BANK OF INDIA,MUMBAI vs. ACIT-2(1)(2), MUMBAI

It is to be kept in mind that in those cases where shares are held as "stock-in-trade", it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 9 retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove."

The learned CIT(A), vide impugned order, following the order passed by the Tribunal in assessee’s own case for the assessment year 2015-16, upheld the disallowance on account of amortisation of lease premium paid for leasehold land. Being aggrieved, the assessee is in appeal before us.

Having considered the submissions of both sides and perused the material available on record, we find that a similar issue came up for consideration before the Coordinate Bench of the Tribunal in assessee’s own case in Bank of India vs. ACIT, in for the assessment year 2015-16. While deciding this issue against the assessee, vide order dated 11/12/2020, the Coordinate Bench vide aforesaid decision, observed as follows: – “45. In the second set of ground of appeal

Learned counsel for the assessee fairly submits that, as on now, the issue is covered, against the assessee, by decisions of the coordinate benches, and he does not, therefore, press the issue any further. Obviously, however, he retains his right to carry the matter further in appeal, if so advised. Learned Departmental Representative does not oppose the submissions of the learned counsel.

During the hearing, the learned AR fairly agreed that this issue has been decided against the assessee in its own case by the Coordinate Bench of the Tribunal in cited supra, for the assessment year 2015-16. The relevant findings of the Coordinate Bench vide its order dated 11/12/2020 are reproduced as follows: – “7. Learned counsel has shown, in accepting the fact that even though the issue is covered in favour of the assessee by earlier decisions of the coordinate benches, these coordinate bench decisions cease to be binding judicial , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 13 precedents inasmuch as reasoning adopted therein does not hold good any longer in the light of the decision in the case of Technimont (supra), admirable grace. It is not clear to us whether this approach is to preempt a detailed discussion on merits of the matter, or whether this approach is indeed bonafide stand of the assessee. That does not, however, matter much at this stage, as all the facets of this matter are covered above nevertheless. The basis on which the relief was granted in the earlier years has been examined and that basis being ex facie incorrect and even rendered by inadvertence is glaring in the analysis that has been extensively reproduced above. Learned counsel for the assessee, however, does not give up; he has an even more innovative plea now. He submits that above decision is per incuriam for some other reason, which has not been discussed in any judicial precedent so far, inasmuch as it overlooks the fact that the notification dated 28* August 2008 was not issued in the context of the business income, and, should accordingly not be applicable so far as business income earned abroad, as in this case, is concerned. We see no substance in this plea either. The notification deals with connotations of the expression "may be taxed", appearing in the tax treaties entered into by India, and there is absolutely no basis whatsoever to support the proposition that the effect of the notification has to be restricted in its application to non-business income only. No such differentiation in treatment of business and non-business income is envisaged in the said notification, nor to do we see any justification for inferring the same. Learned counsel does not have any material whatsoever in support of the proposition canvassed by him, nor does this proposition make any sense on the first principles- inasmuch as once the notification is issued without any such specific restriction for application to business income, we cannot infer a restriction in its application. We, therefore, reject the plea of the assessee, and thus decline to interfere in the matter. We uphold the action of the Assessing Officer in including the profits of the assessee's overseas branches, amounting to Rs1,408.32 crores, in its taxable income in India.”

Thus, respectfully following the decision of the Coordinate Bench of the Tribunal rendered in assessee’s own case cited supra, the addition made on account of income earned by the foreign branches is upheld. Accordingly, Ground No.3, raised in assessee’s appeal, is dismissed.

Ground No.3A, raised in assessee’s appeal, pertains to the computation of income from foreign branches as per the provisions of the income tax laws of the respective countries and not the Income Tax computed as per the provisions of the Act.

On this issue as well, the learned AR fairly agreed that the same has been decided against the assessee by the Coordinate Bench of the Tribunal in DCIT vs. Bank of Baroda, in ITAs No. 1222 and 1221/Mum/2018, for the assessment years 2014-15 and 2015-16. We find that vide aforesaid decision dated 22/05/2019, the Coordinate Bench of the Tribunal observed as follows:– “18. Another common issue raised relates to foreign income to be taxed in India.

On this issue learned Counsel of the assessee fairly conceded that this issue has been decided against the assessee by the ITAT in assessee's own case for A.Y. 2011-12 in vide para 3 to 5 of the said order.

Upon careful consideration we find that ITAT in assessee's own case has decided the issue in favour of the Revenue as under:- 4. We have considered the submission of ld. representative of the parties and perused the order of authorities below. The Assessing Officer while relying upon the Notification No. 2123(e) dated 28.08.2008 treated the income of foreign branches as taxable in India. The ld. CIT(A) on the basis of decision of Tribunal in assessee's own case for Assessment Year 2005-06 to 2007-08 in 2928, 5735/Mum/2011 dated 25.07.2014 held that as per the Notification, the income which is to be included in the total income is such income of foreign branch that was taxed in the foreign country, the relief of tax will be allowed based on the taxed paid in the foreign country and thereby granted part relief to the assessee. We have noted that similar ground of appal was raised by Revenue in appeal for AY. 2009- 10 and the coordinate bench of the Tribunal in dated 17.02.2017 passed the following order: 24. We have carefully considered the submission and perused the record we find that the ITAT in the aforesaid decision has duly considered the said notification referred by the Ld. Counsel of the assessee. We may carefully refer to the contents of the said notification as under; "In exercise of the powers conferred by sub-section (3) of section 90 of the Income-Tax Act, 1961(43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief to tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-Tax Act, 1961(43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement."

We find that after taking into account the aforesaid notification the Tribunal in the aforesaid order has concluded as under. "In view of the aforesaid findings/conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 15 in the return of income filed by the assessee in India and whatever taxed have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given."

Having considered the submissions of both sides and perused the material available on record, we find that while considering a similar issue, the Coordinate Bench of the Tribunal in assessee’s own case for the assessment year 2015-16 cited supra, observed as follows: – “8. So far as the tax credit for the taxes paid abroad is concerned, the assessee has not given specific details of the taxes so paid abroad in respect of which tax credit is sought. On a perusal of the material before us, we find that the 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 16

Accordingly, respectfully following the decision of the Coordinate Bench rendered in the assessee’s own case in the preceding year, this issue is restored to the file of the AO for de novo adjudication in compliance with the directions as rendered by the Tribunal in the preceding year. Accordingly, Ground No. 3B, raised in assessee’s appeal, is allowed for statistical purposes.

Ground No.4, raised in assessee’s appeal, pertains to adding back the provision made towards country risk.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee reversed the provision for country risk amounting to Rs.3.58 crore in the profit and loss account. The assessee claimed that since the provision was not claimed as a deduction in the year of creation of such provision, the reversal of the provision has not been offered to tax. The AO, vide order passed under section 143(3) of the Act, held that the assessee’s explanation is not justifiable for 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 17 claiming the amount of Rs.3.58 crore as a reduction from the net profit in the computation of income. Accordingly, the AO added the amount of Rs.3.58 crore to the total income of the assessee.

We have considered the submissions of both sides and perused the material available on record. During the hearing, the learned AR submitted that the exact working of the crystallised country risk during the year could not be furnished before the learned CIT (A). It was further submitted that, given another opportunity, the assessee can furnish the details, as the amount of country risk represents crystallised loss out of the amount provided as per the RBI guidelines. Accordingly, in the interest of justice, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication with a direction to the assessee to produce the necessary working in respect , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 18 of its claim. As a result, Ground No.4, raised in assessee’s appeal, is allowed for statistical purposes.

Ground No.5, raised in assessee’s appeal, pertains to the disallowance of bad debts written off.

