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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. A. K. GARODIA & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals have been filed by assessee as well as revenue. pertains to assessment year 2007- 08, cross appeals by assessee and revenue in ITA No. 637/Bang/2015 and ITA No. 627/B/2015 pertains to assessment year 2011-12 arising out of separate order dated 30/01/2015, by Ld. CIT (A), Hubli.
It has been submitted that common issues are involved in all these appeals and therefore for sake of convenience are being heard and disposed off by common order.
At the outset, both sides submits that all issues raised by assessee as well as revenue in respective appeals for assessment years under consideration stands squarely covered by orders of this Tribunal in assessee’s own case, for assessment year 2009 – 10 and 2010 – 11, vide order dated 25/04/2018 in ITA No. 673- 674/be/2014 and for assessment year 2012 – 13 and 2013 – 14 reported in (2020) 113 Taxmann.com 530. Ld.AR further submitted that, identical issue was considered by this Tribunal has been upheld by Hon’ble Karnataka High Court, Dharwad Bench, vide Page 3 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 order dated 14/12/2015, in and ITA No. 14/2014, for assessment year 2007-08 and 2008-09. In the appeal filed by revenue issue raised are as under:
1. 1. The order of CIT(A) is opposed to law and facts of the case.
2. Whether on facts & circumstances of the case, is the learned CIT(A) correct in allowing deduction of Rs. 225.73 crores u/s. 36(1) (viia).
3. Whether on facts & circumstances of the case, is the learned CIT(A) right in allowing assessee’s claim of depreciation of Rs. 95.10 lakhs on investments.
4. Whether on facts & circumstances of the case, is the learned CIT(A) correct in deleting the addition of Rs. 13.76 lakhs made on account of stable drafts.
5. Any other ground that may be during the appeal.
6. The appellant craves leave to add, alter, amend and delete any of the grounds of leave. It has been submitted that Ground No.1,5 and 6 are general in nature and therefore do not require any adjudication. Ground No. 2: It is observed that assessee is a rural bank, engaged in business of banking. Ld. AO had noticed that assessee claimed deduction on account of provision for bad and doubtful debts amounting to Rs.228.48 crores.
4. Both sides submitted that, this issue stands covered against assessee by order of this Tribunal for assessment year 2008-09, which is reproduced by this Tribunal in its order dated 25/04/2018 in ITA No. 673 and 674/be/2014 for assessment year 2009-10 and 2010-11. There is no dispute that facts and circumstances in present appeals are identical with that of assessment year 2012-13 and 2013-14 on this issue. It is also, admitted fact that assessee did not debit its profit and loss account Page 4 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 by any sum towards provision for bad and doubtful debts, amounting to Rs.228.48 crores under section 36 (1) (vii) of the Act. This issue has again been considered by this Tribunal for assessment year 2012-13 and 2013-14 reported in (2020) 113 Taxmann.com 530, wherein this Tribunal observed as under: “8. We have considered the rival submission. The provisions of Section 36(1)(viia)(a) of the Act lays down as follows: "(viia) in respect of any provision for bad and doubtful debts made by (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year."
In the case of Syndicate Bank (supra) 78 ITD 103 (Bang.), the Bangalore Bench of ITAT took the view that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an Assessee is entitled to 10 percent of the AARA as deduction u/s.36(1)(viia) of the Act. The relevant observations of the Tribunal in the aforesaid decision was as follows: "20. The learned CIT has also acted under the misconception that deduction under cl. (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is entitled to a deduction which is quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this is a specific deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts."
10. However the Bangalore Bench of ITAT in the case of Syndicate Bank (supra) 150 ITD 103 (Bang.) noticed that the ITAT Bangalore Bench in the case of Canara Bank in dated 9.6.2006 Page 5 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 considered in the case of Canara Bank in dated 9.6.2006 considered the decision of the ITAT in the case of Syndicate Bank 78 ITD 103(Bang) and the decision of the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra) and held that the decision rendered by the Hon'ble High Court has to be followed. The above decision though of a non-jurisdiction High Court was followed as the said decision of the Hon'ble High Court was rendered after the decision in the case of Syndicate Bank 78 ITD 103 (Bang.). The Tribunal held that Judicial discipline demands that the Tribunal should follow the later decision which has considered both the decisions on the issue. The Tribunal following the said decision held deduction on account of Provision for Bad and Doubtful Debts u/s.36(1)(viia) of the Act has to be allowed only to the extent such provision is actually debited in the Profit & Loss Account by the Assessee for the relevant previous year. We therefore respectfully following the decision of the Tribunal in the case of Canara Bank (supra), allow Gr.No.2 to 4 raised by the Revenue and hold that the disallowance made by the AO was proper and the Assessee is entitled to deduction only to the extent PBDD is debited to the P & L A/c. Thus Gr.No.2 to 4 3 raised by the revenue are allowed."
