However, the Ld CIT(A) expressed the view that the PBDD allowed u/s 36(1)(viia) of Act is applicable to both Rural and non-Rural debts. Accordingly, he held that the entire amount of bad debts written off (both rural and non- rural) should be first adjusted against the PBDD a/c allowed u/s 36(1)(viia) of the Act and only the excess should be allowed as deduction. He expressed the view that the decision rendered by Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012)(343 ITR 270)(SC) was rendered under the assumption that the banks would maintain separate PBDD a/c in respect of rural branches and non-rural branches and therefore it is possible to distinguish PBDD as one in respect of rural branches and non-rural branches. The Ld CIT(A) expressed the view that the claim of the bank that the provisions of sec. 36(1)(viia) are distinct and independent of sec. 36(1)(vii) is based on the old circular no. 258 dated 14.6.1979 issued in connection with old law. Accordingly the Ld CIT(A) held that the PBDD allowed u/s 36(1)(viia) of the Act is for single account since its introduction in 1985 and it is for all types of advances including rural advances. He also observed that the above said view has been clarified by Finance Act, 2013 by inserting Explanation 2 to sec 36(1)(vii) of the Act. Accordingly, the Ld CIT(A) held that the bad debts pertaining to non-rural advances should also be first adjusted against PBDD created u/s 36(1)(viia) of the Act. Accordingly, the Ld CIT(A) directed the assessee to furnish workings of PBDD a/c. As per the working so furnished, the opening credit balance as on 1.4.2013 in the PBDD account was shown at Rs.562.17 crores. Since it is more than the bad debts pertaining to non-rural branches of Rs.145.16 crores, the Ld CIT(A) held that the bad debts claim of non-rural branches is not allowable as deduction u/s 36(1)(vii) of the Act, as it does not exceed the Opening balance shown in PBDD a/c. 7.4 In AY 2013-14 also, the Ld CIT(A) had disallowed the claim made u/s 36(1)(vii) on identical reasons. However, the Tribunal has reversed the decision rendered by Ld CIT(A) by following the decision rendered by Hyderabad bench of Tribunal in the case of State Bank of Hyderabad vs. DCIT (ITA No.450/Hyd/2015, and 499/Hyd/2015 dated August 14, 2015). The relevant observations made by the Tribunal are extracted below:- “19. We have considered the rival submissions and perused the materials on record as well as the orders of revenue authorities. As could be seen from the finding of AO as well as ld. CIT(A), only reason for which claim of deduction for Rs. 209,07,50,831 representing actual write off of bad debts relating to non-rural advances u/s 36(1)(vii) was denied is, assessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds the provision made u/s 36(1)(viia). If we examine the facts of the present case in the context of aforesaid statutory provision, it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the actual deduction claimed u/s 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created u/s 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon'ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience. "26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent this mischief. The contention of the Revenue, in our opinion, was rightly rejected by the Special Bench of the Tribunal and it correctly held that the Board itself had recognized the position that a bank would be entitled to both the deductions. Further, it concluded that the proviso had been introduced to protect the Revenue, but it would be meaningless to invoke the same where there was no threat of double deduction.

as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(11(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said 1 proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii)." Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to non-rural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT (supra). Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to nonrural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to non-rural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A).” 5.4 Following the above said decision, we hold that the view expressed by Ld CIT(A) is not legally correct. Accordingly, we set aside the order passed by Ld CIT(A) with regard to his alternative decision, i.e., the view that the proviso to sec. 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also. Accordingly, we direct the AO to delete the disallowance of Rs.192.02 crores.” 7.5 The Ld A.R submitted that the Ld CIT(A) has rendered his decision by following his decision rendered in AY 2013-14 and earlier years. He submitted that Finance Act, 2013 has inserted “Explanation 2” in sec. 36(1)(vii) of the Act and the same reads as under:- “Explanation 2 – For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (via) and such account shall relate to all types of advances, including advances made by rural branches;” The Ld A.R submitted that the Ld CIT(A) has referred to the above said Explanation -2 in 6.13.2(viii) -Page 38 of his order and observed that the view taken by him in earlier years has been clarified in Explanation-2. Thus, according to Ld CIT(A) as well as by the revenue that the decision rendered by Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012)( 343 ITR 270) has been undone by the Parliament by inserting Explanation-2 in sec. 36(a)(vii) of the Act by Finance Act 2013. 7.6 The Ld A.R, however, contended that Explanation-2 has not changed the legal position for claiming deduction of bad debts written off u/s 36(1)(vii) and also claiming PBBD u/s 36(1)(viia) for banks having rural branches. According to Ld A.R, the assessee has claimed deduction towards PBDD under clause (a) of sec. 36(1)(viia) and it relates to the rural advances only. Hence the proviso to sec. 36(1)(vii) shall have bearing only on PBDD relating to rural advances only. Thus, according to Ld A.R, the bad debts written off relating to non- rural advances should be allowed independently u/s 36(1)(vii) of the Act without first adjusting the same against PBDD allowed under clause (a) of sec. 36(1)(viia) of the Act. 7.7 We heard the Ld D.R and perused the record. Now the core question that arises is whether the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and then the excess amount over and above the balance available in PBDD alone could be allowed as bad debts u/s 36(1)(vii) of the Act. 7.8 The provisions of sec. 36(1)(vii) allows deduction as under:- “36(1)(vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account under that clause. ……….. Explanation 2 – For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (via) and such account shall relate to all types of advances, including advances made by rural branches;” The provisions of sec.36(2)(v) are relevant here and it reads as under:- “(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply---- ……. (v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the ‘provision for bad and doubtful debts’ account made under that clause.” A combined reading of provisions of clause (vii) of sec.36(1), the proviso thereunder and clause (v) of sec.36(2) would show that (a) the bank should debit the actual bad debts written off by it to “PBDD a/c” (sec. 36(2)(v)) (b) the deduction u/s 36(2)(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the PBDD made under clause (viia) of sec.36(1). 7.9 The contention of the revenue is that the Explanation 2 has expanded the scope of the proviso to sec. 36(1)(vii) and hence the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and the excess amount alone can be allowed as deduction u/s 36(1)(vii) of the Act. According to revenue, the decision rendered by Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012)( 343 ITR 270). In the above said case, the Hon’ble Supreme Court has expressed the view that the provisions of sec. 36(1)(vii) and 36(1)(viia) allow separate deduction and they are independent provisions. The Supreme Court further held that the clause (viia)(a) applies only to rural advances. So the bad debts relating to non-rural advances need not be deducted against the PBDD allowed under clause (a) of sec.36(1)(viia) of the Act. The Hon’ble Supreme Court, inter alia, also observed as under:- “31 It was neither in dispute earlier nor is it disputed before us, that the assessee-bank is maintaining two separate accounts, one being a provision for bad and doubtful debts other than provision for bad debts in rural branches and another provision account for bad debts in rural branches for which separate accounts are maintained….” Referring to the above said observations, the revenue has taken the view that the Hon’ble Supreme Court has rendered its decision on the assumption that the banks would be maintaining two separate PBDD a/c, viz., one for rural branches and another one for non-rural branches. 7.10 It is possible that all banks may not be maintaining two separate accounts, as observed by the Hon’ble Supreme Court. Hence there was an apprehension in the minds of revenue with regard to the effect of the decision rendered by Hon’ble Supreme Court. For instance, if a particular bank is maintaining only a single PBDD a/c for the provision created u/s 36(1)(viia) of the Act and even if that bank is not having any rural branches, then it may try to avail the benefit of decision rendered by Hon’ble Supreme Court and may possibly contend that (i) the provision allowed u/s 36(1)(viia) shall apply only to rural branches. (ii) since it does not maintain two separate PBDD a/c for rural and non-rural advances, the bad debts relating non-rural branches need not be reduced from the PBDD a/c allowed u/s 36(1)(viia) in terms of sec. 36(2)(v) and the proviso to sec. 36(1)(vii) of the Act. However, the Ld A.R submitted before us that the Explanation 2 has been inserted in sec. 36(1)(vii) by Finance Act, 2013 (after the decision of Catholic Syrian Bank) to debar certain assessees to avail the interpretation given by Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra). 7.11 We have considered the arguments advanced by Ld A.R on this point. According to Ld A.R, if we closely analyse the provisions of sec. 36(1)(viia) of the Act, the intention of the Parliament in inserting Explanation -2 shall become clear. Accordingly, we analysed the provisions of sec.36(1)(viia) and notice that the said section allows deduction of PBDD to various types of assessees, viz., (i) Clause (a) of sec. 36(1)(viia) shall be applicable to a Scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. The quantum of deduction is 7.50% of Total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% of aggregate average advances made by the rural branches of such bank. (ii) Clause (b) of sec. 36(1)(viia) shall be applicable to a bank incorporated by or under the laws of a country outside India. The quantum of deduction is 5% of the total income (computed before making any deduction under this clause and Chapter VIA).