The brief facts of the case pertaining to this issue, as emanating from the record, are: In the return of income, the assessee claimed Rs.2356.44 crore as bad debt written off is allowable as a deduction under section 36(1)(vii) of the Act. During the assessment proceedings, the assessee submitted that it has written off bad debts relating to all types of advances, including those made by the rural branches, aggregating to Rs.2356.44 crore. The assessee submitted that the same has been claimed as a deduction under section 36(1)(vii) of the Act, while computing profits and gains from business for the year under consideration. By referring to the provisions for bad and doubtful account maintained under section 36(1)(viia) of the Act, the assessee submitted that the same does not have credit balance as on 01/04/2015, and therefore, no amount is reduced from the bad debts aggregating to Rs.2356.44 crore written off by the assessee while claiming deduction under section 36(1)(vii) of the Act. The AO, vide order passed under section 143(3) of the Act, disagreed with the submissions of the assessee and observed as follows: - “15.5 The claim of the assessee bank that the opening balance in PBDD account is negative / debit is not correct in view of the following reasons. 1. Provision for bad debt is debited to P&L a/c. It is a provision account (a liability) and hence, is primarily a credit balance account.

Under Section 36 (1)(viia), bank is allowed 7.5% of the profit and 10% of rural advances as deduction on account for provision for Bad and Doubtful Debt, which is credited to the Provision account.

From such credit in PBDD account, act actual write-off of bad debts is adjusted by debiting the said account to the extent of credit balance and as per proviso to section 36(1)(vii), excess is allowable as bad debt. Section 36(2)(v) clearly states that the assessee has to debit the bad debt or a part of it to the PBDD account. The excess cannot be debited to the PBDD account, else the outcome will be a debit balance. This will also result in double deduction of same amount.

The concept of 36(1) (vii), 36(1)(viia) and 36(2)(v) is basically to regulate allowance on account of NPA and bad debts in case of banks. Since provision is allowed as fixed percentage, the same may turn bad subsequently so the concept is to first adjust bad debts from allowed provision and excess bad debt, if any, only can be allowed u/s 36(1)(vii) so that there is no double deduction.

The assessee's accounting is not in conformity with the provision of section 36(1)(vii), 36(1)(viia) and 36(2)(v) because assessee debits even bad debts claimed and allowed u/s 36(1)(vii) over and above the provision for Bad and doubtful debt allowed u/s 36(1)(viia). The amount which has already been allowed as deduction u/s 36(1)(vii) to the assessee is also kept debited, which results in debit balance in provision account, as per assessee's computation. How can the deduction of bad debt claimed u/s 36(1)(vii) be allowed to remain in the PBDD account because once the claim of bad debt in excess of credit balance in PBDD account is made, the same cannot be debited to PBDD account.

It is not a simple ledger account but an accounting concept through which provision for NPA allowed u/s 36(1)(viia) is utilized in bad debts claim first and then the bad debt written off over and above that is allowed u/s 36(1)(vii). Here, the assessee has defied the basic concept. The I. T. Act, never envisaged debit balance of PBDD account and therefore there is no mention of debit balance in first proviso to section 36(1)(vii). Any allowance , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 20 under specific provision of income-tax Act are not just accounting entries but in effect allowance of claim.

As per CBDT Instruction No. 17 of 2008 clarifying first proviso to Section 36(1)(vii), opening credit balance of provision for bad and doubtful debt account is to be considered for reducing bad debts and the excess amount of bad debts written off is to be claimed u/s 36(1)(vii). As per section 36(2)(v) only that part of bad debt is to be debited to the provision account for which there is a credit balance available in the account. The amount exceeding the credit balance is allowed as deduction u/s 36(1)(vii) directly, and it cannot be debited to the PBDD account, which otherwise will result in double deduction effectively. In each case when bad debt written off exceeds credit balance of provision for bad and doubtful debt account, the account will become nil and the excess amount is directly accounted for as loss or expense allowable u/s 36(1)(vii). It cannot remain debited to the provision for bad and doubtful debt account defying the accounting principles. Following this principle. the claim u/s 36(1) (viia) allowed in the year end will at least still remain as closing balance in PBDD account and the opening credit balance for next year. This is so because closing allowance u/s 36(1)(viia) is to be utilized only next year. If assessee's logic is accepted, then the bad debt which is already allowed as deduction u/s 36(1)(vii) is again adjusted against the closing allowance u/s 36(1)(viia) in that year. This methodology of computation followed by assessee results in negative or debit balance in PBDD account which in effect results in double allowance u/s 36(1)(viia) and 36(1) (vii). Such unintended benefit or double deduction cannot be allowed.

Since in the case of banks, claim of bad debt is allowed to the extent of section 36(1)(viia) as provision even before the actual write off, given the peculiarity of the banking business. Therefore the law has prescribed that claim of bad debt write off is allowed in case of banks only if it exceeds the accumulated provision allowed. The adjustment is to be done every year. The assessee is eligible to claim provision for bad and doubtful debt u/s 36(1)(viia) and excess claim of bad debt u/s 36(1)(vii) over and above provisions already allowed u/s 36(1)(viia). The use of word ‘credit balance' in proviso to section 36(1)(vii) and 'debited' in section 36(2)(v), has been stretched too far by the assessee and its learned advisors, to give an absurd meaning to the provisions itself. The basic concept of allowing any claim only once is negated by assessee's interpretation. A very simple concept of allowing provision u/s 36(1)(viia), and bad debt over and above such provision as bad debt written off u/s 36(1)(vii), is made complicated by creating debit balance in PBDD account which is never possible as discussed above. Balance in PBDD account can be positive, or at most be Nil, but not debit or negative. This is so because one can use the allowance up to 100% and once it is done, the balance will become zero. Therefore, claiming negative balance by even reducing / debiting amounts claimed in 36(1)(vii) is not correct.

As mentioned earlier, the claim allowed u/s 36(1)(viia) in any year cannot be adjusted against the bad debt written off allowed u/s 36(1)(vii) of the same year. Therefore, at least that much credit balance will always be there in the PBDD a/c at the year end, which will be opening balance of PBDD credit balance next year.”

Accordingly, the AO held that as per the computation of the assessee, it was claiming double deduction of bad debt written off twice under section 36(1)(vii) as well as section 36(1)(viia) of the Act. Accordingly, the AO computed the bad debt written off under section 36(1)(vii) at Rs.202.73 crore as against Rs.2356.44 crore claimed by the assessee, by observing as follows: “15.9 Thus, for AY under consideration, AY 2016-17, the minimum opening balance shall be Rs. 2,926.41 crore which has been claimed as deduction u/s 36(1) (viia) during AY 2015-16. Thus, as clearly stated in proviso to section 36(i)(vii), the amount of bad debt written off in excess of Rs. 2926.41 crore can only be allowed. In this AY the assessee's claim of debt written off amounts to Rs. 2356.44 crore. As per the discussion in the para 14, the loss on sale of ARC by the bank is considered as Bad debt written off and therefore the total bad debt written off for A.Y. 2016-17 is 2356.44 crore + 772.70 Crore totaling to Rs.3129.14 Crore. The total bad debt written of exceeds the opening PBDD by Rs. 3129.14 - 2926.41= Rs.202.73 crore. Hence, the amount of Rs. 202.73 crore is only allowable as bad debt written off u/s 36(1)(vii). 15.10 In view of the aforementioned discussion, bad debt written off claim of the assessee to the extent of Rs. 2356.44 - Rs. 202.73 crore= 2153.71 crore is being disallowed and added back to the income of the assessee bank. Penalty proceedings u/s.271(1)(c) are initiated for filing of inaccurate particulars of income.”

