UNION BANK OF INDIA,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-1(1), HYDERABAD

In view of this matter and considering the facts of the case, we are of the considered view that the issue of computation of deduction u/s 36(1)(viii) needs to be set aside to the file of the Assessing Officer for the simple reason that the Assessing Officer has disallowed the claim on the ground that the assessee has not furnished any details with regard to income derived from eligible business and corresponding expenses and also computation of eligible profit. Further, the Ld.CIT(A) by considering revised computation filed by the assessee during the appellate proceedings has deleted the additions made by the Assessing Officer. Since we have considered an identical issue and given our findings on the issue of deduction u/s 36(1)(viii) and how to compute such deduction, in our considered view, the matter needs to go back to the file of the Assessing Officer for fresh consideration of the issue and decide the issue in light of our findings given on the issue for the A.Y.2012-13. Thus, we set aside the order of the Ld.CIT(A) on this issue and restore the issue back to the file of the Assessing Officer. The Assessing Officer is directed to reconsider the issue in light of revised computation filed by the assessee and also in light of decision of the Tribunal in assessee’s own case for the A.Y.2012- 13 and allow deduction u/s 36(1)(viii) of the Act in accordance with law.

The next issue that came up for our consideration from Grounds No. 3 & 4 of Revenue’s appeal is deletion of addition made by the Assessing Officer towards disallowance of reversal of unrealized interest of Rs.57,51,43,911/- on Non-Performing Assets (NPAs). The Assessing Officer noticed that the assessee claimed deduction for Rs.57,51,43,911/- on account of reversal of unrealized interest on NPAs. The assessee submitted that this amount has been credited to borrowers’ account as unrealized interest in A.Y 2013-14 and debited the same to the interest account. The assessee further submitted that as per RBI guidelines, once any loan account turns to NPA, then unrealized interest, if any, debited to the said loan account should be reversed. Therefore, the appellant has debited interest to NPA account in earlier period and because said loan account was treated as NPA for the impugned A.Y., the unrealized interest has been reversed and debited to the P&L Account. The Assessing Officer however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, as per the I.T. Act, 1961, the assessee can claim deduction towards bad debts written off and provision for bad debts on loans/advances, but, it cannot claim deduction towards reversal of income on its own as per its accounting policy. Therefore, by following the decision of Hon'ble Supreme Court in the case of M/s State Bank of Travancore 158 ITR 102 and also decision of the ITAT in the case of State Bank of Hyderabad in & 894/Hyd2022 and also relying on the decision of Hon'ble Delhi High Court, has made disallowances towards interest reversal and debited to P&L Account.

The assessee carried the matter in appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches in appellant’s own case for A.Y 2011-12, where it has been held that unrealized interest reversal cannot be treated as income of the assessee. The Ld. CIT (A) by following the decision of the ITAT Hyderabad in appellant’s own case for A.Y 2011-12 deleted the addition made by the Assessing Officer.

Aggrieved by the order of the Ld. CIT (A), the Revenue is in appeal before the Tribunal.

The Ld. DR submitted that the Ld. CIT (A) erred in deleting the addition made towards reversal of unrealized interest without appreciating fact that the assessee bank had neither set off said unrealized interest against the provision of bad and doubtful debts, nor written off as irrecoverable in the books of account and therefore, such reversal of interest is not an admissible deduction under the I.T. Act, 1961.

The Ld. Counsel for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches in appellant’s own case for the A.Y 2012- 13. He further submitted that the Hon'ble Delhi High Court has also considered similar issue in the case of CIT vs. IFCI (2011) 201 Taxman 75. Therefore, he submitted that the order of the Ld. CIT (A) should be upheld. He further submitted that, no doubt this issue is against the assessee by the decision of the Hon'ble Telangana High Court in the case of State Bank Hyderabad vs. CIT, where it has been held that the deduction towards reversal of unrealized interest cannot be allowed. However, he further submitted that in case deduction is not allowed towards reversal of interest, but the same needs to be allowed as bad debts written off and the findings of the Ld. CIT (A) in allowing relief to the assessee is in accordance with law and same needs to be upheld.

We have heard both parties, perused the material available on record and gone through the orders of the authorities below. The appellant has reversed unrealized interest from NPA account as per RBI guidelines for Rs.57,51,43,911/- on the ground that the interest income has been credited on those loan account in earlier financial year and further, when the account become NPA as per RBI guidelines for the impugned A.Y, unrealized interest has been reversed. Since the appellant has not received any interest income, the same has been reversed and debited to P&L Account. We find that, as per RBI guidelines, for asset classification and income recognition, loan account has to be categorized as standard asset, sub-standard asset and doubtful asset depending upon the period for which no recovery from said loan account is made. But deduction towards provision for bad & doubtful debts or actual written off of bad debts should be allowed as per section 36(1)(vii) and (via) of the I.T. Act, 1961. In fact, the appellant also claims deduction towards provision of bad & doubtful debts and actual write off of bad debts in terms of section 36(1)(vii) and 36(1)(viia) of the I.T. Act, 1961. There is no dispute about these facts.