Respectfully following the decision of the Tribunal in Assessee's own case we hold that the AO was justified in disallowing the claim for deduction on account of provisions for bad and doubtful debts u/s.36(1)(viia) of the Act as admittedly the Assessee did not debit its profit and loss account any sum towards provision for bad and doubtful debts. We therefore restore the order of the AO and allow Gr.No.1 & 2 raised by the revenue.”
Respectfully following aforestated observations, we hold that assessing officer was justified in disallowing the claim of deduction on account of provision for bad and doubtful debts under section 36 (1) (viia) of the act. Accordingly, this ground raised
by revenue stands allowed. Ground No. 3 concerns with claim of depreciation of Rs.95.19 Lacs on investments held to maturity as stock in trade.
6. It has been submitted that, this issue also stands squarely covered by order of this Tribunal in ITA No. 673 and 674/be/2014 for assessment year 2009-10 and 2010-11 wherein this Tribunal observed as under:
Page 6 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 Ground No. 3 : As far as ground Nos. 4 and 5 raised by the Revenue are concerned, it is not in dispute before us that an identical issue came for consideration in Assessee’s own case in assessment year 2008-09 and this Tribunal on identical issue held that the assessee is entitled to get deduction on account of depreciation of investments which were held in the category of HTM (Held to Maturity). The dispute in AY 2008-09 was the Assessee in its profit and loss. account for the year ended 31.3.2007 had written off a sum of Rs,17,59,00,087 claiming depreciation on investments, by way of loss on valuation of securities which represents depreciation in the value of securities held by the assessee as on 31.3.2007. The assessee had valued the securities held by it as on 31.3.2007 and found that the market value of such securities as on the said data was less than the cost of the securities by the above sum of Rs.1759,00,087 and wrote off the same in its books of account on the basis of the principle 'cost or market value whichever is less applicable to the valuation of closing stock'. The Assessing Officer however did not agree with the view of the assessee and relying on CBDT's Instruction No.17/2008 dt.26.12.2008 came to the conclusion that the securities in respect of which the decrease in value was written off in the profit and loss account are held “investments held to maturity" and therefore these cannot be treated as stock-in-trade and consequently cannot be valued in the manner in which stock-in-trade is valued. On appeal, the learned CIT (Appeals) in his order relying on the decisions of the coordinate benches of this Tribunal in the case of :- I. ACIT (LTU) V Vijaya Bank in & 205/Bang/2007 d.24.1.2008 for Assessment Year 2003-04. II. (ii) The Karnataka Bank Ltd. VJCIT in ITA No.50/Bang! 997. III. (in) ING Vysya Bank Ltd V DCIT (2006) 6 SOT 606 (Bang) held that all investments made by the assessee constitute stock in trade for the purpose of income tax and has to be therefore valued in the manner in which stock-in-trade is valued. On further appeal by the revenue the Tribunal upheld the order of the CIT(A). Following are the relevant observation of the ITAT in for assessment year 2008-09 held as follows:- “11.5 We have heard the rival contentions on the issue before us and have perused and carefully considered the material on record including the judicial, pronouncements relied on. In the case on hand, we find that there is no dispute as regards the investment made by the assessee in securities and the said investments have been treated and classified by the assessee as stock-in-trade, which have been valued at the end of the year at cost or market value, whichever is less. From this it is clear that the asses-see is treating the securities held under the category ‘held to maturity' as stock-in-trade. This issue has been considered in detail by the Hon'ble Karnataka High Court in the case of Karnataka Bank Ltd. V CIT in its order (ITA No.172/2009 dt.22.3.2013), wherein the Hon’ble Court after considering the decision in the case of CIT V IG Vysya Bank Ltd. in ITA Page 7 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 No.2886/2005 dt.6.6.2012 hzi held at pages 23 to 25 at paras 9 & 10 its order as under: 9. In instant cases, the assessee has maintained the accounts in terms of the RBI Regulations and h has shown it as investment. But consistently for more than 1tqdçades it has been shown as stock-in-trade and depreciation is claimed and allowed Therefore notwithstanding that in the balance feet it is shown as investment, for the purpose of Income Tax Act, it is shown as stock- in-trad. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank has to take into consideration the market value, of the shares. If the market value is less than the cost price, in law they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the Balance Sheet.