(iii) Clause (c) is applicable to a public financial institution or a State financial corporation or a State industrial investment corporation. The quantum of deduction is 5% of total income (computed before making any deduction under this clause and Chapter VIA). (iv) Clause (d) is applicable to Non-banking financial company from AY 2017-18. The Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra) has held that the PBDD allowed under clause (a) of Sec. 36(1)(viia) refers to ‘rural advances’ only. In fact the expression “rural branches” finds place in clause (a) only. It can be noticed that the reference to “rural branches” is not there in clause (b) to (d). Generally, the foreign banks may not have rural branches. However, such kind of banks, financial institutions, NBFC etc. are also eligible to claim deduction towards PBDD u/s 36(1)(viia) of the Act under clauses (b) to (d). In view of the decision rendered in the case of Catholic Syrian bank, it is possible that the assessees covered by clause (b) to (d) may contend that the bad debts written off by them need not be adjusted against PBDD allowed u/s 36(1)(viia) of the Act, since the bad debts relate to “non-rural debts”. Accordingly, we are of the view that the Explanation 2 has been inserted in order to bring the assesses covered by clauses (b) to (d) within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. Hence, in our view, advances given by rural and non-rural branches mentioned in Explanation 2 shall apply to the assesses covered by clause (b) to (d) of sec. 36(1)(viia) of the Act. 7.12 At this juncture, we may gainfully refer to the “MEMORANDUM EXPLAINING FINANCE BILL 2013”, which brings out the intention of the Parliament in inserting Explanation-2 in sec. 36(1)(vii) of the Act. It is extracted below:- “Clarification for amount to be eligible for deduction as bad debts in case of banks:- Under the existing provisions of section 36(1)(viia) of the Income-tax Act, in computing the business income of certain banks and financial institutions, deduction is allowable in respect of any provision for bad and doubtful debts made by such entities subject to certain limits specified therein. The limit specified under section 36(1)(viia)(a) of the Act restrict the claim of deduction for provision for bad and doubtful debts for certain banks (not incorporated outside India) and certain cooperative banks to 7.5% of gross total income (before deduction under this clause) of such banks and 10% of the aggregate average advance made by the rural branches of such banks. This limit is 5% of gross total income (before deduction under this clause) under sections

36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and certain financial institutions. Provisions of clause (vii) of section 36(1) of the Act provides for deduction for bad debt actually written off as irrecoverable in the books of account of the assessee. The proviso to this clause provides that for an assessee, to which section 36(1)(viia) of the Act applies, deduction under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1) (viia) of the Act. The provisions of section 36(1)(vii) of the Act are subject to the provisions of section 36(2) of the Act. The clause (v) of section 36(2) of the Act provides that the assessee, to which section 36(1)(viia) of the Act applies, should debit the amount of bad debt written off to the provision for bad and doubtful debts account made under section 36(1) (viia) of the Act. Therefore, the banks or financial institutions are entitled to claim deduction for bad debt actually written off under section 36(1)(vii) of the Act only to the extent it is in excess of the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act. However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances. Section 36(1)(viia) of the Act contains three sub-clauses, i.e. sub-clause (a), sub-clause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-clause (a) refers to rural advances whereas other sub-clauses do not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances. It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of section 36(1). In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and sub-section (2), it is proposed to insert an Explanation in clause (vii) of section 36(1) stating that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account as referred to therein is made in respect of provision for bad and doubtful debts under section 36(1)(viia) and such account relates to all types of advances, including advances made by rural branches. Therefore, for an assessee to which clause (viia) of section 36(1) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) without any distinction between rural advances and other advances. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. The CBDT has issued an Explanatory note to the Provisions of Finance Act, 2013 on 24.01.2014 in F No.142/24/2013 – TPC, wherein also the very same explanations have been given for introducing Explanation – 2 in Sec. 36(1)(vii) of the Act. The above said Memorandum and the Explanatory Note issued by the Government/CBDT supports our view. 7.13 Our view is further fortified by certain observations made by Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra). We may refer to paragraph 27 of the decision now:- “27. As per this proviso to clause (vii), the deduction on account of the actual write off of bad debts would be limited to the excess of the amount written off over the amount of the provision which had already been allowed under clause (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by clause (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia) applies. Indisputably, clause (viia)(a) applies only to rural advances.” It is pertinent to note that the Hon’ble Supreme Court has categorically held that clause (a) of sec. 36(1)(viia) applies to rural advances only. If the Parliament wanted to undo the above said interpretation given by the Hon’ble Supreme Court, it should have brought amendment in clause (a) to sec. 36(1)(viia) to make its intention clear that the clause (a) shall apply to both rural and non- rural advances. Since there is no such amendment, the interpretation given by Hon’ble Supreme Court that “clause (viia)(a) applies to rural advances only” shall remain intact. Explanation 2 inserted in sec. 36(1)(vii), in our view, does not override the above said interpretation given by Hon’ble Supreme Court. 7.14 In the Memorandum explaining the purpose of introducing Explanation -2 in Sec. 36(1)(vii), it has been acknowledged that only the clause (a) refers to “rural branches”. It has also been stated that the foreign banks do not have rural branches. The assesses covered by clause (b) to (d) may not be having rural branches. Hence, the memorandum explains as under with regard to the decision rendered by Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra):- “However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances.” Because of the interpretation so given by Hon’ble Supreme Court, as discussed earlier, there arose a necessity for the Parliament to clarify that the PBDD allowed u/s 36(1)(viia) shall apply to all types of advances including advances made by rural branches. However, as stated earlier, the clause (a) to sec.36(1)(viia) has been held to be applicable to rural advances only and this interpretation has not been overridden by any amendment. 7.15 As noticed earlier, the assessees covered by clauses (b) to (d) may not be having rural branches, but they would be getting the benefit of deduction of PBDD u/s 36(1)(viia) of the Act. Hence, in order to bring those assessees within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v), it was imperative for the Parliament to clarify the legal position and accordingly Explanation-2 has been inserted in sec. 36(1)(vii) of the Act. Accordingly, on the analysis of the provisions discussed above, we are of the view that the above said Explanation-2 shall operate (a) in respect of clause (a) of sec. 36(1)(viia) of the Act only to rural advances and (b) in respect of clauses (b) to (d), for advances given by both rural and non-rural branches. 7.16 In the instant case, the assessee has claimed deduction towards PBDD under clause (a) to sec. 36(1)(viia) of the Act, meaning thereby, the clause (a) is applicable to rural advances only as per the decision given by Hon’ble Supreme Court in the case of Catholic Syrian Bank. Hence the bad debts relating to non-rural branches are not required to be adjusted against PBDD allowed under clause (a) of sec. 36(1)(viia) of the Act in terms of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. 7.17 In view of the foregoing discussions, we are unable to agree with the view expressed by Ld CIT(A) on this issue. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the bad debts relating to non-rural branches u/s 36(1)(vii) of the Act without adjusting the same against the PBDD a/c, since the said PBDD a/c relates to rural advances only.”

