CANARA BANK ,BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX LTU , BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BENGALURU

BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER

ITA No.865/Bang/2017 (Assessment year: 2012-13)

M/s.Canara Bank, BSCA Section, Head Office, J C Road, Bengaluru-560 002. PAN: AAACC 6106 G … Appellant Vs. Joint Commissioner of Income-tax, LTU, Bengaluru. … Respondent

Appellant by : Shri S.Ananathan, CA. Respondent by : Shri Sanjay Kumar, CIT(DR)

Date of hearing : 09/01/2018 Date of pronouncement : 23/03/2018 O R D E R Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee directed against the order of the learned Commissioner of Income-tax(Appeals)-14, LTU, [CIT(A)], Bengaluru, dated 30/01/2017 for the assessment year 2012-13.

ITA No.865/Bang/2017 Page 2 of 12 Sl. Nature of additions/disallowances Amount Rs. No. Income added: 1 Commission & locker rent received in 40,59,68,772 advance Expenditure/claims disallowed: 2 Provision for bad debts u/s 36(1)(viia) 0 3 Depreciation on Investments 1913,01,00,000 4 Disallowance of expenditure u/s 40(a0(ia) – 28,53,74,990 previous year claim 5 Unrealised gains on Revaluation of Forex 96,64,72,035 Forward contracts 6 Depreciation on Lelased Assets (Rajinder 3,72,220 Steels & Kedia group) Total 2078,82,88,017

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ITA No.865/Bang/2017 Page 5 of 12 is covered in favour of assessee by the co-ordinate bench of this Tribunal in the case of the assessee’s own case for assessment year 2010-11 in ITA No.1493/Bang/2014 reported in 60 ITR(T)-1 wherein it was held as follows:

“25. We heard rival submissions and perused the material on record. The only issue raised in this appeal relates to assessability of income from commission on letter of credit and locker rent. The assessee-bank is following the accounting income on account of these two heads on receipt basis whereas in computation of total income, income from this was spread over the period to which commission related and locker related, which means income was offered to tax proportionate to the period covered under the accounting year under consideration. It is not the case of the AO that income escaped assessment forever. The income is only spread over. It is settled principle of law that treatment given in the books of account of a particular item of income or expenditure has no relevance to decide taxability or otherwise of it under the provisions of the Act. Therefore, though the amount was shown as receipt and credited to P&L account, the assessee was entitled to offer income by following different method of recognition of income. No doubt, the assessee was only following the mercantile system of accounting. The only issue to be decided is whether income accrued to assessee. The Hon’ble Calcutta High Court in the case of Bank of Tokyo Ltd. (supra) held that even though the assessee-bank received entire commission for the guarantee Commission no debt is actually created in favour of the assessee-bank for the entire amount. A right always remains vested in the customers to recall payment in unexpired period in the case of earlier redemption of guarantee. Similarly even in respect of locker rent also, same reasoning can be applied. Therefore, having regard to the decision cited supra and also the principle of consistency, we hold that no addition is warranted in respect of guarantee Commission on letter of credit or locker rent received in advance. Thus, Ground of appeals No.7 is allowed.”

Respectfully following the decision of the co-ordinate bench, we allow this ground of appeal filed by the assessee-bank.

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“18.2 We heard rival submissions and perused the material on record. The Finance Act, 1979 inserted a new clause (viia) in sub-section (1) of section 36 to provide for deduction in computation of taxable profits of schedule bank in respect of provision made for bad and doubtful debts relating to advances made by the rural branches computed in the manner prescribed under IT Rules,1962. For this purpose, ‘rural branches’ has been defined to mean ‘branch of schedule bank situated at place with population not exceeding 10,000 according to last census’. Rule 6BA of the Income-tax Rules provides the procedure for computing AAA for the purpose f provisions of section 36(1)(viia) which reads as under: “6ABA. Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36 - For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely : (a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately ; (b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a) ; (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation : In this rule, rural branch and scheduled bank shall have the meanings assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36.” From a bare reading of the above rule it is crystal clear that the said rules prescribe three steps for computing AAA in the following manner: Step One - In respect of each rural branch, note down the amounts of advances outstanding at the end of the last day of each month comprised in the previous year and aggregate the amounts so noted. Step Two- Divide the aggregate amount arrived at in Step One by the number of months for which the outstanding amounts have been taken into account for the purpose of Step One. Step Three- Aggregate the amounts arrived at under Step Two in respect of all the rural branches. Thus, it is clear that the said Rules do not provide for only fresh advances made by each rural branch during each month alone is to be considered. It only