In that view of the matter, the order passed by the authorities balding that in view of the RBI guidelines, the assessee is stopped from treating the investment as stock-in-trade is not correct That finding recorded by the authorities is hereby set aside. Tie appeal is allowed………… 11.6 The facts of the case on hand are similar to those in the case of Karnataka Bank Ltd in decided by the Hon'ble Karnataka High Court by order dt.23.3.2013. This decision of the Hon'ble Karnataka High Court has also been followed by a co-ordinate bench of this Tribunal in the case of DCIT V Syndicate Bank in ITA Nos.668 & 669/Bang/2010 and 708 & 709/Bang/2010 dt 19 6 2013 We, therefore, respectfully following the decision of the Hon’ble Karnataka High Court in the case of Karnataka Bank Ltd. (supra) hold that the order-of the learned.CIT(Appeals)does not call for any interference and consequently, dismiss grounds No.2 to 4 raised by revenue.”
Respectfully following the decision referred above, we uphold the order of the CIT(A) and dismiss ground No.4 and 5 5aised by the Revenue. There is no dispute that facts and circumstances in present appeal are identical with that of A. Y: 2009 – 10 and 2011 – 12 on this issue. Respectfully following the same, we do not find any infirmity in the order passed by Ld. CIT (A) and the same is upheld. Accordingly, this ground raised
by revenue stands dismissed.
7. Ground No. 4 concerns with deletion of sum of Rs.13,76,649/-being stale drafts. It has been submitted that assessing officer disallowed stale drafts and pay orders under Page 8 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 section 41 (1) of the Act, by holding that assessee purchased these and had not claimed/encashed them. Ld.AO was of the opinion that the said amount which remained unclaimed in the hands of assessee was profit chargeable to tax under section 41 (1) of the Act.
8. It has been submitted that, this issue stands squarely covered by order of this Tribunal in assessee’s own case for Assessment year 2007-08 and 2008-09 in and 227/B/2012 wide order dated 28/11/2013. Ld.AR submitted that Hon’ble Karnataka High Court, Dharwad Bench, approved the view taken by this Tribunal by observing as under: “We have bestowed our careful consideration to the rival contentions urged by the parties and perused the material papers and the judgements relied upon by the learned counsel for the assessee.
17. Re-question with regard to ‘stale drafts and pay orders’. It is not in dispute that the sum of Rs. 58,31,581/- had remained in the hands of the assessee upon the drafts and pay orders issued by the Bank having been rendered stale. The assessing authority sought to categorise the said sum within the meaning of ‘profit chargeable to tax’ under section 41(1) of the Act. Section 41(1) reads as follows:- “41(1) where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, - (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to Page 9 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (10 by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.”
A careful perusal of the above provision leads us to infer that Section 41(1) can be pressed into service when an allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by the assessee. In the instant case, the sum of Rs. 58,38,581/- has remained with the assessee owing to the fact that the payees or holders of the draft/pay orders had not encashed them. The language employed by the legislature being unambiguous, it would be incongruous to construe the said sum as either a loss, expenditure or trading liability incurred by the assessee. While dealing with a situation of unclaimed amount, the Hon’ble Supreme Court in the case of T.V. Sundaram Iyengari, has held as follows:- “12. We are unable to uphold the decision of the Tribunal. The amounts were not in the nature of security deposits held by the assessee for performance of contract by its constituents. As it appears from the facts of the case, the amounts were depleted b adjustments made from time to time. The CIT(A) found that the assessee wrote back the amounts to its P & L a/c because the various trading parties did not claim these amounts for a long time. The amounts represented credit balances in the name of the trading parties and was taken to its P & L a/c. The CIT(A) held Page 10 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 that these amounts were not (1996) 222 ITR 344 revenue receipts but were of capital nature. The provisions of s. 41(1) were not attracted in the facts of this case because he assessee’s liability to pay back the amounts to its customers had not ceased. The Tribunal agreed with this view”. (underlining is by us).