GROUND No. 3 ( 3.1 to 3.2)

18. The appellant bank claimed Rs.58.30 crores as deduction u/s. 36(1)(viii). In this regard assessee was asked to substantiate and furnish the working of the deduction claimed. The assessee furnished the details of the working of the deduction claimed u/s. 36(1)(viii) as under:-

Calculation of Claim for deduction u/s 36(1)(viii) for the year ended 31.03.2015 3242,94,10,480 Interest earned from advances made to industrial, agricultural and infrastructure 2246,36,50,954 Less: Interest expenses (Average Advances in the eligible activities* cost of fund)

Net Interest Income 1045,58,86,092 Less: Operating expenses (Total Operating Expenses* Average advances 754,07,18,267 in the eligible business/Total deposits, advances and investment) Net Profit 291,51,67,825 20% of the above 58,30,33,565 Amount Transferred to Special Reserve 0

2015 Average 2014 31993,49,16,648 28392,66,68,138 30193,07,92,393 Advances in the eligible business Total Operating Expenses 1912,21,20,138 1689,55,33,076

126343,35,05,650 124296,15,93,370 125319,75,49,510 Deposit Advances 86695,86,33,471 81504,03,20,686 84099,94,77,079 Investment 44522,09,86,127 42858,38,47,884 43690,24,17,006 Non-fund Business 11818,60,47,816 11712,53,29,795 11765,56,88,806 Total 269379,91,73,064 260371,10,91,735 264875,51,32,401

20. The AO observed that the assessee has not transferred any amount to special reserve in terms of section 36(1)(viii) of the Act during the year. Creation and maintenance of such special reserve is mandatory condition to avail the deduction. He also observed that deduction is allowed only to some specified entities and it is not an allowance towards expenditure but it is an incentive towards promoting long term finance for industrial or agricultural development, development of infrastructure facility in India and development of housing in India. He further noted that in the earlier year the assessee had transferred into special reserve account as per section 36(1)(viii), accordingly the deduction was allowed. He further noticed that the creation and maintenance of such reserve is also essential to monitor the satisfaction of other conditions regarding aggregate of the amount carried to such reserve account from time to time not exceeding twice the amount of the paid up share capital and general reserve. Accordingly, he noted that assessee has not transferred any amount into the special reserve account for claiming deduction u/s. 36(1)(viii). The AO also having gone through the case law relied by the ld. AR, but did not accept the same and made addition to the total income of the assessee.

21. On appeal before the CIT(A), the assessee reiterated the submissions made before the AO and relied on the judgment of coordinate Bench of ITAT Hyderabad in the case of Nizamabad District Central Co-op. Bank Ltd. v ITO. The ld. CIT(A) examined the issue in detail in the light of provisions of section 36(1)(viii) of the Act and noted that nothing has been brought on record to show that the amount transferred into statutory reserve and capital reserve have been created and maintained for the purpose in terms of section 36(1)(viii). He also noted that as per the AO, the assessee has created and maintained reserve as per section 36(1)(viii) and it has been allowed in earlier years. He further observed that the assessee has not clarified whether the special reserve created in earlier years is being continued and maintained for the year under consideration and it is the statutory reserve and capital reserve to which the amount has been claimed to have been transferred. Accordingly he upheld the order of the AO. Aggrieved, the assessee has filed appeal before the Tribunal.

22. The ld. AR strongly supported the order of the coordinate Bench of ITAT Hyderabad in the case of Nizamabad Dist. Central Bank Ltd. v. ITO and further submitted that the expression “special reserve” has not been defined in section 36(1)(viii), only there is certain restriction for the quantum of transfer into the reserve account, therefore it cannot be said that the amount transferred into nomenclature as other reserve (statutory reserve and capital reserve) cannot be said that the assessee has not complied with requirement of section 36(1)(viii). He further submitted that the assessee has followed the RBI directions for maintaining the reserves and that similar issue has been decided by coordinate Bench of Tribunal in assessee’s own case in the previous AY and the matter has been remitted back to the AO for verification.

23. On the other hand, the ld. DR supported the orders of lower authorities and submitted that the assessee has not controverted the findings recorded by the AO as well as the observations of the ld. CIT(A).The ld. DR also submitted that as per the computation submitted before the AO, the assessee has not transferred any amount to the special reserve. The AO has also observed that the accumulation of the special reserve account should not be twice of the share capital and general reserve. This observation of the authorities below has not been answered by the ld. AR of the assessee. Therefore he submitted that the matter may be sent back to the AO for the purpose of verification.