The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue, by observing as follows: - “16.5 After considering the assessment order, submissions of the appellant and the relevant provisions of the Act, the adjudication on various issues arising out the drawing of provision account u/s 36(1)(viia) and claim of bad debts u/s 36(1) (vii) is in following para (i) As regards to the utilisation of the credit balance in the provision account u/s 36(1)(viia) is concerned, I concur with the view of AO on this issue, as the instruction is very clear in this regard that the opening balance of the year, and not the provision created at the end of the year, is to be consumed towards the actual bad debts of the year. (ii) The law is very clear that the actual bad debts exceeding the already allowed & created provision from taxable income u/s 36(1) (viia) are only to be allowed u/s36(1)(vii). The methodology of the appellant for drawing the account of provision u/s 36(1) (viia) does not appear to be correct, as the appellant is debiting the whole actual bad debts from the provision account , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 22 u/s 36(1)(viia), particularly when the bad debts are more than the provision, leading to debit balance in this account. This debit balance had been considered as opening balance in this account in next year, against which the provision created u/s36(1)(viia) of next had been adjusted and the actual bad debts had been claimed u/s36(1)(vii). Thus by this process, the appellant is creating debit balance in this account in the year by debiting the amounts claimed even u/s36(1)(vii) and then again this debit balance representing the amount claimed u/s36(1) (vii) is claimed against provision u/s 36(1)(viia) for next year. I concur with the discussion made by AO in para 15.5 of the assessment order, the redrawn provision account in para15.6 of the assessment order and the conclusion (para 15.9 & 15.10) of the AO on this issue. 16.5.1 In these facts & circumstances of the case, I concur, in principle, with the discussion, conclusions and the figure work done by the AO in para 15.3 to 15.10 on this issue. Accordingly, the addition made by the AO on this issue is confirmed subject to the modification in figures of addition on account of decision on the issue of loss on sale of assets to ARC decided above. This ground of appeal is dismissed.” Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee reduced the actual bad debts from the credit balance in the provision made under section 36(1)(viia) and the resultant debit balance in the account made under section 36(1)(viia) was carried forward as the opening balance of the next year. At the same time, the amount of bad debts exceeding the credit balance in the provisions account made under section 36(1)(viia) was claimed under section 36(1)(vii) of the Act. The assessee credited the provision under section 36(1)(viia) of the next year, having a debit opening balance, and again reduced the actual bad debts claimed for the year from this account. Thus, the amount exceeding the provision under section 36(1)(viia) is claimed under section 36(1)(vii) of the Act. As the provision account maintained under section 36(1)(viia) did not have any credit balance as on 01/04/2015, no amount was reduced from the aggregate bad debts amounting to Rs.2356.44 , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 23 crore claimed during the year under section 36(1)(vii) of the Act. On the other hand, the AO objected to the methodology of preparing the bad debt provision account and the amounts claimed under section 36(1)(viia) and section 36(1)(vii) of the Act. As per the AO, the methodology of the assessee leads to double deduction of bad debts. Accordingly, the AO recomputed the provision account and recalculated the bad debts allowable to the assessee under section 36(1)(vii) out of the provision credit balance under section 36(1)(viia) of the Act.

Before proceeding further, it is pertinent to note the provisions of the Act, which are relevant for the decision on this issue. Section 36(1)(vii) of the Act provides as under: - “(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:”

Thus, as per section 36(1)(vii) of the Act, the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee is allowable as a deduction while computing the income of the assessee under section 28 of the Act. The first proviso to section 36(1)(vii) of the Act restricts the said deduction and provides that the amount of bad debts which is allowable as a deduction shall be the amount which exceeds the credit balance in the provision for bad and doubtful debts account made under clause (viia) of section 36(1).

The provisions of section 36(1)(viia), which are relevant for this case, are reproduced 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 non-scheduled bank 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 VIA) 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: Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted : Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession." Explanation.—For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;”

Therefore, the proviso to section 36(1)(vii) requires maintenance of the provision of bad and doubtful debt account under section 36(1)(viia) of the Act. Further, the deduction in respect of provision for bad and doubtful debt accounts allowable under section 36(1)(viia) of the Act is required to be credited to this account by the bank. Section 36(2)(b) of the Act requires bad debts written off by the bank to be debited to the provision for bad and doubtful debts account under section 36(1)(viia) of the Act. Further, as noted in the foregoing paragraphs, bad debts written off in excess of the opening credit balance in this account shall be allowable as a deduction under section 36(1)(vii) of the Act. Vide Instruction No.17 of 2008, dated 26/11/2008 issued by the CBDT provided the clarity regarding the manner of computation of deduction under section 36(1)(vii) of the Act as follows: -

Having perused the provisions of sections 36(1)(vii), 36(1)(viia) and 36(2)(v) of the Act in the light of Instruction No.17 of 2008 issued by the CBDT, we do not find any infirmity in the provision for bad and doubtful debts account under section 36(1)(viia) of the Act, prepared by the assessee in the following manner: - AY Opening Claim u/s. Bad Debts Closing Balance Balance 36(1)(viia) written off 1995-96 - 101.16 260.32 (159.16) 1996-97 (159.16) 48.99 296.36 (406.53) 1997-98 (406.53) - 254.48 (661.00) 1998-99 (661.00) - 308.75 (969.75) 1999-00 (969.75) - 295.35 (1,265.10) 2000-01 (1,265.10) 102.87 200.01 (1,362.24) 2001-02 (1,362.24) 222.45 278.87 (1,418.66) 2002-03 (1,418.66) 269.03 552.14 (1,701.78) 2003-04 (1,701.78) 380.98 578.74 (1,899.54) 2004-05 (1,899.54) 375.96 550.03 (2,073.61) 2005-06 (2,073.61) 381.47 346.89 (2,039.03) 2006-07 (2,039.03) 529.71 603.38 (2,112.70) 2007-08 (2,112.70) 786.07 400.81 (1,727.43) 2008-09 (1,727.43) 947.56 585.88 (1,365.76) 2009-10 (1,365.76) 645.17 454.20 (1,174.79) 2010-11 (1,174.79) 1,167.49 936.85 (944.14) 2011-12 (944.14) 1,365.95 989.93 (568.12) 2012-13 (568.12) 1,141.34 3,012.42 (2,439.20) 2013-14 (2,439.20) 2,039.28 4,550.50 (4,950.42) 2014-15 (4,950.42) 2,078.70 3,214.68 (6,086.40)

In this regard, it is pertinent to note the following observations of the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. vs. CIT, reported in (2012) 343 ITR 270 (SC): - “17. The provisions of Section 36(1)(vii) would come into play in the grant of deductions, subject to the limitation contained in Section 36(2) of the Act. Any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is the deduction which the assessee would be entitled to get, provided he satisfies the requirements of Section 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of Section 36(2). The argument advanced on behalf of the Revenue is that it would amount to allowing a double deduction if the provisions of Sections 36(1)(vii) and 36(1)(viia) are permitted to operate independently. There is no doubt that a statute is normally not construed to provide for a double benefit unless it is specifically so stipulated or is clear from the scheme of the Act. As far as the question of double benefit is concerned, the Legislature in its wisdom introduced Section 36(2)(v) by the Finance Act, 1985 with effect from 01.04.1985. Section 36(2)(v) concerns itself as a check for claim of any double deduction and has to be read in conjunction with Section 36(1)(viia) of the Act. It requires the assessee to debit the amount of such debt or part thereof in the previous year to the provision made for that purpose.”