The Tribunal adverting to the above ruling has rightly deleted the sum of Rs. 58,38,581/-. Added by the assessing authority by holding it as unsustainable in law. Admittedly facts in present appeal is identical with that of A. Y: 2007 – 08 and 2008 – 09 considered by Hon’ble Karnataka High Court, Dharwad Bench. Respectfully following the same, we direct Ld. AO to delete the addition. Accordingly, this ground raised
by revenue stands dismissed. In the result appeal filed by revenue stands partly allowed. It has been submitted that assessee for assessment year 2007-08 and 2011-12 has raised similar issues. Grounds 2-14 are in respect of disallowance of a sum of Rs.27,80,85,386/- under section 40 (a) (ia) of the Act.
9. The Ld.AR submitted that, all contested issue stands squarely covered by order of this Tribunal in assessee’s own case for assessment year 2012-13 and 2013-14 reported in (2020) 113 Taxmann.com 530. It is also been submitted that, there is no change in facts and circumstances between the years under consideration as well as subsequent assessment years for which this Tribunal has already took consistent view.
Page 11 of 13 ITA 636/Bang/2015, ITA 627/Bang/2015 & ITA 637/Bang/2015 A. Ys : 2007 – 08 & 2011 – 12 42. We have given a careful consideration to the rival submissions. As far as disallowance of interest of a sum of Rs.28,98,43,076/- is concerned to the extent of the disallowance relates to interest paid to persons furnished Form 15 G and Form 15 H to the assessee, no disallowance can be made u/s 40a(ia) of the Act as held by the Hon'ble Karnataka High Court in the case of Sri Marikamba Transport Co., (Supra). The requirement of filing of Form 15G and 15H with the prescribed authority viz., CIT is only procedural and that cannot result in a disallowance u/s 40a(ia) of the Act. To the extent that payment of interest relates to the Government and the exempted category of persons, the assessee is directed to furnish required details to the AO and the AO will consider the claim of the assessee after affording opportunity of being heard to the assessee."
The decision cited by the revenue in the grounds of appeal
is with regard to the action of the CIT(A) in the deleting the disallowance u/s.40(a)(ia) of the Act on the ground the sums in question did not remain payable as on the last date of the relevant previous year and by following the decision of the Special Bench, Visakapatnam in the case of Merilyn Shipping & Transports (supra). As we have already seen the CIT(A) appeal deleted the disallowance u/s.40(a)(ia) of the Act on two grounds viz., (i) once the depositors give Form No.15G/H, the law empowers the Assessee to make payment of interest without deduction of tax at source. The requirement of filing the form so obtained before the prescribed authority within the prescribed period was only a procedural requirement and it was mandatory and for failure to file the form before the prescribed authority no disallowance can be made u/s.40(a)(ia) of the Act, and (ii) the sums in question did not remain payable as on the last date of the relevant previous year and by following the decision of the Special Bench, Visakapatnam in the case of Merilyn Shipping & Transports (supra). The decision cited by the revenue in the grounds of appeal is only in the context of the second ground on which the CIT(A) allowed relief to the Assessee. As far as the first ground on which CIT(A) gave relief to the Assessee is concerned, that ground is supported by the decision of the Hon'ble Karnataka High Court in the case of Sri Marikamma Transport Co.(supra) and that basis on which CIT(A) gave relief to the Assessee still holds good.
16. Respectfully following the decision of the Tribunal in Assessee's own case we hold that the CIT(A) was justified in AO was justified in deleting the disallowance of interest expenses u/s.40(a)(ia) of the Act, to the extent of the disallowance relates to interest paid to persons furnished Form 15 G and Form 15 H to the assessee as no disallowance can be made u/s 40a(ia) of the Act as held by the Hon'ble Karnataka High Court in the case of Sri Marikamba Transport Co., (Supra). The requirement of filing of Form 15G and 15H with the prescribed authority viz., CIT is only procedural and that cannot result in a disallowance u/s 40a(ia) of the Act. Consequently, we uphold the order of CIT(A) and dismiss Gr.No.3 raised by the Revenue.”