Coming to the issue on hand, the assessee claims that it has recognized interest income on loan account on accrual basis in earlier A.Ys and credited to income account. Since those loan accounts become NPA as per RBI guidelines for the current F.Y, the appellant has reversed unrealized interest and debited to P&L Account and claimed deduction while computing income from business/profession. Although, the appellant accounting treatment of reversal of interest in the books is in accordance with general accepted accounting principles, but when it comes to claiming deduction, the reasons given by the assessee for claiming deduction towards reversal of interest is not in accordance with the scheme of taxation. As we have already stated, deduction towards provision of bad and doubtful debts and actual write off of debt should be allowed in terms of section 36(1)(vii) and 36(1)(viia) of the Act. In fact, the assessee also claims deduction as per said provision. Therefore, the assessee having claimed deduction as per provisions of the Act, once again claiming deduction for reversal of interest in terms of their accounting policies, is contrary to the law, because there is no clarity in respect of facts whether the assessee has made provision for bad debts in respect of those account in their books of account or not. Therefore, in our considered view, there is no merit in the argument of the assessee that reversal of unrealized interest is deductible. Although, the appellant claims that this issue is covered in favour of the appellant by the decision of the ITAT Hyderabad Benches in earlier A.Ys, but on going through the orders passed by the Tribunal, there is no discussion on the issue at all. On the other hand, the Ld. DR filed a copy of the order passed by the Hon'ble Telangana High Court in the case of State Bank of Hyderabad vs. Jt. CIT reported in 2023 (2) TMI 810, where the High Court held that reversal of interest on NPA is not deductible. The relevant findings of the Hon'ble Telangana High Court are as follows: “7. Thereafter, assessee filed further appeal before the Tribunal. After adverting to the findings of the assessing officer and CIT(A), Tribunal held as follows: We have carefully considered the rival submissions and perused the record. In the case of TCI Finance (supra) the issue as to whether nonrecognition of income by following RBI norms can be considered as a recognized method of accounting, was considered in detail and held as if any assessee follows the RBI norms consistently the same has to be accepted and interest income on NPA need not be recognized. With regard to the income already recognized in the earlier year the Bench observed, in para-29 of the order, that the department has already accepted the claim made as per the reversal entries. Since the issue is confined to non- recognition of income and not with regard to the reversal of entries, the Bench had no occasion to consider this issue with regard to the claim of deduction of the amount referable to the reversal of the entries. In the case of Bank of Madura (supra), the Hon'ble Madras High Court was Concerned with the peculiar case of a bank declaring higher income by charging excess interest from one of its Customers and on realization of the same, the excess interest which was charged and collected was claimed as liability in the year of realizing the mistake and credited to the account of the customer. The Court held that the claim of deduction in the year of realization of mistake is in order. It may be noted here that it was a case of excess collection of interest and there was a duty cast upon the bank to refund the excess interest whereas in the instant case interest on NPAs was earlier declared as income on accrual basis and though it has not become bad in all respects, the entry was sought to be reversed only because of RBI guidelines. The assessee has furnished the circular letter of the RBI containing consolidated instructions/guidelines on matters relating to prudential norms on income recognition. In the circular dated 4th July, 2002, the RBI has consolidated all the instructions

From the above, we find that Tribunal had considered the circular of RBI dated 04.07.2002 and held that once an income of a previous year is recorded, assessee cannot reduce the Income of subsequent years on the ground that in the earlier year income was shown on actual basis wrongly. Tribunal held that such a claim of the assessee is not permissible under the provisions of the Act. Further, Tribunal held that assessee had also not written off the NPAs as bad debts under Section 36(1)(vi) of the Act. Therefore, there was no question of writing off such interest as a bad debt.

In the hearing today, Ld. counsel for the appellant has referred to Section 21 of the Banking Regulation Act, 1949 and submits that under sub-section (1) thereof, all banking companies are bound to follow policy of the RBI so determined. Therefore, assessee being a banking company had to comply with the RBI guidelines. He has also referred to a decision of the Supreme Court in Deputy Commissioner of Sales Tax v. M/s. Motor Industries Company (1983) 2 SCC 108 and submits that in that case under the Kerala General Sales Tax Act, 1963, Supreme Court had pointed out a way to overcome such a difficulty. Further reference has been placed on the decision of the Supreme Court in UCO Bank v. Commissioner of Income Tax (1999)4 SCC 599 to contend that it is always open to the Central Board of Direct Taxes (CBDT) to issue instructions under Section 119 of the Act to remove any difficulty in which event such instructions would be binding on the department.

We are afraid we cannot accept such contention urged by Ld. counsel for the appellant. In the present appeal, it is not CBDT which has issued circulars or guidelines under Section 119 of the Act. On the other hand, circular has been issued by the RBI which is binding on all the banking companies in general. However, when it comes to assessment under the Act, the revenue authorities are bound by the provisions of the Act. Therefore, the claim of the assessee that interest paid on NPAs should be excluded from computation of income was rightly negatived by the assessing officer, which has been affirmed by the two lower appellate authorities.

In this view of the matter and by respectfully following the decision of the Hon'ble Telangana High Court in the case of State Bank of Hyderabad vs. Jt. CIT (Supra), we are of the considered view that the reversal of unrealized interest on NPA accounts and debited to P&L Account cannot be allowed as deduction. Thus, we reverse the findings of the Ld. CIT (A) and upheld the addition made by the Assessing Officer.

Ground No. (i) and (v) are general in nature which do not require any adjudication.

In the result, appeal filed by the Revenue for the A.Y.2013- 14 is partly allowed.

The assessee has raised the following grounds of appeal in ITA No.364/Hyd/2018:

The Order of the Commissioner of Income Tax (Appeals)-1, Hyderabad dated 27-1-2017 is erroneous and contrary to law and facts of the case.