24. After hearing both the sides and perusing the entire material on record, we note that as per the observation of lower authorities the assessee has not transferred any amount in terms of section 36(1)(viii), however, as per the details submitted before the revenue authorities, the assessee has transferred into statutory reserve account of Rs.109.85 crores and into capital reserve account of Rs.6.54 crores and the assessee has claimed deduction u/s. 36(1)(viii) of Rs.58.30 crores which is equal to 20% of the net profit as computed above. The lower authorities have not accepted the arguments of the assessee. We note that during the course of hearing, the ld. AR submitted that similar issue has been decided by the coordinate Bench of Tribunal in assessee’s own case for AY 2014-15, for the sake of convenience, we reproduce the relevant part on this issue:-

21. We heard both the parties and perused the materials on record. We will first look into the provisions of sec.36(1)(viii) which reads as follows "(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head 'Profits & gains of business or profession" (before making any deduction under its clause) carried to such reserve account"

22. Section 36(1)(viii) envisages a transfer to a special reserve in order to claim deduction under the said section. The issues to be considered here are (i) Whether the amount transferred to any reserve can be considered for deduction u/s.36(1)(viii) since “special reserve” is not defined in the Act (ii) Whether the amount transferred in the subsequent year also need to be considered for the deduction u/s.36(1)(viii) since there is no time limit prescribed for the transfer to special reserve 23. On the issue of Whether the amount transferred to any reserve can be considered for deduction u/s.36(1)(viii) since “special reserve” is not defined in the Act we notice that a similar question is considered by the Hyderabad Bench of the ITAT in the case of Nizambad District Cooperative Central Bank Ltd., Vs. ITO where the Tribunal has held that “53. It is the contention of the assessee before us that as per the provisions of section 36(1)(viii) assessee is eligible for & 1839/Bang/2018 Page 15 of 41 deduction for an amount of 79,39,000 whereas deduction to the extent of 14,21,432 has been allowed to assessee, hence, assessee remains eligible to claim deduction u/s 36(1)(viii) to the extent of 65,17,568. On a perusal of section 36(1)(viii) of the Act. it is clear that deduction not exceeding twenty percent of the profits derived from eligible business can be allowed in respect of any special reserve created. The expression 'special reserve' has not been defined u/s 36(1)(viii). The only restriction imposed as per proviso to section 36(1)(viii) is aggregate of amount carried to such reserve account should not exceed twice the amount of paid up share capital and general reserve. Therefore, it cannot be said that the items appearing in the miscellaneous reserve cannot be treated as special reserves as there is nothing in the provision to suggest that only statutory reserves can be treated as special reserve. In view of the above, considering the fact that assessee is eligible to claim deduction u/s 36(1)(viii)to the extent of 79,39,000 out of which an amount of 14,21,432 has already been allowed, assessee is entitled to claim deduction of the balance amount of 65,17,568. Accordingly, we direct the AO to allow deduction to assessee to that extent. This ground is allowed.”

19. We would first like to reproduce the relevant section referred to by both the parties in their arguments: Sec. 36(1) Other deductions 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s.

24. Respectfully following the case law (supra) as discussed hereinabove, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee's claim of deduction made under s. 36(1 )(viii) of the Act. Whether assessee had indeed made a further creation of special reserve in the succeeding year and also whether such reserves were created before finalization of the grant of deduction u/s 36(1)(viii) had not been verified by any of the authorities below. We therefore, set aside the orders of the authorities below and remand the issue to the file of the AO for fresh consideration in accordance with law. Ground no.4 of the assessee is allowed for statistical purposes." 8.4.2 Respectfully following the aforesaid decision of the coordinate bench in the case of Corporation Bank (supra), we hold that reserve created even in subsequent / succeeding years; however before the finalization of grant of deduction under Section 36(1)(viii) of the Act i.e. as per date of order of assessment is required to be considered while allowing the assessees claim for deduction under Section 36(1)(viii) of the Act. The Assessing Officer is directed to examine and allow the assessee's claim accordingly. Consequently, this ground No.5 (5.1 to 5.3) is allowed for statistical purposes.”

25. We therefore follow the binding decision of the coordinate bench in the case of Vijaya Bank (Supra), and hold that reserve credit in the subsequent or succeeding years before the initiation of grant of deduction u/s 36(1)(viii) of the Act is required to be considered while allowing the assessee’s claim for the deduction under the said section. We, therefore direct the AO to examine and allow the assessee’s claim accordingly. This ground is allowed for statistical purposes.”

Ground No. 4.1 to 4.6

27. The ld.AO disallowed the entire amount u/s 40(a)(ia) on the ground that the assessee has not deducted TDS on the said amount. The AO examined the arrangements made with the recipient in detail and observed that Notification No.47/2016 came into effect only from the date of its publication, therefore it cannot be applied for the FY 2014-15 and accordingly he disallowed the entire amount of Rs.138,11,847 u/s. 40(a)(ia).

28. Aggrieved by the order of the AO, the assessee has contended before the CIT(A) that NPCI was formed with the objective to primary function as a hub in facilitating all electronic retail payment systems through the National financial switching network and all the transactions are carried out without any human intervention. The assessee also submitted that the assessee had sued NPCI to facilitate transaction involving ATMs of other banks by the customers of the assessee to carry out electronic transactions. The CIT(A) observed that this is a recurring issue and decided by him in the preceding AY against the assessee. Accordingly after considering detailed submissions of the assessee, he rejected the claim of the assessee and observed that the TDS recovery mechanism displayed in NPCI’s website and that all banks who were receiving the services before the NPCI were deducting TDS. Aggrieved by the order of the CIT(A), the assessee has now raised this issue before the Tribunal.

30. The ld.DR relied on the order of lower authorities.

No.1900/Bang/2017 dated 28-09-2018) and submitted that an identical issue was decided in favour of the assessee. We notice that the co-ordinate bench has held that there is no requirement of deducting tax at source from the payments made to NPCI. In this regard, it has followed the decision rendered by the Hon’ble Supreme Court in the case of Kotak Securities Ltd (2016)(67 taxmann.com 356). The relevant observations made by the coordinate bench on this issue are extracted below:- “12. Ground No.8 (8.1 & 8.2) - Disallowance u/s.40(a)(ia) of the Act in respect of payment made to NPCI. 12.1 In these grounds (supra), the assessee assails the decision of the authorities below in disallowing expenditure of Rs.8,05,15,596 u/s.40(a)(ia) of the Act; being payments made to NPCI. As per the details on record before us, in the year under consideration, the assessee bank had incurred expenditure of Rs.8,05,15,596; on which payments the assessee had not deducted tax at source. The Assessing Officer held that since NPCI is providing technical services to the assessee bank, the payments made in this regard are liable to TDS under Section 194J of the Act and in view of the assessee's failure to do so, disallowed the aforesaid amount under Section 40(a)(ia) of the Act. On appeal, the learned CIT (Appeals) upheld the Assessing Officer's decision in the matter. 12.2 The learned Authorised Representative of the assessee submitted that since it is a standard facility, the same is not covered under the purview of the provisions of Sec. 194J of the Act as technical services. In this regard, the learned Authorised Representative placed reliance on the decision of the Hon'ble Apex Court in the case of Kotak Securities Ltd., reported in (2016) 67 taxman.com 356 (SC). It was further contended that in any case, the assessee bank had submitted Form No.26A as per Rule 31ACB and as such is covered by the proviso to Sec. 40(a)(ia) and therefore no disallowance could be made. 12.3 Per contra, the learned Departmental Representative for Revenue placed reliance on the orders of the Assessing Officer on this issue. 12.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the issue before us is covered in favour of the assessee by the decision of the Hon'ble Apex Court in the case of Kotak Securities Ltd. (supra); wherein at paras 8 to 10 thereof the Hon'ble Apex Court has held as under :-