Since the provision for bad and doubtful debt account maintained under section 36(1)(viia) of the Act does not have any credit balance as on 01/04/2015, we agree with the submissions of the assessee in claiming the deduction of the entire bad debt written off as an irrecoverable under section 36(1)(vii) of the Act. Accordingly, the impugned addition made by the AO on this issue is deleted. As a result, Ground No.5, raised in assessee’s appeal, is allowed.

Ground No.6, raised in assessee’s appeal, pertains to the applicability of the provisions of section 115-JB of the Act to the assessee bank.

During the hearing, the learned Representatives appearing for the parties fairly agreed that this issue has been decided in favour of the assessee by the Special Bench of the Tribunal. We find that a similar issue came up for consideration before the Special Bench of the Tribunal in Union Bank of India vs. DCIT, in for the assessment year 2015-16. Vide its order dated 06/09/2024, the Special Bench of the Tribunal deciding the issue in favour of the assessee banks, including the assessee in appeal before us, held that clause (b) to sub-section (2) of section 115JB of the Act inserted by Finance Act, 2012, w.e.f. 01/04/2013, i.e., from the assessment year 2013-14 onwards, are not applicable to the banks constituted as corresponding new banks in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, provisions of section 115- JB of the Act cannot be applied and consequently, tax on book profit (MAT) are not applicable to such banks. Therefore, respectfully following the decision of the Special Bench of the Tribunal (cited supra), Ground No.6, raised in assessee’s appeal, is allowed.

In view of our finding rendered in respect of Ground No.6, the issue arising in Ground No.6A and 6B, raised in assessee’s appeal, are rendered infructuous and therefore, are kept open.

In the result, the appeal by the assessee for the assessment year 2016- 17 is partially allowed for statistical purposes. ITA No. 1547/Mum./2023 Revenue’s appeal – A.Y. 2016-17 44. In the appeal, the Revenue has raised the following grounds: - , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 29

Grounds No.1 and 2 raised in Revenue’s appeal pertain to the disallowance under section 14A read with Rule 8D of the Rules.

Ground No.3, raised in Revenue’s appeal, pertains to the deduction of taxes paid by the assessee outside India. We find that this issue does not emanate from the order passed by the lower authorities. Therefore, this ground does not require adjudication.

Grounds No.4 and 5, raised in Revenue’s appeal, pertain to the disallowance of broken period interest.

The brief facts of the case pertaining to this issue as emanating from the record are: During the year under consideration, the assessee paid Rs.30,40,09,273 as broken period interest on the purchase of Held to Maturity (“HTM”) Securities, treating the same as revenue expenditure. Accordingly, during the assessment proceedings, the assessee was asked to furnish an explanation why the broken period interest should be allowed as revenue expenditure. In response, the assessee submitted that the interest on Government Securities is normally credited half-yearly, and when the Government Securities are sold, the purchaser has to pay the seller not only the purchase price of the securities but also the interest accrued on the Government Securities from the last due date of the interest till the date of 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 32 purchase of the securities. The assessee submitted that the interest from the last due date till the date of purchase is referred to as a broken period interest. It was also submitted that its clients treat the investment in Government Securities as stock-in-trade. The AO, vide order passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that the broken period interest paid by the assessee is nothing but part of the price paid for the securities for acquiring the securities and therefore whatever may be the reason that prompted the assessee to purchase the securities, the price paid for them is in the nature of capital outlay only. Accordingly, the AO held that the broken period interest claimed by the assessee is part of the cost price of the securities acquired by it, and therefore, the deduction of Rs. 30,40,09,273 on account of broken period interest was disallowed. The learned CIT(A), vide impugned order, following the decision of the Coordinate Bench of the Tribunal rendered in assessee’s own case for the assessment year 2015-16, allowed the ground raised by the assessee on this issue and held that the broken period interest paid by the assessee is revenue expenditure. Being aggrieved, the Revenue is in appeal before us.

We find that the Hon’ble Supreme Court in Bank of Rajasthan vs. CIT, reported in (2024) 469 ITR 280 (SC) held that where an assessee bank purchase government security and paid broken period interest since said securities was treated as stock-in-trade, the broken period interest could not be considered as capital asset and would have to be treated as revenue expenditure.

Therefore, in view of the aforesaid findings and respectfully following the decision of the Hon’ble Supreme Court, we do not find any infirmity in the findings of the learned CIT(A) on this issue and the same are upheld. As a result, Grounds No.4 and 5 raised in Revenue’s appeal, are dismissed.

Ground No.6, raised in Revenue’s appeal, pertains to the deletion of the disallowance of the premium of HTM securities.

The brief facts of the case pertaining to this issue as emanating from the record are: During the year under consideration, the assessee booked a loss of Rs.231,78,68,424 on account of amortisation of investment held in the HTM category. Accordingly, the assessee was asked to explain why the loss on amortisation should not be disallowed. In response, the assessee submitted that as per section 24 of the Banking Regulation Act, it has been made obligatory that the banking institutions must maintain a certain , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 34 percentage of its asset in form of security at any given date. Accordingly, the investment, inter alia, in HTM securities is made in the course of business and constitutes stock-in-trade. In its submission, the assessee also placed reliance upon the decision rendered in its own case by the Tribunal, wherein it was held that the investment in securities constitutes stock-in-trade of the assessee, and therefore, valuation loss on securities should be allowed as a deduction. In this regard, the assessee placed reliance upon various other judicial pronouncements, wherein similar loss was allowed. The AO, vide order passed under section 143(3) of the Act, disagreed with the submission of the assessee and disallowed the loss on account of amortisation on investment held in HTM category, by observing as follows: - “7.3 The contention of the assessee is considered but found untenable. In this regard the following details may be considered. As per the circular dated 12-07-2005 of the Reserve Bank of India, the investments in the HTM category should be carried at acquisition cost. In case, the purchase price is higher than the face value, the premium should be amortised over the remaining period of maturity of the security. The loss on revaluation of permanent securities reflected in the bank's P&L A/c. is on account of amortization of the premium paid while purchasing the securities. HTM securities are those which banks intend to hold till maturity. The banks were permitted to hold upto 25% of their securities in the HTM category, in the current year. The Banks were allowed to exceed the limit of 25% subject to meeting the prescribed guidelines. The Banks were also allowed to interchange the investment from one category to another with the prior authorization of the Board of Directors. Thus, it is clear that the securities under the HTM category till they are interchanged from the HTM to other categories, are to be held purely as investment and not as stock-in-trade. These securities are not meant for sale but only for redemption on the date of maturity. 7.4 There is no dispute that this amortization in regard to securities held in the HTM category is made as per guidelines of the RBI contained in their Master Circular dated 12.07.2005 which also permit to ignore the difference in case the cost price is less than the face value. However, the question arises under which provision of the Act such amortization can be allowed as deduction. In respect of HTM securities, the assesse follows two different systems which are inconsistent with each other. When the purchase price is less than the face value at which the security is ultimately sold, the difference is booked as profit only in the year of sale. But when the cost price is more than the face value, the loss is not booked in the year of sale but is spread , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 35 over the period of holding. If the securities are held as investment, there is no question of allowance of any amount till such time as they are sold or redeemed. Even if these securities are held as stock-in-trade, as per RBI's guidelines, the method of valuation of closing stock adopted in respect of securities in HTM category is cost price which is one of the two recognized methods of valuation. Since the cost price is constant, there is no question of deduction of any amount under the commercial principles even if HTM securities are accepted to be stock-in-trade of the assesse. Whatever loss is suffered on sale of redemption of securities, that will constitute the loss of the year in which they are sold or redeemed. In between, no amount can be allowed under the provisions of section 145. By claming amortization, the assesse seeks to neutralize the effect of valuing the securities in HTM category on cost price which is one of the two recognized methods of valuation of the closing stock. 7.5 It cannot be the effect of the RBI guidelines that the total income for the purpose of Income Tax has to be computed in accordance with the enjoinment of these guidelines. These are only meant as guiding factors to determine the commercial profit for various purposes on conservative principles. The total income has to be computed under the mandate of the Income Tax Act and a recognized system of accounting has to be followed u/s. 145 of the Act. 7.6 It may be worthwhile to mention that in the DBOD circular dt. 6.9.2001, cited above, it has been clearly mentioned that "It is to be noted that the above accounting treatment does not taken into account taxation implications and hence the banks should comply with the requirements of Income Tax authorities in the manner prescribed by them. The findings given by Hon'ble Supreme Court in a very recent judgment delivered in January, 2010 in the case of M/s. Southern Technologies Ltd. vs. JCIT in Civil Appeal No. 1337/ 2003 which were referred earlier also in the order, are also very relevant. In this case, the assessee which is an NBFC had created a provision for NPA, which in terms of RBI guidelines was debited to Profit & Loss Account and was claimed in the Income Tax Return. 7.7 The Hon'ble Supreme Court has held that the above provision is not allowable. With regard to RBI Guidelines, it has been observed by Hon'ble Supreme Court that; "We need to emphasize that the RBI Guidelines has nothing to do with the accounting treatment or taxability of "Income" under the Income Tax Act. The two i.e. I.T. Act and RBI Guidelines operate in different fields. Ultimately, the nature of transaction has to be examined in each case. The authority has to examine the nature of expense / loss. Such examination and finding thereof will not depend upon presentation of expense/ loss in the financial statement. In our view, the RBI directions and I.T. Act operate in different fields." 7.8 The above reference to the specific clause in RBI circular clearly mentions that the prescribed accounting treatment does not take into account the applicability of I.T. law. and decision of Hon'ble Supreme Court makes it very clear that RBI Guidelines themselves will not decide taxability of the income. Therefore, the assessee's arguments that the bank should be allowed full claim of amortization of HTM category as per Instruction No.17 dt. 26.11.2008 is not accepted. Accordingly, the amount of premium amortized in respect of HTM securities of Rs. 231,78,68,424/- is disallowed and added , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 36 back to the total income. Penalty proceedings u/s.271(1)(c) are initiated for filing of inaccurate particulars of income. Addition: Rs. 231,78,68,424/-”

