ASSISTANT COMMISSIONER OF INCOME-TAX, SATARA vs. THE KARAD URBAN CO. OP. BANK LTD KARAD, KARAD

4. On the facts and circumstances of the case and in law, the Id. CIT(A), while giving relief to the assessee, has failed to appreciate that even the latest Master Direction of the RBI dated 12/09/2023 bearing No.RBI/DOR/ 2023-24/104 DOR.MRG.36/ 21.04.141/2023-24 issued to all Commercial Banks on Classification, Valuation and Operation of Investment Portfolio of Commercial Banks, says that while the gains and losses across all performing investments held under the AFS have to be aggregated and net appreciation or depreciation shall be directly credited or debited to a reserve named AFS Reserve, the same shall not be routed the Profit & Loss Account.

.”

3. Briefly stated the facts are that the assessee is an Urban Co-Operative Society bank engaged into banking business for more than 105 years, having 67 branches all over the Maharashtra. For the AY 2018-19, the assessee e- filed its original return on 30.10.2018 declaring the total income of Rs. 4,99,34,570/-. The return was subsequently revised declaring the same total income as above. The case of the assessee was selected for scrutiny under CASS. Accordingly, statutory notice(s) u/s. 143(2) and 142(1) of the Income Tax Act, 1961 (the “Act”) alongwith questionnaire were issued and duly served upon the assessee. In response thereto, the assessee filed its reply which was taken on record and considered by the Ld. Assessing Officer (“AO”). The Ld. AO observed that during the relevant AY, the assessee bank has made a “provision for depreciation” of Rs. 34.5 Crores, however, the said amount has not been disallowed by the assessee while computing its total income as per the provisions of the Act. He, therefore issued a show cause notice to the assessee asking it to show cause as to why the amount of provision of Rs. 34.5 Crores should not be disallowed and added back to the income of the assessee and also noted that the assessee has not furnished any supporting documentary documents in support of its claim. The assessee filed its reply to the said show cause notice (incorporated in para 5.4. and 5.5 of the assessment order) but the same was not found to be acceptable by the Ld. AO.

The assessment was completed by the Ld. AO at the total income of Rs.39,49,34,510/- vide order dated 24.03.2021 passed u/s. 143(3) r.w.s. 143(3A) & 143(3B) of the Act by making disallowance of “provision for depreciation” of Rs. 34,50,00,000/- u/s.37 of the Act and adding the same to the income of Rs. 4,99,34,510/- returned by the assessee.

“6.1 Brief facts of the case are that the appellant had filed its return of income for A.Y 2018-19 on 30.10.2018. Thereafter the appellant revised its return of income on 14.2.2019 & 73.2019. The case of the appellant was selected for scrutiny under CASS. The AO during the course of the assessment proceedings noticed that the appellant had claimed large amount of refund during the year so the appellant was asked to submit explanation about the same. After considering the reply of the appellant the AO noticed that the appellant had made provision for depreciation of Rs. 34.50 cr. However the amount was not disallowed by the appellant while computing its total income. In view of the same the AO issued a show cause dated 1.2.2021 to the appellant asking it to explain as to why the provision of Rs. 34.50 cr should not be disallowed and added back to its income as provision for depreciation is not allowed as an expense. In response to the same the appellant submitted its reply explaining that the bank had made investment in securities under AFS (available for sale) of Rs. 8,44,60,37,949.32 as on 31.3.2018 and as per RBI guidelines these securities are valued at market cost provided by FBIL (Financial Benchmark India Private Limited) as on 31.3.2018. Accordingly the valuation of these securities was done and market value of these securities was Rs.47,03,31,106.32/- and bank had opening balance for depreciation of Rs.12,55,00,000/- so the difference of depreciation of Rs. 34,50,00,000/- was charged to P&L Account in A.Y 2018-19. The AO did not accept the explanation submitted by the appellant by holding that the loss claimed by the appellant is a notional loss as the same is anticipated because it has neither occurred nor there is definite proof of the same happening and the real loss will be booked at the time of sale or redemption. The AO thus completed the assessment proceedings by making an addition of Rs. 34.50 cr u/s 37 to the returned income of the appellant. 6.2 The appellant in its ground of appeal