"

8. A reading of the very elaborate order of the Assessing Officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided for by the Stock Exchange. All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be merely in the nature & 1839/Bang/2018 Page 24 of 41 of a facility offered or available which would not be covered by the aforesaid provision of the Act.

10. For the aforesaid reasons, we hold that the view taken by the Bombay High Court that the transaction charges paid to the Bombay Stock Exchange by its members are for 'technical services' rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section194J of the Act." 12.4.2 Respectfully following the aforesaid decision of the Hon'ble Apex Court in the case of Kotak Securities Ltd. (supra), we hold that the services rendered by NPCI are not technical services and as such, are not covered by the provisions of Sec. 194J of the Act. Consequently, ground No.8 is allowed as indicated above. 6.2 Following the above said decision of co-ordinate bench rendered in the case of Canara Bank (supra), we hold that the payments made to NPCI towards NFS ATM charges cannot be considered as “technical services” within the meaning of sec.194J of the Act. Hence there is no liability to deduct tax at source from those payments. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance.

33. Ground No.5 : During the course of assessment proceedings, on perusal of Form 3CD audit report, the AO noted that “no sum in the form penalty in nature is debited to Profit & Loss Account” but AO observed from the published report that Rs.5.16 lakhs is in the nature of penalty levied by RBI paid during the year, therefore the AO did not allow it u/s. 37(1) observing that it is a violation of any law for the time being in force. The assessee filed appeal before the CIT(A) and submitted that Rs.5.16 lakhs as penalty to RBI was paid for deficiencies in exchange of notes and coins / remittance sent to RBI / operations of currency chest etc. It is further submitted that levy of penalty by RBI is not due to any offences prohibited by law or for infringing of any statute. It is only an additional burden imposed on the bank branches to provide better customer services to members of public with regard to exchange of notes and coin, therefore it is not in the nature of penalty and hence the addition made by the AO should be deleted.

However, the violations of Banking Regulation Act and RBI directions is not clear from the order of authorities below as well as from the submissions made by the ld. AR of the assessee. In view of this, we think it fit to remit the issue to the AO for determination of the nature of violation of Banking Regulation Act / RBI directions and decide the issue as per law. The assessee is directed to provide necessary details. Accordingly this issue is allowed for statistical purposes.

(i) CIT v. Mysore Breweries Ltd. [2009] 227 CTR 569 (ii) CIT v. Yashaswi Leasing & Finance Ltd. 204 Taxman 602 (iii) CIT v. Steriplate (P) Ltd. (2011) 338 ITR 547.

33. The Ld AR submitted that the coordinate bench of Tribunal in assessee’s own case (supra) for the assessment year 2013-14 has restored the case back to the CIT(A) and prayed for a similar direction for the assessment year under consideration 34. We heard the Ld DR who relied on the written submissions and supported the decision of the lower authorities. The coordinate Bench of the Tribunal in assessee’s own has held as under “7. The next issue contested by the assessee relates to the applicability of sec.115JB of the Act. In the return of income, the assessee did not compute book profit, as according to the assessee the provisions of sec.115JB will not be applicable to it. The AO did not accept the said contentions and held that the provisions of sec.115JB shall apply to the assessee. Accordingly, he computed book profit u/s 115JB of the Act also. The Ld CIT(A) also confirmed the same. 7.1 An identical issue was considered by this bench of Tribunal in the case of Canara Bank (ITA No.236/PAN/2018 & ITA 1884/Bang/2018 dated 27-12-2021) and the matter was restored to the file of Ld CIT(A) with the following observations:-

7.1 Before Ld CIT(A) also, the assessee contended that the provisions of sec.115JB will not be applicable to it. It was submitted that the assessee falls under the category of “corresponding new bank” under BR Act. Accordingly it was contended before Ld CIT(A) by the assessee as under:- (a) banking company is defined under BR Act as a “company” which transacts business of banking. (b) “Company” is defined as a company as defined in section 3 of the Companies Act and includes a foreign company within the meaning of sec.591 of that Act. (c) Since the assessee falls under the category of Act of “corresponding new bank”, it was contended that it cannot fall under the definition of “banking Company”. (d) Clause (b) of sec.115JB(2) is applicable to a banking company, but the assessee is not a banking company as per the definition given in BR Act. Accordingly, it was contended that the assessee is not liable u/s 115JB of the Act. 7.2 The Ld CIT(A), however, did not accept the above said contentions. The view expressed by Ld CIT(A) has been summarised below:- (a) Sec. 115JB(1) is the charging section and it overrides all other provisions of the Act. It provides that the provisions of this section are applicable in case of “every company”. It does not carve out any exception. (b) Sec. 2(17) defines the word “company”. According to this section company “means” any Indian Company. (c) Explanatory Note to Finance Act, 2012 has explained that Minimum Alternative Tax (MAT provisions u/s 115JB) shall apply to a banking company. (d) Assessee is a “company” as per the deeming provisions of sec.11 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, which reads as under:- “11. Corresponding new bank deemed to be an Indian Company:- For the purposes of the Income tax Act 1961 (43 of 1961), every corresponding new bank shall be deemed to be an Indian Company and a company in which public are substantially interested.” (e) The assessee itself is filing its return of income under the status of “company”.