The learned CIT(A), vide impugned order, following the decision of the Tribunal rendered in assessee’s own case for the assessment year 2015-16, deleted the addition made by the AO on this issue and allowed the loss on account of amortisation of investment held in HTM category. Being aggrieved, the Revenue is in appeal before us.

Having considered the submissions of both sides and perused the material available on record, we find that the Coordinate Bench of the Tribunal in the assessee’s own case for the assessment year 2015-16, vide order dated 11/12/2020 cited supra, dismissed a similar ground raised by the Revenue on this issue. Since the learned CIT(A) has followed the decision of the Coordinate Bench of the Tribunal rendered in the assessee’s own case in the preceding year, we do not find any infirmity in the same, and, therefore, the impugned order on this issue is upheld. As a result, Ground No.6, raised in Revenue’s appeal, is dismissed.

Ground No.7, raised in Revenue’s appeal, pertains to the deletion of the disallowance of losses written off.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, while examining the computation filed along with the revised return of income, it was observed that the assessee has calculated the loss written off of Rs.8,22,59,119, while arriving at the income from business. Since there was no convincing , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 37 explanation regarding the aforesaid aspect of the assessee, the AO vide order passed under section 143(3) of the Act added these losses while computing the business income of the assessee.

The learned CIT(A), vide impugned order, took into consideration the decision of its predecessor rendered in assessee’s own case for the assessment year 2015-16, wherein following the direction of the learned CIT(A) for the assessment year 2013-14, the learned CIT(A) directed the AO to find out if the provisions have been added back in the earlier years and the write off is debited to the provision account, in which case the write off is to be allowed as deduction. Since the aforesaid findings of the learned CIT(A) for the assessment year 2015-16 were not challenged by the Revenue before the Tribunal, the learned CIT(A) vide impugned order, following a similar approach adopted in the preceding year, issued similar directions to the AO.

Having considered the submissions of both sides and perused the material available on record, we find that this issue is recurring in nature, and in preceding years, the learned CIT(A) directed the AO to carry out necessary verification, which directions were also issued in the year under consideration. Undisputedly, these findings in the preceding year were not challenged by the Revenue before the Tribunal. Be that as it may, since the issue requires verification of the aspects highlighted by the learned CIT(A), we do not find any infirmity in the directions so issued, and the same are upheld. Accordingly, Ground No.7, raised in Revenue’s appeal, is dismissed.

Ground No.8, raised in Revenue’s appeal, pertains to the deletion of the disallowance of interest on perpetual bonds.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, the assessee was asked to show cause as to why the perpetual bonds should not be treated as equity and consequently the interest paid on such bonds should be allowed under section 36(1)(iii) of the Act. In response, the assessee submitted that it has issued perpetual debts instruments over the years and as on 31/03/2016, the outstanding balance of perpetual debt is at Rs.1680 crore. It was further submitted that these instruments are classified as borrowing in bank’s balance, and interest paid on the above instruments is provided in the books as interest expenses. In this regard, the assessee submitted that the above accounting treatment of the interest and presentation in balance sheet is in tune of the RBI Guidelines and Accounting Standard-16 issued by the ICAI on borrowing cost. The assessee submitted that the interest paid on the perpetual debt is out of distributable profits of previous year or current year and the nature of payments is different from the interest i.e. borrowed for the purpose of business, which is allowable under section 36(1)(iii) of the Act. The AO, vide order, passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that perpetual bonds are in the nature of debt instruments with no maturity date. Only the issuing company can buy back the bonds from the investors. Therefore, it was held these bonds are perpetual in nature. Since in the case of perpetual bonds, the investor does not have the authority to claim a refund of the amount given, the AO held , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 39 that the said amount cannot be held “borrowing” and hence the interest on such bonds is not admissible as a deduction under section 36(1)(iii) of the Act. Accordingly, the AO disallowed the amount of Rs.160,77,00,000 claimed as deduction and added the same to the total income of the assessee.

The learned CIT(A), vide impugned order, deleted the addition made by the AO on this issue, by observing as follows: -

Having considered the submissions of both sides and perused the material available on record, we find that the Coordinate Bench of the Tribunal in State Bank of India (successor to State Bank of Bikaner and Jaipur) vs. DCIT, in vide order dated 29/09/2022, while allowing the interest paid on perpetual debt under section 36(1)(iii) of the Act observed as follows: -

The learned DR could not show any reason to deviate from the aforesaid findings rendered by the Coordinate Bench of the Tribunal. Therefore, respectfully following the decision cited supra, we do not find any infirmity in the findings of the learned CIT(A) in allowing deduction under section 36(1)(iii) of the Act in respect of interest earned on perpetual bonds. As a result, Ground No.8, raised in Revenue’s appeal, is dismissed.

Ground No.9, raised in Revenue’s appeal, pertains to the deletion of the addition on account of the commission receipt on the deferred payment bank guarantee.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, the assessee was asked regarding the calculation of deferred payment guarantee commission. In response, the assessee submitted that the deferred payment guarantee is issued at the request of the customers who purchase goods or merchandise from creditors for a payment, which has been deferred or postponed. The assessee submitted that in such circumstances, it undertakes the role of a guarantor in lieu of commission. The assessee further submitted that it has received a guarantee commission. However, the same has not been offered completely in the year under consideration, but it has amortised over a period of guarantee. The AO disagreed with the submissions of the assessee and held , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 43 that the commission received is like a fee for issuing the guarantee and is not a contingent receipt or advance, which is returnable at the end of the guarantee period. Thus, the assessee submitted that the amount of commission receipt is an income having accrued at the time of bank issues the guarantee. Accordingly, the commission of Rs.443.40 crore received by the assessee on guarantee issued was added to the total income of the assessee.