1 has assailed the AO for travelling beyond the scope of scrutiny in making an addition of Rs. 34.50 cr as the ground on which the addition was made was not part of the issues notified to the appellant in the initial notice and the AO had not taken appropriate approvals to convert the case of appellant into complete scrutiny from limited scrutiny 6.2.1 The appellant in its submission during the appellate proceedings has not submitted any legal or factual details in support of the ground of appeal

1. However from the perusal of the assessment order it is clear that out of 6 reasons for selection of the appellant's case for scrutiny 3 were related to verifying large refund claimed by the appellant. The AO vide his questionnaire issued along with notice u/s 142(1) dated 19.1.2021 asked the appellant to explain the reason for claiming large refund and in response to the same the appellant vide its reply submitted that the refund was caused to the provision for depreciation made by it. So therefore the addition made by the AO is subsequent to enquiry as per reasons for which the appellant's case was selected for scrutiny In view of the same there is no fault in the action of the AO. The ground of appeal 1 is dismissed.

6.3 The appellant in its grounds of appeal has assailed the AO for not issuing the initial notice dated 22.9.2021 as per the format as notified by the CBDT vide letter F No. 225/157/2017/ITA. II dated 23.6.2017 as the same does not mention in clear terms that the case of the appellant has been selected for complete scrutiny as has been claimed in the second SCN cum DAO served on the appellant on 5.3.2021 6.3.1 The appellant in its submission during the appellate proceedings has not submitted any evidence in support of its contention. Moreover as per the provisions of section 292 B the notice or the assessment cannot be held to be invalid or deemed to be invalid merely by reason of any mistake, defect or omission in such assessment or notice if such assessment or notice is in substance and effect in conformity with or according to the intent and purpose of this act. The provisions of section 292 B are as under Return of income, etc., not to be invalid on certain grounds. 292B. No return of income, assessment, notice, summons or other proceeding. furnished or made or issued or taken or purported to have been fumished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.] In view of the discussion above the ground of appeal raised by the appellant is without basis hence liable to be rejected. The ground of appeal 2 is dismissed. 6.4 The appellant in its ground of appeal 3 has justified its action of claiming depreciation in value of investment of Rs. 34,50,00,000/- as the same was based on accounting policies followed consistently from year to year and when CBDT & RBI circulars on the issue and judicial precedents of High Courts and tribunals is in the favour of the appellant. 6.4.1 The appellant in its submission during the appellate proceedings has submitted that the valuation of the securities has been done as per the RBI master Circular No. RBI/2015-16/43 DCBR. BPD (PCB) M.C. No. 4/16 20.000/2015-16 dated July 1, 2015. The appellant has also relied on the Instruction no. 17/2008 dated 26.11.2008 issued by the CBDT in this regard. The appellant has also relied on the following case laws in support of its contention:

1. CIT vs. Bank of Baroda 129 taxman 716 (Bombay)

2. ITO Srinagar vs. J&K bank Ltd. 95 ITD 141 (Amritsar ITAT)

3. Capital Local Area Bank Ltd. vs. ACIT Jalandhar 82 taxmann.com 387 (Amritsar ITAT)

4. Yes Bank vs. ACIT 88 taxnmann.com 431 (Mumbai ITAT)

5. Caylon Bank vs. DCIT 31 taxmann.com 231 (Mumbai ITAT)

6. ACIT vs. Chatrapati Rajeshri Sahu Urban Co-op Bank Ltd. IT Appeal No. 798 of 2011 (ITAT- Pune) I have considered the assessment order of the AO and the submission made by the appellant. After the perusal of the submission of the appellant and after taking into consideration the RBI master Circular No. RBI/2015-16/43 DCBR. BPD (PCB) M.C. No. 4/16.20.000/2015-16 dated July 1, 2015, the Instruction no 17/2008 dated 26.11.2008 of the CBDT and the ratio laid down by the Hon'ble Courts in the various case laws cited by the appellant as discussed above I find that the appellant was justified in claiming the depreciation in value of investment amounting to Rs.34,50,00,000/- as an expenditure. The ground of appeal 3 is allowed.”