(f) The shares of assessee bank are listed in the Stock exchange and traded. (g) The assessee is a banking company under Banking Regulations Act, since the definition of the term “banking company” in BR Act is a functional definition. The assessee is following all the rules and regulations of the BR Act which are applicable to other private banks. The assessee bank is constitutionally defined as “corresponding new bank” in BR Act. However, the BR Act does not say that ‘corresponding new bank’ is not a Banking Company. (h) It is not the case of the assessee that being a ‘corresponding new bank’ and not registered under Companies Act, 1956, the assessee is not governed by BR Act. (i) It is highly unfortunate on the part of a reputed public sector bank to resort to such unwarranted, hyper technical, hair splitting of the definitions under various Acts only to avoid the payment of due taxes. (j) Assuming that the assessee is not a Banking Company, then the provisions of sec.115JB(2)(a) will be applicable to the assessee, as it is an Indian Company as per section 11 of the Banking Companies (Acquisition and Transfer of Undertaking) Act 1980. (k) Various decisions relied upon by the assessee relate to the period prior to the amendment made by Finance Act 2012. 7.2 Before us, the Ld A.R reiterated that the provisions of sec.115JB will not apply to the assessee, since it is not formed under Companies Act. He placed his reliance on the decision rendered by Kolkatta bench of Tribunal in the case of Damodar Valley Corporation (2017(8) TMI 1363). On the contrary, the Ld D.R supported the order passed by Ld CIT(A). 7.3 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has expressed the view that the assessee would fall under clause (a) of sec.115JB(2). However the case of the assessee is that clause (b) of sec.115JB(2) is made applicable to banking companies, since banking company is included in sec. 211 of the Companies Act. However, it is the contention of the assessee that it is not a ‘banking company”, i.e., it is a “corresponding new bank”. 7.4 We notice that the provisions of sec.51 of the Act specifically state that only certain provisions of BR Act are applicable to “Corresponding new bank”. We noticed earlier that the Ld CIT(A) has proceeded to decide this issue by observing that all provisions of BR Act are applicable to the Company. We notice that the Ld CIT(A) did not consider the effect of provisions of sec.51 of the BR Act upon the assessee. Hence the decision taken by him under the impression that all the provisions of BR Act are applicable to the assessee is faulted one. In our view the Ld CIT(A) should considered the effect of provisions of sec. 51 of BR Act and accordingly he should have appreciated the contentions of the assessee on the definition of “banking company”, provisions of sec.211(2) of the Companies Act etc. Since these aspects go to the root of the issue, in our view, this issue needs to be examined at the end of Ld CIT(A) afresh. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to his file for examining it afresh.” 7.2 Since the facts relating to the issue and contention of the assessee is identical in nature, following the above said decision, we restore this issue to the file of Ld CIT(A) with similar directions.”

ITA No. 528/Bang/2019 (Revenue’s appeal)

(Amount in Provision made Claim u/s Rs.) (Amount in 36(1)(viia) Rs.) a. 519,90,70,502 10% of 51990705021 being average aggregate 565,92,40,708 advances 788,88,21,840 b. 46,01,70,206 7.50% of total income before allowing deduction u/s 36(1)(viia) (Rs.0 x 7.50%) Total 5659240708

The AO after considering the submissions made by the assessee and applying the prescribed rule 6ABA for computation of deduction computed deduction under this section at Rs. NIL and disallowed the entire claim of deduction made by the assessee. Aggrieved from the above disallowance the assessee filed appeal before the CIT (A).

"18.2 We heard rival submissions and perused the material on record. The Finance Act, 1979 inserted a new clause (viia) in sub-section (1) of section 36 to provide for deduction in computation of taxable profits of schedule bank in respect of provision made for bad and doubtful debts relating to advances made by the rural branches computed in the manner prescribed under IT Rules, 1962. For this purpose, 'rural branches' has been defined to mean 'branch of schedule bank situated at place with population not exceeding 10,000 according to last census'. Rule 6BA of the Incometax Rules provides the procedure for computing AAA for the purpose of provisions of section 36(1)(viia) which reads as under: "6ABA. Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36 - For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely : (a) the amounts of advances made by each rural branch as outstanding at the end of the fast day of each month comprised in the previous year shall be aggregated separately;

(b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a) ; (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation : In this rule, rural branch and scheduled bank shall have the meanings assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36.” From a bare reading of the above rule it is crystal clear that the said rules prescribe three steps for computing AAA in the following manner: Step One - In respect of each rural branch, note down the amounts of advances outstanding at the end of the last day of each month comprised in the previous year and aggregate the amounts so noted. Step Two- Divide the aggregate amount arrived at in Step One by the number of months for which the outstanding amounts have been taken into account for the purpose of Step One. Step Three- Aggregate the amounts arrived at under Step Two in respect of all the rural branches. Thus, it is clear that the said Rules do not provide for only fresh advances made by each rural branch during each month alone is to be considered. It only prescribes that the amount of advances made by rural branch and is outstanding at the end of the last day of each month shall be aggregated. Having regard to the plain provisions of the IT Rules, it cannot be construed that only fresh loans made by rural branches outstanding at the end of each month should be considered for the purpose of calculating AAA. It is trite law that the condition not imposed by the statute cannot be imported while construing a particular provision of Rules or statutes. Thus, the reasoning adopted by the AO as well as the CIT(A) does not stand the test of law. Furthermore, co-ordinate bench of Hyderabad Tribunal in the case of Nizamabad District Cooperative Central Bank Ltd. (supra) held as follows: "8. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. Before going into the issue, it is necessary to look into the relevant statutory provisions. Section 36(l)(vii) provides for deduction on account of bad debts actually written off in the books of account. However, proviso to 36(1)(vii) makes an exception by providing that in case of an assessee to which clause (viia) applies the claim of bad debt shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made under clause (viia). Clause (viia) permits a cooperative bank to claim deduction of provision made for bad and doubtful debts as per the prescribed conditions. As has been correctly observed by ld. CIT(A), the only dispute between assessee and department is in respect of working out 10% of aggregate average rural advances. While assessee has made such working by considering the entire outstanding advances at the end of each month, AO has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances. However, a perusal of the provision contained u/s 36(1)(viia) and rule 6ABA, would make it clear that the 10% of aggregate average advances has to be worked out on the entire outstanding advances and not the advances of that month alone. That being the case, we agree with the view held by ld. CIT(A).

9. Now coming to the quantum of deduction claimed u/s 36(1)(vii) and 36(1) (viia), law is well settled that an assesses can claim deduction under both the clauses subject to the condition imposed under the proviso to 36(1)(vii). As can be seen from the working submitted by ld. AR, the provision created during the year u/s 36(1)(viia) read with rule 6ABA, amounts to Rs. 16,35,55,829.00 whereas assessee has claimed deduction of Rs.5,16,46,976, which is well within the provision permissible under section 36(1)(viia). Therefore, there cannot be any doubt with regard to the allowability of deduction claimed by the assessee u/s 36(1)(viia). Accordingly, we do not find any infirmity in the order of ld, CIT(A) in deleting addition of Rs. 3,88.25,673, However, as far as deduction of Rs.18,79,704 is concerned, the same cannot be allowed u/s 36(1)(vii) considering the fact such amount has not exceeded the provision for bad and doubtful debts u/s 36(1)(viia). At the same time, alternative claim of the assessee that it is to be allowed u/s 37(1), in our view, is acceptable. On a perusal of the assessment order and the facts and materials available on record, it is quite evident that the amount was waived at the direction of the State Govt. Department has not controverted this fact. Therefore, in our view, the waiver of interest at the instance of the State Government, has to be allowed as business expenditure u/s 37(1). Accordingly, we uphold the order of Id. CIT(A) in deleting addition of Rs.18,79,704 though, for a different reason. The grounds raised by the department are dismissed." 18.3 In the light of the above, we hold that the methodology adopted by the AO for the purpose of computing AAA is against the plain provisions of rules and also against the ratio of the decision of the coordinate bench in the cases cited supra. However, remit this issue back to the file of the to identify rural branches less than 10,000 population as per last census and the AAA of such rural branches