The learned CIT(A), vide impugned order, following the decision of the Hon’ble Jurisdictional High Court in DIT(IT) vs. BNP Paribas SA, reported in (2013) 32 taxmann.com 276 (Bom), deleted the addition made by the AO on account of guarantee commission, by observing as follows: -

Having considered the submissions of both sides and perused the material available on record, we find that the Hon’ble Jurisdictional High Court in BNP Paribas SA (supra) observed as follows: -

As a learned CIT(A) following the decision of the Hon’ble Jurisdictional High Court has deleted the addition on this issue, we do not find any infirmity in such findings. As a result, Ground No.9, raised in Revenue’s appeal, is dismissed.

Ground No.10, raised in Revenue’s appeal, pertains to the deletion of the addition of unrealised interest income on Non-Performing Assets (“NPA”).

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee has not recognized an amount of Rs.195.41 crore, which was interest on sticky advances, which remained NPA for a period of more than 90 days but less than six months as its income for the year under consideration. The AO, vide , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 45 order, passed under section 143(3) of the Act, made an addition on account of interest on NPA by observing as follows: - “12.2 Thus, the provisions of Rule 6EA read with section 43D are very clear that irregularity of the nature referred in Rule 6EA (a)(ii) should be noticed for a period of 6 months or more. The benefit of non-recognition of interest in NPAs can be granted to the assessee as per the provisions of Rule 6EA read with section 43D only when the irregularities exist for a period of 6 months or more.

On this issue, what has been disputed by the assessee is that the guidelines of Reserve Bank of India prescribed recognition of the assets being NPA when the period of default is 90 days or more and that the provisions of section 43D of the Act which stipulates recognition of income by way of interest in relation to such categories of all bad or doubtful debts having regard to the guidelines issued by the RBI in relation to such debts. The assesse mainly seeks to contend that what would prevail is RBI guidelines in relation to section 43D of the Act and not the Rule 6EA of the Rules. In regard to such contention of the assesse, it is stated that the provisions of section 43D stipulates that "the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts." Therefore, what can be seen from the provisions of section 43D of the Act is that the income by way of interest has to be considered "as may be prescribed" and such stipulation has been prescribed in Rule 6A of I.T. Rules, 1962 for the said purposes. It is to be understood that the rule may be prescribed having regard to the guidelines issued by the Reserve Bank of India and such stipulation in section 43D only warrants the authorities to prescribe the rules in view and in reference to the guidelines issued by the Reserve Bank of India. It therefore has to be understood that while the guidelines issued by the Reserve Bank of India are essential point for recognition, having regard to them and keeping a reference of the same, the rules have to be prescribed, but it would be the rules which have to be followed. Even if for any reason, rules have been prescribed by the Government having regard to the guidelines of RBI which may subsequently have changed, then too, it has to be considered and taken that the rules which are in force are such which have been prescribed having regard to such guidelines and no change in the rules having regard to the guidelines of RBI have been considered necessary. The phrase as appearing in the provisions of section 43D "as may be prescribed" cannot be read in any other manner and certainly cannot be ignored. The contention of the assesse that the mention in section 43D of "having regard to the guidelines issued by the RBI" would warrant necessarily to follow the guidelines superseding the prescribed rules in I.T. Rules, 1962 is therefore, clearly flawed. The Hon'ble Delhi High Court in the case of CIT vs. Vashisth Chay Vyapar Ltd. 330 ITR 440 have clearly mentioned the observation of Hon'ble Apex Court that in so far as the permissible deductions or exclusions under the Acts are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated there for under the Act. It was also observed by the Hon'ble Court that the prudential norms do not override the provisions of 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 46 the Act. Such observations were made by the Hon'ble Apex Court in the case of Southern Technologies Ltd. vs. JCIT. The assesse, in their submission, have sought to contend that in their case it is the recognition of income and not the claim of deduction/exclusion. In regard to such contention, it is stated that the case of the assessee would fall under the expression "exclusion of recognizable income under the Act". The assesse has further placed reliance on the decision of Hon'ble Supreme Court in the case of UCO Bank vs. CIT. The said decision is in respect of recognition of income on receipt basis on the sticky loans. The same has no reference to either Rule 6EA or corresponding or related guidelines of RBI in this regard. The assesse has also placed reliance on the decision of Hon'ble Mumbai Tribunal in the case of American Express Bank Ltd. vs. ACIT. In respect of such reliance placed, it is stated that the same is in respect of proviso to section 5 of the Interest Act r.w.s.43D of the Act and the same does not deal with Rule 6EA of the Rules.

The assesse has further contended that Rule 6EA cannot expand the scope of section 43D. In this regard, it is stated that Rule 6EA has been prescribed so as to apply the provision of section 43D correctly 3. In view of the facts and circumstances of the case and discussion hereinabove, interest on NPA not provided amounting to 195,41,06,729 is being added back to the income of the assesse bank. Penalty proceedings u/s.271(1)(c) are initiated for filing of inaccurate particulars of income. Addition: Rs. 195,41,06,729/-.”

The learned CIT(A), vide impugned order, following the decisions on this issue rendered by the Tribunal, held that the interest on NPAs classified by the RBI for 90 days for non-payment has to be considered for section 43D of the Act and accordingly, the unrealised interest on such classified NPAs cannot be added to the income of the assessee. Being aggrieved, the Revenue is in appeal before us.

Having considered the submissions of both sides and perused the material available on record, we find that while deleting the similar interest pertaining to NPA, the Coordinate Bench of the Tribunal in State Bank of India vs. DCIT, in and 4563/Mum/2016, for the assessment year 2008- 09, vide order dated 03/02/2020, observed as follows: - , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 47 “34. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee's own case in State Bank of India (supra) for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under: - "78. We noted that the assessee does not offer to tax, the interest income on NPAs, classified in terms of RBI guidelines, on accrual basis. The same is offered to tax in the year in which the same is received and credited to the profit and loss account in terms of the RBI guidelines. Presently, the period to recognise an advance as a NPA as per RBI guidelines is where interest and/ or instalment of principal remained overdue for 90 days whereas as per Rule 6EA, the same is 180 days. The AO has brought to tax the notional interest on sticky advances having irregularities for the period between 90 days to 180 days on accrual basis, relying on section 43D of the Act and rule 6EA of the Rules. The CIT(A) has upheld the disallowance made by the Assessing Officer following the directions of the DRP for the assessment year 2012-13.

We have gone through the case law in American Express Bank Ltd. vs. Addl. CIT [2012] 25 taxmann.com 572 (Mumbai), wherein the Mumbai Tribunal was considering a case where the loans on which interest/principal remained unpaid for 90 days were classified as no-accrual loans. The unpaid interest in respect of such loans was reversed to an account called Reserve for Doubtful Interest (RFDI) account. All subsequent interest accruals of such loans were credited to RFDI account and not to the profit and loss account. The assessee offered to tax the net amount credited to the RFDI account i.e. the interest accruals in the RFDI account net of recoveries. However, it was argued that such tax treatment leads to offering interest on non-accrual loans to tax on accrual basis, even if the same is not credited to the profit and loss account. The Mumbai Tribunal held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 48 interest could be charged to tax. The aforesaid decision has been affirmed by the Bombay High Court in the case of DIT vs. American Express Bank Ltd [2015] 235 Taxman 85 (Bombay). In the present case the assessee argued that there is no credit entry in the books of the account in respect of the interest on such NPAs and, accordingly, the addition made cannot be sustained. Hence according to assessee the issue stood covered by the first proposition in terms of the Bombay High Court in assessee's favour and hence, no further submissions were made on other two propositions.