ITA No.865/Bang/2017 Page 7 of 12 prescribes that the amount of advances made by rural branch and is outstanding at the end of the last day of each month shall be aggregated. Having regard to the plain provisions of the IT Rules, it cannot be construed that only fresh loans made by rural branches outstanding at the end of each month should be considered for the purpose of calculating AAA. It is trite law that the condition not imposed by the statute cannot be imported while construing a particular provision of Rules or statutes. Thus, the reasoning adopted by the AO as well as the CIT(A) does not stand the test of law. Furthermore, co-ordinate bench of Hyderabad Tribunal in the case of Nizamabad District Co-operative Central Bank Ltd. (supra) held as follows: “8. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. Before going into the issue, it is necessary to look into the relevant statutory provisions. Section 36(1)(vii) provides for deduction on account of bad debts actually written off in the books of account. However, proviso to 36(1)(vii) makes an exception by providing that in case of an assessee to which clause (viia) applies the claim of bad debt shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made under clause (viia). Clause (viia) permits a cooperative bank to claim deduction of provision made for bad and doubtful debts as per the prescribed conditions. As has been correctly observed by ld. CIT(A), the only dispute between assessee and department is in respect of working out 10% of aggregate average rural advances. While assessee has made such working by considering the entire outstanding advances at the end of each month, AO has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances. However, a perusal of the provision contained u/s 36(1)(viia) and rule 6ABA, would make it clear that the 10% of aggregate average advances has to be worked out on the entire outstanding advances and not the advances of that month alone. That being the case, we agree with the view held by ld. CIT(A). 9. Now coming to the quantum of deduction claimed u/s 36(1)(vii) and 36(1) (viia), law is well settled that an assessee can claim deduction under both the clauses subject to the condition imposed under the proviso to 36(1)(vii). As can be seen from the working submitted by ld. AR, the provision created during the year u/s 36(1)(viia) read with rule 6ABA, amounts to Rs. 16,35,55,829.00 whereas assessee has claimed deduction of Rs. 5,16,46,976, which is well within the provision permissible under section 36(1)(viia). Therefore, there cannot be any doubt with regard to the allowability of deduction claimed by the assessee u/s 36(1)(viia). Accordingly, we do not find any infirmity in the order of ld. CIT(A) in deleting addition of Rs. 3,88,25,673. However, as far as deduction of Rs. 18,79,704 is concerned, the same cannot be allowed u/s 36(1)(vii) considering the fact such amount has not exceeded the provision for bad and doubtful debts u/s 36(1)(viia). At the same time, alternative

ITA No.865/Bang/2017 Page 8 of 12 claim of the assessee that it is to be allowed u/s 37(1), in our view, is acceptable. On a perusal of the assessment order and the facts and materials available on record, it is quite evident that the amount was waived at the direction of the State Govt. Department has not controverted this fact. Therefore, in our view, the waiver of interest at the instance of the State Government, has to be allowed as business expenditure u/s 37(1). Accordingly, we uphold the order of ld. CIT(A) in deleting addition of Rs. 18,79,704 though, for a different reason. The grounds raised by the department are dismissed.”

18.3 In the light of the above, we hold that the methodology adopted by the AO for the purpose of computing AAA is against the plain provisions of rules and also against the ratio of the decision of the co-ordinate bench in the cases cited supra. However, remit this issue back to the file of the AO to identify rural branches less than 10,000 population as per last census and the AAA of such rural branches alone should be considered for the purpose of this deduction. ......” Respectfully following the decision of the co-ordinate bench, we remit this issue back to the file of the AO for the purpose of identifying rural branches less than 10000 population as per last censes and average aggregate advances of such rural branches alone should be considered for the purpose of computing the amount of deduction under this section. This ground of appeal is partly allowed for statistical purposes.

“21.2 We heard rival submissions and perused material on record. This issue was decided by the co-ordinate bench in the case of the assessee to which both of us are parties wherein after referring to circular Nos.18 of 2015 dated 02/11/2015 and the decision of the Hon’ble jurisdictional High Court in the case of Karnataka bank vs. CIT (356 ITR 539) and the decision of the Hon’ble Apex Court in the case of Southern Technology (320 ITR 577) and UCO Bank (237 ITR 889) it has been held as under: “9.5 We heard the rival submissions and perused the material on record. The short issue in this ground of appeal is whether fall in value of investments made pursuant to SLR requirements of RBI can