The Commissioner of Income Tax (Appeals) erred in law in upholding the action of Assessing Officer in disallowing Rs.329,62,82,921/- being the claim made by the Appellant bank u/s 36(1)(vii) in respect of the bad debts written off by the non rural branches. 6.1. The Commissioner of Income Tax (Appeals) failed to appreciate the fact that the debts written off by the non rural branches are allowable u/s36(1)(vii). 6.2. The Commissioner of Income Tax (Appeals) erred in not following the decision of the Hon'ble Supreme Court in this regard. 6.3. The Commissioner of Income Tax (Appeals) failed to appreciate the fact that the Appellant had written off the debts. 6.4. The order of the Commissioner of Income Tax (Appeals) is based on surmises and conjunctures.

The first issue that came up for our consideration from Ground No.2 of assessee’s appeal is disallowance of deduction u/s 36(1)(viia) of the Act of Rs.1014,06,21,916/-. The assessee claimed an amount of Rs.1017,46,21,168/- u/s 36(1)(viia) of the Act.

Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld.CIT(A), the assessee submitted that it has created provision for bad and doubtful debts in accordance with provisions of section 36(1)(viia) however, because of nomenclature used in the books of accounts, the Assessing Officer misunderstood the deduction claimed u/s 36(1)(viia) and disallowed the entire deduction, even though the deduction claimed by the assessee is in accordance with law. The assessee further contended that this issue is already covered in favour of the assessee by the decision of Hyderabad Tribunal in assessee’s own case in earlier assessment year, where the issue has been discussed and allowed deduction as per law.

The Ld.CIT(A) after considering relevant submissions of the assessee and also taking note of the decision of the ITAT Hyderabad Bench in assessee’s own case, rejected the explanation of the assessee and sustained the additions made by the Assessing Officer, towards deduction claimed u/s 36(1)(viia), by holding that the issue is not covered by the order of the Tribunal for earlier years as claimed by the assessee. Further, it is pertinent to point out that the RBI Master Guidelines has given guidelines for creating provision for bad and doubtful debts on NPA. This is to safeguard interest of the banking institutions, however as per the Income tax Act, 1961 (“the Act”), the provision is not ascertained or actual liability, hence not allowable as deduction. Since the assessee has created provision during the year to the tune of Rs.856,08,68,463/- by taking 10% of current year average rural branch advances and further Rs.157,97,53,454/- being 7.5% of current year total income totaling to Rs.1014,06,21,916/-, the write off of bad debts cannot be allowed, as it is not a bad debt as per Income Tax Act. What is allowed as per RBI guidelines cannot be allowed under the Income Tax Act. Therefore, rejected the arguments of the assessee and sustained the additions made by the Assessing Officer towards disallowance u/s 36(1)(viia) of the Act.

The Ld. counsel for the assessee submitted that the Ld.CIT(A) erred in sustaining the additions made by the AO towards disallowance u/s 36(1)(viia) of the Act, merely on the ground that provision for NPA is not allowable as deduction as per Income Tax Act, ignoring the fact that the assessee claimed deduction u/s 36(1)(viia) of the Act, as per method prescribed under the law. The Ld. counsel for the assessee further submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT Hyderabad benches in assessee’s own case for the earlier assessment years including the A.Y.2012-13, where, the issue has been discussed in light of provisions of section 36(1)(viia) and held that if provision created by the assessee is in accordance with section 36(1)(viia), then the same needs to be allowed as deduction.

The Ld. DR on the other hand supporting the order of the Ld..CIT(A) submitted that the assessee has claimed deduction u/s 36(1)(viia) of the Act on the basis of provision created as per RBI guidelines on NPAs. Further, provision in the books of accounts as per RBI guidelines is different from provision for bad and doubtful debts u/s 36(1)(viia) of the Act. The assessee is entitled for deduction towards bad and doubtful debts in terms of section 36(1)(viia) of the Act and on this issue there is no dispute. However, if the assessee claims deduction towards provision for NPA, then the same cannot be considered as provision for bad and doubtful debts as per section 36(1)(viia) of the Act. Since the assessee could not file relevant evidences to prove its claim on how the provision created for NPA as per RBI guidelines is allowable as deduction u/s 36(1)(viia), the AO and the Ld.CIT(A) has rightly disallowed the claim of the assessee. Therefore, the order of the Ld.CIT(A) should be upheld.

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. As per provisions of section 36(1)(viia) of the Act, provision for bad and doubtful debt is made for the amounts not exceeding 7½ % of the total income and 10% of the aggregate average advances made by the rural branches of a Bank in computing total income is deductible. Deduction u/s 36(1)(viia) is not governed by provisions made in the books of account of the assessee, but purely on the basis of statutory provision as contained u/s 36(1)(viia) of the Act. The assessee is making provision for bad and doubtful debts accounts as per prudential norms and guidelines issued by the RBI. However, while computing total income, deduction has been claimed as per section 36(1)(viia) of the Act. Therefore, in the process, there is unutilized provision for bad and doubtful accounts in the books of account of the assessee. However, if any advance/loan given by rural branches becomes bad debt, such advances are to be debited to such provision account to the extent of balance available and excess, if any, should be debited to the P&L Account. In case of excess provision available as per books, section 36(1)(viia) did not have any time limit for utilization of such provision. If no bad debt arises on account of rural advances, provision created u/s 36(1)(viia) is to be carried forward from year to year and whenever bad debt on account of rural advances arises, such bad debts are to be set off against the balance in provision made for rural advances/loan, but cannot be claimed/allowed as deduction by debiting to P&L account. In the present case, provision made as per section 36(1)(viia) is higher, whereas write off of actual bad debt in respect of rural advance is less. Thus, there is excess provision u/s 36(1)(viia) and the same needs to be carried forward to the subsequent A.Ys. Therefore, in our considered view, the Assessing Officer and the Ld. CIT (A) erred in making addition towards the amount lying in provision for bad and doubtful account u/s 36(1)(viia) of the Act for Rs.1014,06,21,916 /-. Further, the assessee had also proved with evidences that provision for NPA is nothing but provisions for bad and doubtful debts created in terms of section 36(1)(via) of the Act. Therefore, in our considered view, the AO cannot disallow entire deduction claimed merely on the basis of nomenclature used by the assessee.