5. The Revenue is aggrieved by the above decision of the Ld. CIT (A) and is in appeal before the Tribunal and all the grounds raised by the Revenue relate thereto.

7. The Ld. AR, on the other hand, strongly supported the order of the Ld. CIT(A) and submitted that the Ld. CIT(A) has rightly allowed the claim of the assessee. He further submitted that the impugned issue is covered in favour of the assessee in its own case by the coordinate bench of the Tribunal for the preceding AYs 2007-08, 2008-09, 2009-10 and 2010-11. Before us, the Ld. AR filed the detailed written submissions in support of its claim, which is reproduced below:

“After placing before Your Honors, these facts, now please allow us to make our submission on the grounds of appeal raised by the Appellant Department in this impending appeal as follows - I. Hon'ble CIT-A, NFAC, Delhi was very much aware of the legal position with respect to the issue that is being contested by the appellant-department in this appeal & has also applied his mind to the facts of the case as well as legal matrix as applicable to the case & the same is amply clear from the concluding portion of para no 6.4.1 on page 18 of his order u/s 250 dt 04.06.2024, which is being reproduced here for the sake of clarity – “I have considered the assessment order of the AO and the submission made by the appellant. After the perusal of the submission of the appellant and after taking into consideration the RBI master Circular No. RBI/2015-16/43 DCBR BPD (PCB) MC No 4/16 20 000/2015-16 dated July 1, 2015, the Instruction no. 17/2008 dated 26.11.2008 of the CBDT and the ratio laid down by the Hon'ble Courts in the various case laws cited by the appellant as discussed above I find that the appellant was justified in claiming the depreciation in value of investment amounting to Rs.34,50,00,000/- as an expenditure. The ground of appeal 3 is allowed." II. Reliance placed on Hon'ble Apex Court's decision in case of Southern Technologies Ltd- 320 ITR 577 while assailing the stand taken by Hon'ble CIT-A NFAC in placing reliance on RBI Master Circular No RBI/2015-16/43 DCBR BPD (PCB) MC. No 4/16.20.000/2015-16 dated July 1, 2015, is also totally misplaced, misleading uncalled for & based on incorrect understanding of legal position & for this purpose the assessee respondent wishes to place on record that in his own cases in the past, the same issue has been decided by Hon'ble ITAT Pune in favor of the assessee respondent in appeal no 103,1454,2432/PN/2012, which were decided on 31.01 2014 & also in appeal no 200/PN/2015 decided on 31 10.2017 II.I Therefore the assessee respondent also wishes to place on record that this is a COVERED CASE II.II moreover it will be worth placing on record that all these appeals have been decided after the decision in case of Southern Technologies Ltd was delivered by Hon'ble Apex Court III. Appellant - Department's contention that CBDT instruction no 17/2008 dt 26.11.2008 merely states that depreciation / appreciation of scrips held under AFS securities is to be aggregated and only net depreciation is to be provided for in the accounts, as per the latest RBI guidelines but the same does not provide that such notional depreciation be allowed as expenditure while computing taxable income, clearly amounts to an attempt to interpret/challenge by the appellant-department to the said instruction which has been issued by the CBDT u/s 119(2)(a) of the Act. III.I with due respect & utmost humbleness, please allow us to place on record that CBDT instructions are totally binding upon every Revenue Officer & he is only supposed to abide by the same & not allowed to put his own interpretations into it. For this purpose, the assessee - appellant wishes to place on record the following judicial precedents on which he wishes to place his heavy reliance - Case 1. in Commissioner of Customs Calcutta vs Indian Oil Corporation (CA 2342-2362 of 2001) Hon'ble Apex Court, while stating that provisions of section 151A of Customs Act are pari material with provisions of section 119 of the Income Tax Act, has held that A Revenue Officer can not take stand against Circulars issued by the Department-136 taxman 491 Case