We noted that this issue is squarely covered by the decision of Hon'ble Bombay High Court in the case of American Express Bank Ltd (supra), wherein it is held that there is no credit entry in the books of the account in respect of the interest on such NPAs, no addition can be made. Further, even the Mumbai Tribunal in the case of American Express Bank Ltd. (supra) has considered this issue and held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. Hence, we delete the addition of interest income and allow this issue of assessee's appeal."

The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee's own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedents in assessee's own case cited supra, we uphold the plea of the assessee, and the addition made by the AO on this issue is hereby deleted. Thus, ground no.8, raised in assessee's appeal is allowed.”

Respectfully following the aforesaid decisions rendered by the Coordinate Bench, we do not find any infirmity in the findings of the learned CIT(A) on this issue and, therefore, the same are upheld. Accordingly, Ground No.10, raised in Revenue’s appeal, is dismissed.

Ground No.11, raised in Revenue’s appeal, pertains to the deletion of the disallowance being a loss on the sale of assets to the Asset Reconstruction Company (“ARC”).

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee debited an amount of Rs.727.70 crore to its profit and loss account on account of short fall arising on sale of financial assets to ARC. We find that while deciding a 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 49 similar issue in favour of the assessee, the Coordinate Bench of the Tribunal in assessee’s own case in Bank of India vs. DCIT, in for the assessment year 2009-10, vide order dated 08/11/2017 observed as follows: -

As the learned CIT(A), while deleting the disallowance made by the AO on account of loss on sale of assets to ARC, followed the decision of the Coordinate Bench of the Tribunal rendered in assessee’s own case for the preceding year, we do not find any infirmity in the findings of the learned CIT(A) on this issue. Accordingly, the same are upheld, and Ground No.11, raised in Revenue’s appeal, is dismissed.

Grounds No.12 and 13, raised in Revenue’s appeal, pertain to the computation of book profit under section 115JB of the Act. In view of our findings rendered in respect of Ground No.6 raised in assessee’s appeal for the assessment year 2016-17 (supra), these grounds are rendered infructuous and therefore are kept open.

In the result, the appeal by the Revenue for the assessment year 2016- 17 is dismissed.

Grounds No.2A and 2B, raised in assessee’s appeal, pertain to the disallowance of the claim for amortisation of the lease premium paid in respect of various leasehold properties of the assessee. Since a similar issue has already been adjudicated in assessee’s appeal for the assessment year 2016- 17, in the absence of any change in material facts or law, our findings , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 53 rendered therein shall apply mutatis mutandis to this ground. Accordingly, we do not find any infirmity in the findings of the learned CIT(A) on this issue, and the same are upheld. As a result, Grounds No.2A and 2B, raised in assessee’s appeal, are dismissed.

Ground No.3A, raised in assessee’s appeal, pertains to the exclusion of income of foreign branches situated in countries with which India has entered into the Double Taxation Avoidance Agreement. Since a similar issue has already been adjudicated in assessee’s appeal for the assessment year 2016- 17, in the absence of any change in material facts or law, our findings rendered therein shall apply mutatis mutandis to this ground. Accordingly, the addition made on account of income earned by the foreign branches is upheld, and Ground No.3A, raised in the assessee’s appeal, is dismissed.

Ground No.3B, raised in assessee’s appeal, pertains to the computation of income from foreign branches as per the provisions of the income tax laws of the respective countries and not the Income Tax computed as per the provisions of the Act. Since a similar issue has already been adjudicated in assessee’s appeal for the assessment year 2016-17, in the absence of any change in material facts or law, our findings rendered therein shall apply mutatis mutandis to this ground. As a result, Ground No.3B, raised in assessee’s appeal, is dismissed.

Grounds No.3C and 3D, raised in assessee’s appeal, pertain to the grant of credit towards taxes paid or withheld in foreign countries. Since a similar issue has already been adjudicated in assessee’s appeal for the assessment , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 54 year 2016-17, in the absence of any change in material facts or law, our findings rendered therein shall apply mutatis mutandis to this ground. Accordingly, this issue is restored to the file of the AO for de novo adjudication in compliance with the directions as rendered by the Tribunal in assessee’s own case, for the assessment year 2015-16, in ITA No. 1767/Mum/2019. As a result, Grounds No. 3C and 3D, raised in assessee’s appeal, are allowed for statistical purposes.

Ground No. 3E, raised in assessee’s appeal, pertains to the grant of credit of taxes paid by foreign branches in countries or territories with whom India does not have any agreement under section 90 of the Act. We restore this issue to the file of the AO for de novo adjudication with a direction to grant the credit of tax as per the provisions of section 91 of the Act after necessary verification of the relevant facts as per law. With the above, Ground No.3E, raised in assessee’s appeal, is allowed for statistical purposes.

Ground No. 4, raised in assessee’s appeal, pertains to the disallowance of bad debts written off. Since a similar issue has already been adjudicated in assessee’s appeal for the assessment year 2016-17, in the absence of any change in material facts or law, our findings rendered therein shall apply mutatis mutandis to this ground. Accordingly, the impugned addition made by the AO on this issue is deleted. As a result, Ground No.4 raised in assessee’s appeal is allowed.

Ground No. 5A, raised in assessee’s appeal, pertains to the applicability of the provisions of section 115-JB of the Act to the assessee bank. Since a 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 55 similar issue has already been adjudicated in assessee’s appeal for the assessment year 2016-17, in the absence of any change in material facts or law, our findings rendered therein shall apply mutatis mutandis to this ground. Accordingly, respectfully following the decision of the Special Bench of the Tribunal in Union Bank of India v. DCIT, in for the assessment year 2015-16, Ground No.5A raised in assessee’s appeal is allowed.

In view of our finding rendered in respect of Ground No.5A, the issue arising in Ground No.5B and 5C, raised in assessee’s appeal, are rendered infructuous and therefore, are kept open.

In the result, the appeal by the assessee for the assessment year 2018- 19 is partially allowed for statistical purposes.

The learned CIT(A), vide impugned order, following the decision of the Coordinate Bench of the Tribunal in IDBI Bank Ltd. vs. DCIT, held that these penalties are not in the nature of offences, which are prohibited by the law and, therefore, are compensatory in nature. Accordingly, the learned CIT(A) held that the payment is not hit by Explanation–1 to section 37(1) of the Act. Consequently, the addition made by the AO was deleted. Being aggrieved, the Revenue is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, a penalty of Rs.25.72 crore was levied on the assessee, and the same was claimed as expenditure under section 37(1) of the Act. During the hearing, in response to the query raised, the learned AR filed the following details of the penalty levied on the assessee:

Therefore, from the perusal of the aforesaid details, it is evident that not only the penalty was imposed on domestic branches of the assessee, but the same was also imposed on the foreign branches of the assessee in Indonesia and Singapore. Before proceeding further, it is relevant to note the provisions of section 37 of the Act, which reads as follows: - “37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1. For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an 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 shall be made in respect of such expenditure. Explanation 2. For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. (2) [***] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.”