We, further note that this issue is squarely covered in favour of the assessee by the decision of the ITAT, Hyderabad Benches in appellant’s own case in and 1230/Hyd/2017 dated 28.08.2024 for the A.Y 2012-13, where under identical set of facts, the Tribunal held as under:

The Ld. Counsel for the assessee submitted that the investments by any bank in shares and securities are in the nature of stock-in-trade and further investment in securities is part of business activities of the assessee and thus, there cannot be any disallowance towards expenditure u/s 14A r.w.r 8D of IT Rules, 1962. The Ld. Counsel for the assessee further submitted that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Maxopp Investments Ltd vs. CIT reported in (2018) 402 ITR 640 (S.C). He, therefore, submitted that the addition made by the AO should be deleted.

The Ld. DR, on the other hand, supporting order of the Ld. CIT (A) submitted that this issue is covered in favour of the Department by the decision of the ITAT, in appellant’s own case for the earlier A.Ys, where the Tribunal upheld computation of disallowances made by the Assessing Officer @ 2% exempt income. Therefore, the order of the Ld. CIT (A) should be upheld.

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The assessee has earned dividend income of Rs.5,87,06,000/- and claimed exempt u/s 10(34) of the I.T. Act, 1961. The assessee had also made Suo motto disallowance u/s 14A of the Act for Rs.17,88,153/-. The Assessing Officer did not accept disallowances computed by the assessee and further applied Rule 8D of IT Rules, 1962 and computed total disallowance of Rs.12,47,47,560/- under Rule 8D(2)(iii) by applying 0.5% of average value of investment. The assessee contended that the shares held by the Bank in the ordinary course of its business is in the nature of stock-in-trade and any profit derived from said activity is assessable under income from business/profession and thus, question of invoking provisions of section 14A r.w.r 8D of IT Rules, 1962 to compute disallowances of expenses relatable to exempt income does not arise.

We, find that an identical issue has been considered by the Tribunal in assessee’s own case in for the A.Y.2012-13, where the issue has been discussed in detail in light of the decision of Hon’ble Supreme Court in the case of Maxopp Investments Ltd vs. CIT reported in (2018) 402 ITR 640 (S.C). The relevant findings of the Tribunal are as under: “42. We have gone through the reasons given by the Assessing Officer and the learned CIT (A) to uphold the addition towards disallowance of expenditure u/s 14A of the Act, r.w.r 8D of IT Rules, 1962, in light of argument of the learned Counsel for the assessee along with certain judicial precedents, including the decision of the Hon'ble Supreme Court in the case of Maxopp Investments Ltd vs. CIT (Supra). The Hon'ble Supreme Court has discussed this issue at length in the case of Maxopp Investments Ltd vs. CIT (Supra) in Paras 36 to 41 and more particularly in Para No.39, where it is clearly discussed the issue of applicability of provisions of section 14A r.w.r 8D in case of dividend income earned by any assessee on investment held as stock-in-trade. The Hon'ble Supreme Court after considering relevant facts held that in those cases where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as income under the head profits and gain from business and profession. What happens is that in the process when the shares are held as stock-in-trade, certain dividend income is also earned, though incidentally which is also income. However, by virtue of section 10(34) of the I.T. Act, 1961, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Shares and Stock vs. CIT(Supra). Therefore, to that extent depending upon facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. The sum and substance of the findings of the Hon'ble Supreme Court is that, once there is a dividend income from shares held as stock-in-trade which is claimed as exempt by virtue of section 10(34) of the I.T. Act, 1961, then the expenditure incurred relatable to said income should be apportioned. For better understanding, the relevant finding of the Hon'ble Supreme Court is reproduced hereunder: “36) There is yet another aspect which still needs to be looked into. What happens when the shares are held as ‘stock-in-trade’ and not as ‘investment’, particularly, by the banks? On this specific aspect, CBDT has issued circular No. 18/2015 dated November 02, 2015. 37) This Circular has already been reproduced in Para 19 above. This Circular