2. Whether, since Board has considered it necessary to lay down a general test for deciding what is a doubtful debt in circular dated 9-10-1984 and directed that all ITOs should treat such amounts as not forming part of income of assessee until realised, this direction by way of a circular cannot be considered as travelling beyond powers of Board under section 119 and such a circular is binding under section 119-Held, yes - UCO BANK-104 taxman 547 Case

3. Any action of Income Tax Department violating CBDT Instruction is untenable in law - Mrs Meena Shirish Kotwal - IV. The appellant-department's contention that "the assessee, has failed to appreciate that even the latest Master Direction of the RBI dated 12/09/2023 bearing No RBI/DOR/ 2023- 24/104 DOR MRG 36/ 21:04 141/2023-24 issued to all Commercial Banks on Classification, Valuation and Operation of Investment Portfolio of Commercial Banks, says that while the gains and losses across all performing investments held under the AFS have to be aggregated and net appreciation or depreciation shall be directly credited or debited to a reserve named AFS Reserve. the same shall not be routed the Profit & Loss Account, is also totally wrong & misplaced because the RBI circular cited by the appellant - department is applicable to Commercial Banks only & does not have any applicability in case of Co-operative Bank & it may please be noted that the assessee-respondent is a Co-operative Bank Final Prayer- Your Honors after placing on record the appropriate legal position with respect to the case on hand, the respondent most humbly & respectfully wishes to place on record that the challenge to the Appellate order passed by Hon'ble CIT-A NFAC u/s 250 of the Act on 04.06.2024, is not correct both on facts as well as on legality, therefore the assessee respondent most respectfully makes a prayer for rejection of all the contentions made by the appellant - department & confirm the order passed by Hon'ble CIT-A NFAC.”

raised by the Revenue which are reproduced in the proceeding para 2 above. On the contrary, the Ld. Counsel for the assessee vehemently supported the order of the Ld. CIT(A) by making a detailed submission of its arguments reproduced in the preceding paragraph. We find that the Ld. CIT(A) has allowed the claim of the assessee giving the cogent reasons in his appellate order after considering the assessment order and the factual and legal submissions made by the assessee. Further, perusal of the decision(s) of the coordinate bench of the Pune Tribunal reveals that the impugned issue has been decided in favour of the assessee in AY 2007-08, 2008-09, 2009-10 and 2010-11 in The Karad Urban Co-op Bank Ltd. Vs. Addl. CIT (ITA Nos. 103, 1454 & 2432/PN/2012 respectively), wherein the Tribunal has discussed this issue in detail and accordingly gave its verdict in favour of the assessee. The Revenue has not brought on record any material to contradict the findings of the Ld. CIT(A) as well as the Tribunal in the past years. The relevant observations and findings of the Pune Tribunal in the said decisions (supra) are reproduced below: : AY 2007-08

4. The learned Authorized Representative pointed out that the issues in ground Nos.2, 3 and 4 of assessee's appeals are covered in favour of the assessee by the order of ITAT, Pune Bench 'A' in vide order dated 05.08.2013 in the case of Dy.CIT Vs. Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd., wherein, the similar issues were decided by the Pune Bench 'B' in favour of assessee by observing as under:

10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find an identical issue had come up before the Tribunal in the case of Nahsik Merchant Cooperative Bank Ltd. (Supra). We find the Tribunal has discussed the issue and dismissed the grounds raised by the Revenue by holding as under:

4. After going through rival submissions and material on record we find that with the advent of section 80P(4) w.e.f. A.Y, 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(1) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in section 80P has taken away the benefit of the erstwhile deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the Finance Act, 2006 w.e.f. 01-04-2007 reads as under: “The provision of the section was not in relation to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank.”