Thus, under section 37 of the Act, any expenditure, which is not in the nature of expenditure described in section 30 to section 36, and which is not in the nature of capital expenditure or personal expenses, is allowable as a deduction, if the same is laid or expended wholly and exclusively for the purposes of the business. Explanation-1 to section 37 of the Act, further lays down an exception to the aforesaid provision and provides that any expenditure, which is an 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 in respect of such expenditure shall be allowable. Therefore, under section 37(1) read with Explanation-1 to section, any expenditure which is an offence or which is prohibited by law, is not allowable as a deduction under section 37 of the Act. By way of various judicial pronouncements, it is now well settled that in order to decide whether the damages, penalty or interest paid by the assessee is allowable as a deduction under section 37(1) of the Act, the scheme of the provisions of relevant rules/regulations/statute providing for payment of such damages or penalty or interest needs to be examined, notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. It is further well settled that where the examination reveals that a certain impost is purely compensatory in nature, the same shall be allowable as a deduction under section 37(1) of the Act. However, where the impost is found to be penal in nature, the deduction under section 37(1) of the Act is to be denied. In this regard, gainful reference can be made to the decision of the Hon’ble Supreme Court in Prakash Cotton Mills vs. CIT, reported in (1993) 201 ITR 84 (SC). Therefore, in the light of the aforesaid settled principles, we shall now examine , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 62 the penalty levied on the assessee’s Indian and Foreign branches, during the year under consideration, which has been claimed as a deduction under section 37(1) of the Act.

From the details of the penalty as reproduced in the foregoing paragraph, furnished during the hearing, we find that a penalty of Rs.2.77 lakh was levied on the assessee’s Indonesian Branch for failure to comply with the internal regulation of the Indonesian Exchange and delay in submission of the report. Further, a penalty of Rs.405.22 lakh was levied on the domestic branches of the assessee for delay in reporting currency chest transactions and for various other requirements as per the RBI guidelines. Upon perusal of the details, it is evident that these penalties were levied for delay in reporting, as per the guidelines of the respective governing authority. Thus, we are of the considered view that the said penalties were merely compensatory in nature, and therefore, are allowable under section 37(1) of the Act.

The balance penalty of Rs.21.64 crore was levied on the assessee’s Singapore Branch by the Monetary Authority of Singapore (“MAS”), which is a local regulatory authority monitoring the financial institutions in Singapore. In this regard, the learned AR placed on record the order passed by MAS levying the penalty on the Singapore Branch of the assessee, which is reproduced as follows for ready reference: - “27 July 2017 Bank of India, Singapore Branch 158 Cecil Street #01-01 Singapore 069545 BY HAND , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 63

From the perusal of the said order, as reproduced above, it is evident that the penalty equivalent to Rs.21.64 crore was levied on the assessee’s Singapore Branch for breach of MAS Notice 626 on Prevention of Money Laundering and Countering the Financing of Terrorism, issued pursuant to section 27B of the MAS Act. In paragraph 3 of the aforesaid order, it is mentioned that as per section 27B(2) of the MAS Act, a fine of USD 1,000,000 per offence is prescribed. However, in exercise of the powers granted under the MAS Act, 45 offences out of a total of 1765 offences were compounded, and the decision was taken not to take any action against the remaining 1720 offences, if the assessee pays a sum of USD 4,500,000 within 14 days. In paragraph 4, it is further stated that upon non-acceptance of the aforesaid , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 65 proposal, a prosecution in respect of the said offences may be instituted against the assessee’s Singapore Branch. Along with the aforesaid order, the list of 45 offences, which were compounded by the authority has been enclosed, which includes offences such as failure to record customer’s existing residential address; failure to verify identity of the customers using reliable, independent sources; failure to verify the natural persons that act on behalf of the customer; failure to identify and verify the identities of the beneficial owner; failure to establish and verify the identity of the customer if the business relationship exceeds the transaction value of USD 20,000; failure to pay special attention to unusually large transaction that have no apparent or visible economic or lawful purpose; failure to implement the internal policy if business relation of the customer present higher risk for money laundering and terror financing, etc.

We find that under the Notice 626 of Prevention of Money Laundering and Countering the Financing of Terrorism, financial institutions operating in Singapore are required to put in place robust controls to detect and deter the flow of illicit funds through Singapore's financial systems. Accordingly, financial institutions are required to identify and know their customers (including beneficial owners), conduct regular account reviews, and monitor and report any suspicious transactions. Various Anti Money Laundering/Countering the Financing of Terrorism requirements for the banks, in the aforesaid Notice 626, are as follows: -  Risk assessment and risk mitigation.  Customer due diligence.  Reliance on third parties.  Correspondent banking and wire transfers.

It is pertinent to note that India being a part of Financial Action Task Force, which is a Global Anti Money Laundering and Anti-Terror Financing Body, has taken various measures to combat terrorism financing through a multi-faceted approach of legislative frameworks, such as Unlawful Activities (Prevention) Act, 1967, Prevention of Money Laundering Act, 2002 and Foreign Contribution (Regulation), apart from dedicated intelligence units. It is pertinent to note that Singapore is also an active member of the Financial Action Task Force and has been recognised to have a strong, sophisticated Anti-Money Laundering and Counter-Terror Financing System in place. Therefore, it is evident that the penalty of Rs.21.64 crore was levied on the assessee’s Singapore Branch for violation of regulations that have been laid down in Singapore to prevent a serious cause of global concern. Therefore, having regard to the nature of offences committed by the assessee’s Singapore Branch, in the light of the order under the provisions of MAS Notice 626 on Prevention of Money Laundering and Countering the Financing of Terrorism, we are of the considered view that the penalty was levied on assessee’s Singapore Branch for an offence which is prohibited by law and the same cannot be said to be merely compensatory in nature.

Further, from the perusal of the decision of the Coordinate Bench in IDBI Bank Ltd. (supra), as placed reliance by the learned CIT(A), it is evident that the penalty in the facts of the case was levied on the said Bank for non- compliance of guidelines on customer services, guidelines in respect of 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 67 exchange of bonds and small denomination notes and mutilated notes. Thus, having carefully perused the said decision, we are of the considered view that the nature of non-compliance for which the penalty was levied in the said decision is nowhere similar to the nature of non-compliance for which the penalty is levied on the assessee’s Singapore Branch, i.e. for violation of rules/regulations on Prevention of Money Laundering and Countering the Financing of Terrorism. Therefore, the reliance placed on the decision of the Coordinate Bench in IDBI Bank Ltd. (supra) by the learned CIT(A) is completely misplaced. Accordingly, we are considered view that the penalty of Rs.21.64 crore levied on the assessee’s Singapore Branch falls within the ambit of provisions of Explanation-1 to section 37(1) of the Act and, therefore, cannot be allowed as deduction to the assessee while computing its income chargeable under the head “profits and gains of business or profession” and, therefore, the same is sustained. Accordingly, Ground No.6, raised in Revenue’s Appeal, is partly allowed.

Grounds No.7 and 8, raised in Revenue’s appeal, pertain to the computation of book profit under section 115-JB of the Act. In view of our findings rendered in respect of Ground No.5A raised in assessee’s appeal for the assessment year 2018-19 (supra), this ground is rendered infructuous and, therefore, is kept open.

In the result, the appeal by the Revenue for the assessment year 2018- 19 is partly allowed.

To sum up: - , 1452, 1547 & 1548/Mum/2023 (A.Ys. 2016-17 & 2018-19) 68 ./2023 Partially allowed for statistical Assessee’s appeal – A.Y. 2016-17 purposes ITA No. 1547/Mum./2023 Dismissed Revenue’s appeal – A.Y. 2016- Partially allowed for statistical Assessee’s appeal – A.Y. 2018-19 purposes ITA No. 1548/Mum./2023 Partly allowed Revenue’s appeal – A.Y. 2018-19 Order pronounced in the open Court on 30/01/2026