In the present case, the assessee contended that although the Hon'ble Supreme Court upheld the theory of apportionment of expenditure towards taxable and non- taxable income, but said findings is in the context of facts of the case of Maxopp Investments Ltd vs. CIT (Supra), whereas in Para 40 of the said judgment, it has upheld the decision of the Hon'ble Punjab & Haryana High Court in the case of State Bank Patiala vs. CIT(supra), where the ratio was that provisions of section 14A r.w.r 8D is not applicable when shares are held as stock-in-trade by a Bank. Although, the Hon'ble Supreme Court has upheld the decision of the Hon'ble Punjab & Haryana High Court and applicability of section 14A r.w.r 8D and the Assessing Officer has applied the provisions of section 14A and restricted the disallowance to the amount which was claimed as exempt, however, the learned CIT (A) disallowed the entire deduction of expenditure. That view of the learned CIT (A) was clearly untenable as rightly set aside by the ITAT. Therefore, on fact, Punjab & Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT. In other words, even in case before the Hon'ble Punjab & Haryana High Court, the issue was applicability of provisions of section 14A r.w.r 8D of the I.T. Act, 1961 and the same has been affirmed by the Hon'ble Supreme Court. The appellant claims that in view of the discussion of the Hon'ble Supreme Court in Para 41 of the judgment, provisions of section 14A r.w.r 8D is not applicable when shares are held as stock-in-trade by a Bank. Although we are unable to agree with the said argument of the learned Counsel for the assessee, but to give another opportunity to the assessee to explain its case before

The next issue that came up for our consideration from Ground No.4 of assessee’s appeal is with regard to the recovery from bad debts written off amounting to Rs.2,97,54,308/-. The Assessing Officer noticed that the appellant has recovered an amount of Rs.105,07,52,259/- as recovery from rural and non- rural branches out of bad debts written off and claimed as deduction which include an amount of Rs.2,97,54,308/- being the amount recovered from bad debts written off which were not allowed as deduction u/s 36(1)(vii) of the I.T. Act, 1961. The appellant claims that unless deduction is allowed u/s 36(1)(vii), the recovery cannot be taxed u/s 41(4) of the I.T. Act, 1961. The Assessing Officer however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the appellant could not file relevant evidence to prove that it has not claimed deduction towards write of bad and doubtful debts to the extent of Rs.2,97,54,308/- which represent the amount recovered out of bad debts written off during the impugned assessment year.

The Ld. Counsel for the assessee submitted that the appellant has placed all evidence including the relevant statement of total income from A.Y 2000-01 to 2004-05 and argued that the recovery from debts written off from the above period to the extent of 2,97,54,308/-, was neither claimed nor allowed as deduction. Therefore, he submitted that the matter may be set aside to the file of the Assessing Officer for verification and decide the issue in accordance with law.

The Ld. DR fairly agreed that this issue may be set aside to the file of the Assessing Officer for further verification and to decide the issue in accordance with law.

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The appellant claims that it recovered Rs.2,97,54,308/- from bad debt account in respect of the period from 2000-01 to 2004-05, but the same was not claimed nor allowed as deduction in above A.Ys. If the claim of the assessee is correct that the deduction is not allowed u/s 36(1)(vii), then recovery from bad debts written off cannot be taxed u/s 41(4) of the I.T. Act, 1961. The facts need to be verified to ascertain the claim of the assessee that it has not claimed deduction towards bad debts when the provision was made for the A.Y 2000-01 to 2004-05. Therefore, we set aside the issue to the file of the Assessing Officer and direct the Assessing Officer to verify the claim of the assessee and decide the issue in accordance with law.

The next issue that came up for our consideration from Ground No.5 of assessee’s appeal is with regard to disallowance of Rs.50,00,00,000/- towards provision for liability arising on account of revision of wages payable to employees. The AO has disallowed a sum of Rs.50,00,00,000/- towards provision created for wage arrears on the ground that the assessee has made adhoc provision for wage arrears even though the arrears are not due to the employees. It was the argument of the Ld. counsel for the assessee that in banking sectors the wages of the employees are revised periodically and in anticipation of wage arrears, the assessee has made adhoc provision for wage arrears. The assessee further submitted that this issue is squarely covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of CIT Vs. Bharat Heavy Electricals (2013) 352 ITR 88, where the Hon’ble Delhi High Court held that once there is no dispute with regard to terms of employment between the workers and officers with the bank and dispute is only with regard to quantification of the compensation of wages, then provision created by the assessee for wage arrears in anticipation for revision in pay cannot be treated as unascertained liability. Therefore, he submitted that the additions made by the AO should be deleted.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee is a banking company and is bound by bi-partite agreement with the employees and the officers for payment of wages in terms of agreement between workmen and All India Banking Officers Association from time to time. It is also not in dispute that wages of employees are revised from time to time as per bi-partite agreement with the participating banks and employee’s associations and the last of such wage settlement was entered into on 31.10.2012. According to the assessee, from 01.11.2012 a new wage settlement was entered into between the parties for which negotiations have commenced during the A.Y. 2013-14 and were in progress. The Ld. counsel for the assessee further contended that the employees were demanding increase of 19.5% and the Indian Bank Association has accepted for increase of 13% which was under further negotiations. Since the five-month period in the financial year 2012-13 relevant to A.Y.2013-14 was covered by such settlement, the assessee has made provision of Rs.50,00,00,000/- in the account for the F.Y.2012-13 towards wage revision which was under negotiation. In our considered view, it is an admitted fact that in the banking industry, the wages of the employees and officers are revised periodically and on the basis of bi-partite agreements between the parties. The assessee has made provision in the books of accounts based on negotiations between the employees and the Association and also based on earlier settlements. Therefore, we are of the considered view that the provision created by the assessee in the books of accounts towards wage arrears is on the basis of scientific methods and on historical trends and thus, the provision cannot be treated as unascertained liability. Further, this issue is also covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of CIT Vs. Bharat Heavy Electricals Ltd [2013] 352 ITR 88 (Del), where the Hon’ble High Court has considered an identical issue of provision made for wage arrears and after considering the relevant facts, held that once provision is on the basis of scientific method and historical trends, then the same cannot be treated as unascertained liability. Similar view has been taken by the Hon’ble High Court of Rajasthan in the case of Principal Commissioner of IT Ajmer Vs. Erstwhile Raj Gramin Bank, Alwar 2017(11) TMI 129, where the Hon’ble High Court by following the decision of Hon’ble Delhi High Court in the case of CIT Vs. Bharat Heavy Electricals Ltd. (supra) allowed the provision created for wage settlements.