alone should be considered for the purpose of this deduct/on. Thus, these grounds of appeal are allowed for statistical purposes." 7.4.2 We find that the issue is settled in favour of the assessee by the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Canara Bank (supra) and in view thereof we hold that the computation of the AAA made by the Assessing Officer is incorrect. 7.4.3 Before us, the learned Authorised Representative submitted that the assessee is not disputing the classification of rural branches made by the Assessing Officer and accepts the AAA as at 31.3.2010 at Rs.2020,71,42,322 as arrived at by the Assessing Officer at page 42 of the order of assessment and in this context pleaded that the matter need not be remanded back to the Assessing Officer. In view of the aforesaid submissions of the learned Authorised Representative of the assessee, we hold that the assessee is entitled to deduction by considering the AAA at Rs.2020,71,42,322 as worked out by Assessing Officer at page 42 of his order and direct the Assessing Officer to rework the deduction under Section 36(1)(viia) of the Act accordingly. Consequently, the Ground No.4 of assessee's appeal is allowed for statistical purposes.”

53. Since the issue has been settled in favour of the assessee by the above decision, accordingly we uphold the order of the CIT(A). This ground of the revenue is dismissed.

54. Ground No. 3: During the course of assessment proceedings, the AO noted that assessee has claimed depreciation on various categories of securities as per classification of the RBI in its computation of income. The assessee has classified 3 categories of its securities i.e., Held To Maturity (HTM), Available For Sale (AFS) and Held For Trading (HFT). As per RBI guidelines, the securities held under the category of AFS and HFT are subject to market valuation and the closing stock of securities held under these categories have to be valued on 31st March and depreciation on account of such valuation shall be provided. Accordingly the assessee has debited a sum of Rs.42.9 crores under the head provisions & contingencies. Further the AO noted that the category of HTM securities shall not be subjected to market valuation and depreciation is not to be allowed as per RBI guidelines and as per CBDT Instruction No.17/2008 dated 26.11.2008. During the impugned AY, the assessee has computed depreciation in the computation of income of Rs.1564.15 crores on its investments. In this regard, the assessee was asked to produce the evidence for such huge differences. The AO further noted that there is difference in valuation for purpose of Income Tax Act as well as for the books of accounts maintained. In reply the assessee submitted that the issue has been decided in favour of the assessee by various judicial pronouncements and the Hon’ble jurisdictional High Court has also decided this issue in favour of assessee. The assessee was further asked to classify the securities as per the RBI norms, against this the assessee submitted that there is no fixed criteria but it is left to the banks. Further the AO noticed that the issue is before the Hon’ble Supreme Court against the decision of the High Court in the assessee’s case. He further noticed that in the case of ING Vysya Bank v. CIT (2012) 208 Taxman 511 the issue is decided in favour of the revenue. He further observed that it is a legal issue where the revenue and assessee are both in appeal before the Apex Court, accordingly to keep the issue alive till the decision of the Hon’ble Supreme Court, the claim of depreciation of Rs.161,24,64,360 on HTM securities was disallowed.

55. Aggrieved, the assessee filed appeal before the CIT(A). The CIT(A) considering detailed written submissions filed by the assessee, observed that the similar issue has been decided by the co-ordinate bench treating the investments as stock-in-trade and decided the issue in favour of the assessee. Against the CIT(A)’s order, the revenue is in appeal before the Tribunal.

“43. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (supra) has allowed the appeal in favour of the assessee. The Tribunal in this case has held that – 10. The next issue contested by the revenue relates to the disallowance of depreciation on HTM Securities, which has been deleted by Ld CIT(A). The AO took the view that the RBI has allowed banks to claim depreciation on securities which are “Held for Trade” and “Available for sale” only. Accordingly he held that the depreciation is not available on securities “Held to Maturity”. Accordingly, he disallowed the claim of Rs.174.42 crores relating to depreciation on HTM securities. 10.1 The Ld CIT(A) noticed that the ITAT, Bangalore has decided an identical issue in AY 2003-04 in favour of the assessee. The Hon’ble Karnataka High Court upheld this decision in vide order dated 11.03.2013. Similarly in AY 2008-09 also, the Tribunal in ITA Nos. 578 & 653 of 2012 has decided the issue in favour of the assessee. Similarly in AY 2010-11 to 2012-13 has again decided in favour of the assessee. Accordingly, the Ld CIT(A) deleted the disallowance. 10.2 We heard the parties and perused the record. We notice that the co-ordinate bench has decided an identical issue in favour of the assessee in the assessee’s own case in ITA No.1252/Bang/2016 dated 05-01-2018 relating to AY 2010-11 with the following observations:- “11. Ground Nos.1 & 2 - Depreciation on HTM Securities. 11.1 In these grounds (supra), Revenue assails the order of the learned CIT (Appeals) in directing the Assessing Officer to allow the assessee's claim towards depreciation on HTM Securities. The facts of the matter as emanate from the record are that the assessee bank claimed a sum ofRs.215,69,38,927 as depreciation on the HTM category of investments. The Assessing Officer disallowed the assessee's claim following the decision of the Hon'ble Karnataka High Court in the case of ING Vysya Bank Vs. CIT (2012) 208Taxman 511. On appeal, the learned CIT (Appeals) allowed the assessee's claim by following the decision of the Hon'ble Karnataka High Court in the assessee's own case in dt.11.3.2013 and also the decisionof the co-ordinate bench of this Tribunal in the assessee's own case for A.Y.2008-09 in ITA No.578 & 653/Bang/2012 for A.Y. 2008-09. 11.2 The ld. CIT DR placed strong reliance on the order of the Assessing Officer which was based on the decision of the Hon'ble Karnataka High Court in the case of ING Vysya Bank (supra) which decided the issue in favour of the revenue. 11.3 Before us, the learned Authorised Representative for the assessee submitted that it was only after considering its own decision in the case of ING Vysya Bank (supra) that the Hon'ble Karnataka High Court decided the issue in favour of the assessee in the case of Karnataka Bank Vs. ACIT reported in (2013) 356 ITR 549 (Kar). Following the decision of the Hon'ble Apex Court in the case of UCO Bank Vs. CIT (1999) 237 ITR 889 (SC), the Hon'ble Karnataka High Court held that the investments of the bank are stock in trade and are to be valued at lower of cost or market value and the resultant depreciation is an allowable deduction. The learned Authorised Representative ITA Nos.1834/Bang/2018 & 1839/Bang/2018 Page 34 of 41 further submitted that the decision n the case of Karnataka Bank (supra), was followed by the Hon'ble Karnataka High Court in the assessee's own case in their order in ITA No.687/2008 which was then followed by the co-ordinate bench of this Tribunal in the assessee's case in the immediately preceding assessment year 2009-10 in order in ITA No.318/Bang/2014 dt.22.7.2016 and for A.Y. 2008-09 in ITA No.578/Bang/2012 dt.27.2.2015. 11.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that this issue has been considered and held in favour of assessee and against Revenue both by the decisions of the Hon'ble Karnataka High Court and those of the co-ordinate bench of this Tribunal in the assessee's own case. We find that a co-ordinate bench, while dismissing Revenue's ground on this issue in the assessee's own case for Assessment Year 2008-09 in its order in ITA No.578 & 653/Bang/2012 at paras 33 & 34 thereof has held as under :- "