5. The intention of the provision may be derived more precisely from relevant Para 166 of the budget speech which stated that "Co-operative banks, like any other bank, are lending institutions and should pay tax on their profits, Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a special footing and will continue to be exempt under section 80P of the Income Tax Act. However, I propose to exclude all other co-operative banks from the scope of that section Accordingly, section 80P is to be amended to give effect to the above proposal. It is also proposed to amend section 2(24) to provide that profits and gains of business of banking (Including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of 'income' (with effect from 1st April, 2007)".

6. Cooperative bank unlike other commercial banks are subjected to dual control from both RBI as well as from state cooperative department. The accounting treatment for a cooperative bank is therefore a result of guidelines from both the controlling authorities. Ordinarily a deduction is not available to an assessee unless specifically provided under the Act. This is irrespective of accounting treatment provided by the assessee in its books of accounts. But at the same time it was well settled that deduction expressly mentioned under the Act are not exhaustive and profit is to be derived according to ordinary commercial principles. As per the extant RBI guidelines dated 01-07-2009 the investment portfolio of the banks is required to be classified under 3 categories viz., Held the maturity HTM), Held for Trading (HFT) and Available for Sale (AFS). The value of each kind of investment is to be done in the following manner: Sr. No. Classification Valuation Norms of Investment.

1. HTM These are carried at acquisition cost unless the cost is more than the face value, in which case the premium should be amortised over the period remaining to maturity. The premium is required to be amortised over the period remaining to maturity. This apart, any permanent diminution in value shall FV shall go on to reduce cost of the investment.

2. AFS The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. These investments are considered to form stock-in-trade of a bank and therefore are to be valued at cost or NRV, whichever is less. Fall in value below cost, therefore, is to be provided immediately, however any net appreciation in value is ignored and not recognized as income on the basis of conservatism.

8. The ITAT, Mumbai Bench, in the case of ACIT vs. The Bank of Rajasthan Ltd. (2011) TIOL-35-ITAT-Mumbai, has held that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been. amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. Vs. ACIT that amortization on purchase of Government securities was made as per prudential norms of the RBI and same was allowable deduction. In view of above, assessee was justified in contending for amortization of premium paid in excess of face value of securities held to maturity (HTM) category or period remaining till maturity was found reasonable by the CIT(A). Accordingly addition of Rs.17,91,659/- made by the Assessing Officer by disallowing amount towards amortization of Government Securities (HMT) was deleted. This reasoned factual and legal finding of the CIT(A) needs no interference from our side. We uphold the same.

: AY 2008-09 “7. At the outset of hearing, the learned Authorized Representative has not pressed the grounds of appeal

Nos. 1, 5, 6, 7, 8, 9, 10, 11 and 12, so they are dismissed as not pressed. The grounds of appeal Nos.2, 3 and 4 are with regard to claim of depreciation on government securities shifted from AFS to HTM Securities at the beginning of the year. This issue has been discussed vide para 4 of this order. Facts being similar, so following the same reasoning, the issue has been decided in favour of assessee.” : AY 2009- 10

10. At the outset of hearing, the learned Authorized Representative did not pressed the grounds of appeal Nos. 1, 2, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17, so they are dismissed as not pressed. The grounds of appeal Nos.3, 4, 5 and 6 are with regard to claim of depreciation on government securities shifted from AFS to HTM Securities at the beginning of the year. This issue has been discussed and decided in vide para 4 of this order. Facts being similar, so following the same reasoning, the issue has been decided in favour of assessee.”

9. Considering the facts of the case and legal position enumerated above and respectfully following the decision(s) of the coordinate bench of the Tribunal (supra) and in the absence of any contrary material brought on record by the Revenue to enable us to take a different view, the order of the Ld. CIT(A) is hereby upheld. The grounds raised by the assessee are accordingly dismissed.

Order pronounced in the open court on 4th March, 2025.