In view of this matter and by respectfully following the decision of Hon’ble Delhi High Court and Rajasthan High Court in the cases cited above, we are of the considered view that the AO and the Ld.CIT(A) erred in disallowing the provision created for wage arrears. Thus, we set aside the order of the Ld.CIT(A) on this issue and direct the AO to delete the additions made towards disallowance of provisions for wage arrears.

On appeal, the Ld. CIT (A) sustained the addition made by the Assessing Officer.

The Ld. Counsel for the assessee submitted that the Ld. CIT (A) is erred in sustaining addition made by the Assessing Officer towards bad debts written off pertains to non-rural branches u/s 36(1)(vii) without appreciating fact that the Hon'ble Supreme Court in Para 45 in the case of Catholic Syrian Bank Ltd vs. CIT (Supra) very clearly explained the position of deduction towards provision for bad debts u/s 36(1)(viia) and deduction towards bad debt written off u/s 36(1)(vii). Further, this issue is also covered in favour of the assessee by the decision of ITAT Hyderabad in assessee’s own case for the A.Y.2012-13 in where the Tribunal by following the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd vs CIT (2012) 343 ITR 270 (SC) deleted the additions made by the AO. Therefore, he submitted that the Ld. CIT (A) has clearly erred in sustaining additions made by the Assessing Officer.

The Ld. DR, on the other hand, supporting the orders of the Ld. CIT (A) submitted that the law is clear in as much as after insertion of Explanation (2) by the Finance Act 2013 w.e.f. A.Y 2013-14 for the purpose of proviso to clause (vii) of section 36(1) and 36(2)(v) of the Act, the account referred to therein shall be only one account in respect of provision for bad and doubtful debts created u/s 36(1)(viia) and such account which related to all types of advance including advance made by rural branches, therefore, the appellant is erred in once again relying upon the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd vs. CIT (Supra) which was rendered before the amendment. The Ld. CIT (A) after considering the relevant facts has rightly sustained the addition made by the Assessing Officer and their order should be upheld.

We have heard both parties, perused the material available on record and gone through the orders of the authorities below. The appellant has claimed deduction towards bad debts written of in respect of non-rural branches for Rs.329,62,82,921/- without reducing said written off from credit balance available in provision for bad and doubtful debts created u/s 36(1)(viia) in respect of rural branches. The Assessing Officer did not accept the contention of the assessee on the ground that after insertion of Explanation (2) to provisions of sub-section (vii) of section 36(1), the account referred to therein shall be one account for all the advances including advances made by the rural branches of an assessee bank. It is the contention of the assessee that even after insertion of Explanation 2 to proviso to sub clause (vii) of section 36(1), the ratio laid down by the Hon'ble Supreme Court holds good, because the Hon'ble Apex Court has clearly explained the law in respect of deduction towards provision for bad & doubtful debts u/s 36(1)(viia) of the Act and deduction towards bad debts written off u/s 36(1)(viia) and as per the ratio laid down by the Hon'ble Supreme Court, the scheduled commercial banks would continue to get full benefit of write off of irrecoverable debts u/s 36(1)(vii) in addition to the benefit of deduction for provision for bad & doubtful debts u/s 36(1)(viia).

Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s). For the above reasons, I agree that the appeals filed by the assessees stand

In this view of the matter and by respectfully following the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd vs. CIT (Supra), we direct the Assessing Officer to delete the addition made towards bad debts written off in respect of non-rural branches u/s 36(1)(vii) of the I.T. Act, 1961 for Rs.329,62,82,921/-.

In the result, appeal filed by the assessee in is partly allowed for statistical purpose.

The first issue that came up for consideration from ground No.(ii) of Revenue’s appeal is deletion of addition of Rs.195,00,00,000/- made by the Assessing Officer towards disallowance of excess claim of deduction u/s 36(1)(viii) of the Act. We, find that an identical issue has been considered by us in assessee’s own case for the A.Y.2013-14 in ITA No.350/Hyd/2018. But for the figures, the facts and issues involved in this appeal are identical. The reasons given by us in the preceding paragraph Nos.10 and 11 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we set aside the order of the Ld.CIT(A) on this issue and restore the issue back to the file of the Assessing Officer for reconsideration. The Assessing Officer is directed to reconsider the issue in light of our discussion given on the issue for the A.Y.2012-13 and decide the issue for the impugned assessment year.

The next issue that came up for consideration from Ground No.(iii) and (iv) of Revenue’s appeal is deletion of addition of Rs.1445,83,26,590/- made by the Assessing Officer on account of disallowance of differential amount of depreciation on investments claimed by the assessee bank.