"21. We have considered the rival submissions. Similar issue as to whether depreciation on investments held under the category "Held to Maturity" can be allowed as deduction came up for consideration in the case of Syndicate Bank (supra) before the ITAT Bangalore Bench. The Tribunal on the issue held as follows: "58. We have heard the submissions of the ld. DR and the ld. Counsel for the assessee. The ld. DR relied on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. in ITANo.2886/2005 dated 06.06.2012. In the aforesaid decision, the Hon'ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing income under the Income-tax Act. The Hon'ble Court further took the view that every investment held by a bank cannot be considered as stock in trade. The Hon'ble High Court finally concluded that 30% of the investments can be clothed to the character of stock-in-trade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction.

by the Revenue is dismissed.

60. Apart from the above, the ld. counsel for the assessee also submitted that the decision rendered by the Hon'ble High Court of Karnataka in the case of ING Vysya Bank (supra) is per incuriam the decision of the Hon'ble Supreme Court in the case of UCO Bank v.CIT, 240 ITR 355 (SC). He brought to our notice that the Hon'ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act, following mercantile system of accounting both for book keeping as well for income-tax purposes. The Hon'ble Apex Court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income-tax purposes. The Hon'ble Court took the view that all investments held by a bank are to be regarded as stock-in-trade.

61. The ld. counsel for the assessee further drew our attention to a very recent decision of the Hon'ble High Court of Karnataka rendered on 11.03.2013 in the case of CIT v. Vijaya Bank, ITA No.687/2008. The Hon'ble High Court of Karnataka in the aforesaid case followed its own decision rendered in the case of Karnataka Bank Ltd. v. CIT in rendered on 11.01.2013, wherein the Court took the view that depreciation claimed on investments 'held on maturity' by a bank has to be treated as stock-in-trade in accordance with RBI guidelines and CBDT Circular. It was his submission that the later decision of the Hon'ble Karnataka High Court has to be followed.

62. We have given a careful consideration to the rival submissions and are of the view that the contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in assessee's own case on an identical issue for the A.Y. 2005-06 has upheld the claim of the assessee. The later decision of the Hon'ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the revenue in its appeal is without merit. Consequently, the same is dismissed."

22. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant grounds of appeal

of the Revenue."

34. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant ground of appeal No.4 of the Revenue." 11.4.2 We find that the decision of the learned CIT (Appeals) in the impugned order is in line with the aforesaid decision of the Hon'ble Karnataka High Court and the co-ordinate bench of this Tribunal in the assessee's own case (supra). In this view of the matter, we do not find any reason to interfere with the finding of the learned CIT (Appeals) on this issue and consequently finding & 1839/Bang/2018 Page 38 of 41 no merit in grounds at S.Nos.1 & 2 (supra) raised by revenue, dismiss the same.” 10.3 We notice that the Ld CIT(A) has followed the decision rendered by the co-ordinate bench in the assessee’s own case and has deleted the disallowance of depreciation claimed on HTM securities. Accordingly, we do not find any reason to interfere with his decision rendered on this issue.

44. Considering the decision of the coordinate bench of the Tribunal and noting the fact that the CIT(A) has followed the decision of the coordinate bench in assessee’s own case, we do not find any reason to interfere with the decision of the CIT(A). Accordingly the decision of CIT(A) with respect to depreciation on HTM securities is upheld and the appeal of the revenue on this issue is dismissed.”

59. Respectfully following the decision of the coordinate bench of the Tribunal and noting the fact that the CIT(A) has followed the decision of the coordinate bench in assessee’s own case, we do not find any infirmity in the order of the CIT(A). The ld. Dr has submitted that the Hon’ble Apex Court has accepted the SLP filed by the revenue but the status of the same could not be furnished by the ld. DR Accordingly the ground raised by the revenue on this issue is dismissed.

60. Ground No. 4 is with regard to disallowance under Section 14A of the Act. During the assessment proceedings, the AO observed that assessee has made suo motu disallowance of RS.2,14,520 and in this regard, a note was furnished by the assessee along with the computation stating as under:-

since non-interest bearing funds as on 31.3.2014 [Rs.11168.56 Cr] is much more than total investments in tax free securities [Rs.738.09 Cr], no interest expenditure is attributable for earning tax free income. Proportionate administrative cost is however disallowed u/s 14A.

61. The AO observed that the computation of disallowance u/s. 14A was not enclosed along with computation and it was called for. Accordingly the assessee submitted written submissions which were reproduced in the assessment order. From the submissions it was observed that during the impugned AY, the assessee has received substantial amount of exempt income of Rs.28.62 crores during the year and the average tax free investments were of Rs.733.94 crores. Accordingly the AO observed that for managing such huge investments, incurring of certain expenditure is very essential. He relying on certain judgments computed the disallowance as per Rule 8D r.w.s. 14A to the extent of Rs.3,86,85,500 and added back to the total income of the assessee. The ld. CIT(A) after considering the detailed submissions and decision of the coordinate Bench in the assessee’s own case for AY 2010-11, 2011-12 & 2008-09 allowed the appeal of the assessee on this issue. Aggrieved, the revenue is in appeal before the Tribunal.

47. We heard the parties on this issue and perused the record. We notice that the co-ordinate benches have decided this issue prior to rendering of decision by Hon’ble Supreme Court in the case of Maxopp Investment Ltd (2018 (3) TMI 805)(SC). However, before us, the Ld A.R relied upon certain other decisions in order to contend that no disallowance u/s 14A is called for. In view of the subsequent development of law on this issue, in our considered view, this issue requires fresh examination at the end of AO by duly considering the various decisions on the subject. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh.

Order pronounced in the open Court on 25th April, 2023.