The appellant bank has claimed depreciation in respect of investments held in Available For Sale (AFS) category for Rs.1,79,73,20,381/- crores and investments held in Held to Maturity (HTM) category for Rs.1266,10,06,209/- crores, total amounting to Rs.1445,83,26,590/-. The assessee claimed depreciation on investment based on scrip wise valuation of securities on the ground that the investment of appellant bank is stock-in-trade and further, any diminution in value of the said stock in trade should be treated as loss or depreciation. The Assessing Officer disallowed the loss claimed for Rs.179,73,20,381 in respect of AFS securities by holding that the assessee has claimed only diminution in value of securities, whereas, the net appreciation, if any has been ignored. Further, the Assessing Officer has also disallowed depreciation claimed on securities held under HTM securities by holding that the HTM securities do not constitute stock-in-trade and these securities are to be valued at cost and not at cost or market price, whichever is lower.

On appeal, the Ld. CIT (A) by following the decision of the ITAT Hyderabad Benches in appellant’s own case for A.Y 2006- 07 deleted the addition made by the Assessing Officer.

The Ld. DR submitted that the Ld. CIT (A) is erred in deleting the addition made by the Assessing Officer towards diminution in value of investment without appreciating the fact that the said diminution in the value of investment was not provided for in the books of account of the assessee bank.

The Ld. Counsel for the assessee, on the other hand, supporting the order of the Ld. CIT (A) submitted that this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches in the appellant’s own case for the A.Y 2006-07, where under identical set of facts, the Tribunal held that the deduction towards diminution in value of investment is allowable deduction.

We have heard both parties, perused the material available on record and gone through the orders of the authorities below. We find that, this issue is squarely covered in favour of the assessee by the decision of the ITAT Hyderabad Benches, in appellant’s own case for the A.Y 2012-13 in where the Tribunal by following its earlier order for A.Y 2006-07 has deleted the addition made by the Assessing Officer. The relevant findings of the Tribunal are as under: “5. After hearing the parties and perusing the record, we find that the issue under consideration is squarely covered by the decision of the coordinate bench of ITAT, Hyderabad in assessee's own case for AY 2006- 07wherein the coordinate bench held as follows: "50. We are of the opinion that the assessee Bank is holding various Government Securities in order to comply with the statutory liquidated ratio. The bank would have to hold requisite percentage of deposits in the form of cash, gold, government or approved securities. The government securities held for the purpose of comply with the SLR has been held to be stock in trade and therefore value of the same as on 31st March has to be made and there is any depreciation the same should be allowed as a revenue deduction. However, the RBI has issued Circular wherein they have classified the investment made to comply with SLR requirement as `Held to maturity' (HTM), `Available for sale' (AFS) and `Held for Trade' (HFT). Based on the RBI Circular lower authorities came to the conclusion that investment in Government Securities which are classified under the head HTM cannot be considered as stock in trade and therefore depreciation in value of such securities cannot be allowed as a deduction. The Apex Court in the case of UCO Bank Ltd Vs CIT reported in 240 ITR 355 has held that value of the securities at cost or market value whichever is less should be accepted for income tax even if the banks in their books do not value on that basis. Therefore, it is an accepted proportion that investment made by the bank to comply with the SLR requirement would constitute their stock in trade and depreciation in value of the same is an allowable deduction.

Respectfully following the decisions cited by the Ld. counsel for the assessee, we uphold the claim of the assessee and direct the AO to allow depreciation/fall in value of investment in Government Securities including

In this view of the matter and by respectfully following the decision of the ITAT Hyderabad Benches in appellant’s own case for the A.Y 2012-13, we are inclined to uphold the findings of the Ld. CIT (A) and reject the grounds taken by the Revenue.

In the result, an appeal filed by the Revenue for the A.Y.2014-15 is partly allowed for statistical purpose.

The first issue that came up for consideration from ground No.2 of assessee’s appeal is addition of Rs.1089,99,27,003/- towards deduction u/s 36(1)(viia) of the Act. An identical issue has been considered by us in the assessee’s own case for the A.Y.2013-14 in ITA No.364/Hyd/2018. But for figures, the facts and the issue is identical for the year under consideration. The reasons given by us in the preceding paragraph Nos.28, 29 and 30 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we set aside the order of the Ld.CIT(A) on this issue and restore the issue back to the file of the Assessing Officer for reconsideration. The Assessing Officer is directed to reconsider the issue in light of our discussion given in assessee’s own case for the A.Y.2013-14 and decide the issue for the year under consideration.

The next issue that came up for consideration from ground No.3 of assessee’s appeal is disallowance u/s 14A of the Act. An identical issue has been considered by us in the assessee’s own case for the A.Y.2013-14 in ITA No.364/Hyd/2018. But for figures, the facts and issue are identical for the year under consideration. When we compare the issue before us for the A.Y.2013-14, the reasons given by us in the preceding paragraph Nos.35, 36 and 37 shall mutatis mutandis apply to this appeal as well. Therefore, for similar reasons, we set aside the order of the Ld.CIT(A) on this issue and restore the issue back to the file of the AO for reconsideration in light of our discussions given on the issue for the earlier assessment year and decided the issue for the year under consideration.

The next issue that came up for consideration from Ground No.4 of the assessee’s appeal is addition towards disallowance of Rs.99,75,00,000/- towards provision for wage arrears. An identical issue has been considered by us in assessee’s own case for the A.Y.2013-14 in ITA No.364/Hyd/2018. But for the figures, the issue is similar for the year under consideration. The reasons given by us in the preceding paragraph Nos.44 and 45 shall equally apply to this appeal as well. Therefore, for similar reasons, we set aside the order of the Ld.CIT(A) and directed the Assessing Officer to delete the additions made towards disallowance of provision for wage arrears.

The next issue that came up for consideration from Ground No.5 of assessee’s appeal is disallowance of sum of Rs.2,50,00,000/- u/s 37(1) of the Act towards penalty paid u/s 46(4) of the Banking Regulation Act, 1949 for deviation in implementation of KYC-AML guidelines. The assessee bank has not added back penalty in the computation of income by following the decision of Hon'ble Supreme Court in the case of CIT Vs. Dhanalaxmi Bank Ltd. (373 ITR 526). The Assessing Officer, however, was not convinced with the explanation furnished by the assessee. According to the Assessing Officer, penalty paid to RBI u/s 46(4) of the Banking Regulation Act, 1949 for deviation in implementation of KYC-AML guidelines is penal in nature for violation of any law, which is an offence, or which is prohibited by law and therefore, cannot be allowed as deduction. The Assessing Officer had also distinguished the case law relied upon by the assessee in the case of CIT Vs.Dhanalaxmi Bank Ltd and held that the facts of the said case were entirely different, where the RBI has imposed penal interest on the bank for not maintaining cash reserve ratio, whereas, in the present case, penalty has been levied for contravention of section 46(4) of the Banking Regulation Act, 1949.

Being aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). Before the Ld.CIT(A), the assessee contended that penalties paid by banks to RBI for not adhering to its regulations in the course of its business cannot be treated as penalties levied for offence or prohibition of an act, therefore, submitted that the additions made by the Assessing Officer should be deleted. The Ld.CIT(A) after considering the relevant submissions of the assessee held that expenditure incurred towards penalty paid to RBI for violation of provisions of section 46(4) of the Banking Regulation Act, 1949 is not a business expenditure incurred wholly and exclusively for the purpose of business of the assessee and therefore, cannot be allowed as deduction.

Aggrieved by the Ld.CIT(A) order, the assessee is now in appeal before the Tribunal.

The Ld. Counsel for the assessee submitted that the Ld.CIT(A) is erred in sustaining the additions made by the Assessing Officer towards disallowance of penalty paid to RBI for violation of section 46(4) of the Banking Regulation Act, 1949 for deviation in implementation of KYC-AML guidelines without appreciating the fact that the said payment is not penalty for committing an offence or prohibition of any law. The Ld. counsel for the assessee further submitted that this view is squarely covered in favour of the assessee by the decision of ITAT Ahmedabad benches in the case of Bapunagar Mahila Co-op Bank Ltd. 2015(7) TMI 472-ITAT Ahmedabad.

The Ld. DR, on other hand supporting the order of the Ld.CIT(A) submitted that any penalty paid for violation of any law or for prohibition of any act cannot be allowed as deduction u/s 37(1) of the Act. The Assessing Officer and the Ld.CIT(A) after considering the relevant facts have rightly disallowed penalty paid to RBI for violation of section 46(4) of Banking Regulation Act, 1949. Therefore, their order should be upheld.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the RBI has imposed penalty of Rs.2,50,00,000/- u/s 46(4) of Banking Regulation Act, 1949 for deviation in implementation of KYC-AML guidelines. The only dispute is with regard to whether the penalty imposed by RBI u/s 46(4) of Banking Regulation Act, 1949 is penal in nature or compensatory in nature. As per section 37(1) of the Act, any expenditure incurred by an assessee for any purpose, which is offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance should be made in respect of such expenditure. Section 46(4) of the Banking Regulation Act, 1949 deals with penalties for complying with certain directives of the RBI and as per said provisions, if any other provision of this Act is contravened or if any such default is made in complying with any requirements of this Act, by any person, such person shall be punishable with fine which may extend to one crore rupees or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where a contravention or default is a continuing one, with a further fine which may extend to one lakh rupees for every day, during which the contravention or default continues. On plain reading of section 46(4) of Banking Regulation Act, it is very clear that the RBI imposed penalty for not adhering to guidelines or not following the Act, which is compensatory in nature, but is not penal in nature, because the provisions only recommend payment of fine, but there are no provisions for conviction etc. From the above provisions, it is very clear that such penalty is compensatory in nature for not adhering to guidelines, but not penal in nature. If any penalty paid by any person is only compensatory in nature, then the same cannot be treated as any expenditure incurred for the purpose which is an offence or which is prohibited by law. This legal principle is supported by the decision of ITAT Ahmedabad benches in the case of Bapunagar Mahila Co-operative Bank Ltd.(supra), where the Tribunal deleted identical additions made by the Assessing Officer towards levy of penalty by RBI for violation of its directions. In the present case, RBI imposed penalty for deviation in implementation of KYC-AML guidelines and therefore, in our considered view, the said violations cannot be considered as criminal act for which the assessee has paid penalty. Therefore, we are of the considered view that the Assessing Officer and the Ld.CIT(A) erred in disallowing penalty paid to RBI u/s 46(4) of the Banking Regulation Act, 1949 u/s 37(1) of the Act. Thus, we set aside the order of the Ld.CIT(A) on this issue and direct the Assessing Officer to delete the additions made towards disallowance of expenditure incurred towards payment of penalty to RBI u/s 37(1) of the Act.

As a result, appeals filed by the Revenue for the A.Y.2013- 14 and 2014-15 and the appeals filed by the assessee for the A.Y.2013-14 and 2014-15 are partly allowed for statistical purpose. Order pronounced in the Open Court on 24th January, 2025.