ITA No.865/Bang/2017 Page 9 of 12 be allowed as a deduction while computing business income of a banking company. Notwithstanding treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of RBI governing SLR requirement. Even otherwise, the Hon'ble jurisdictional High Court in the case of Karnataka Bank vs. CIT (356 ITR 539) held that circular issued by the RBI for treatment in the books of account is not relevant for classifying the investments whether stock-in-trade or not. In the present case, undisputedly, assessee-bank has changed its method of accounting by classifying the investments from investments to stock- in-trade. In such a situation, provisions of sec.45(2) of the Act are attracted. The said provisions of the Act read as under: “45(2)Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. ” But here the question is, in the earlier years though investments are shown as investments in the books of account, for income-tax purposes, the same was shown as stock-in-trade. Therefore, assessee-bank changed its method of accounting during the previous year relevant to assessment year under consideration is not a material fact in deciding the issue in the present appeal. In the earlier years, the same was claimed as stock-in-trade and the resultant loss or gain on account of following the principle cost or market price whichever is less, is recognized for income-tax purpose. In this context, it is apt to reproduce circular No.18/2015: ”Circular No. 18 of 2015, dated November 02, 2015. Subject : Interest from Non-SLR securities of Banks—reg. It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, “expenses relatable to investment in non-SLR securities need to be disallowed under section 57(i) of the Act as interest on non-SLR securities is income from other sources”. 2. Clause (id) of sub-section (1) of section 56 of the Act provides that income by way of interest on securities shall be chargeable to income-tax under the head “Income from other sources”, if, the income is not chargeable to income-tax under the head “Profits and gains of business and profession”.

ITA No.865/Bang/2017 Page 10 of 12 3. The matter has been examined in light of the judicial decisions on this issue. In the case of CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 160 Taxman 48 (SC), the apex court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head “Profits and gains of business and profession”. 3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 4. In the light of the Supreme Court’s decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned. (Sd.) . . . . . . . . . . . . . . . D. S. Chaudhry, CIT (A&J), CBDT, New Delhi. From the reading of the above circular, it is clear that investments held by the banking concern are treated as a part of business of the banking company and therefore, the income arising from such investments is treated as part of business income falling under the head ‘profits and gains of business’. Though the circular was issued in the provisions of sec.80P of the Act, the said principle was equally made applicable to other banks and commercial banks to which Banking Regulation Act, 1949 applies. Therefore, by virtue of the above said circular, investments made by the banking company should be treated as a business asset of the banking company or stock-in-trade. It is well settled in law that CBDT circulars are binding upon the officers who are entrusted with the responsibility of executing the provisions of the Act. 9.6 The jurisdictional High Court, in the case of Karnataka Bank (supra), after referring to the judgment of the Apex Court in the case of Southern Technology (320 ITR 577) and UCO Bank (237 ITR 889) held that the directions of the RBI are only disclosed norms and they have nothing to do with computation of taxable income. The jurisdictional High Court further upheld the claim of the assessee-bank following the principle of consistency. Even the Hon’ble Apex Court in the case of UCO Bank (supra) only laid down principle that where the investments are forming part of stock-in-trade, loss arising on account of fall in value of the securities should be recognized and allowed as a deduction. But the above case cited supra does not come to the rescue of the assessee- bank for the reason that the assessee-bank, even in the books of account, has treated the investments as stock-in-trade from the assessment year

ITA No.865/Bang/2017 Page 11 of 12 2005-06 onwards. Therefore, the question boils down to the one issue whether the change of method of accounting is bona fide or not. It is not the case of the revenue that the assessee-bank changed for a casual period to suit its own purpose. Therefore, the bona fide of the assessee- bank in changing the method of accounting cannot be doubted. Now, it is well settled that the assessee is entitled to change regular method of accounting irrespective of the fact, it results in loss to revenue. Therefore, having regard to the spirit of the circular cited supra and the fact that investments are shown as stock-in-trade in the books of account, loss/depreciation on account of fall in value of securities held by the assessee-bank should be allowed as deduction. Therefore, income arising there-from should also be treated as business income. The provisions of section 45(2) cannot be applied to the facts of the present case, as in the earlier years, for the purpose of income-tax proceedings, the investments were treated as stock-in-trade. Thus, grounds of appeal Nos.4, 5 & 6 are disposed of”.

The reliance placed AO on the decision of the Hon'ble jurisdictional High Court in the case of ING Vysya Bank vs. CIT (2012) 208 Taxmann 511 is misplaced for the reason that Hon'ble jurisdictional High Court in the case of Karnataka Bank (supra) held that the decision in ING Vysya Bank (supra) runs counter to law lay down by the Hon’ble Apex Court in the case of UCO Bank (supra). In the light of the above position in law, we direct the AO to allow fall in value of investments as a revenue loss.”

Respectfully following the decision of the co-ordinate bench in the assessee’s own case (supra), we allow this ground of appeal.

ITA No.865/Bang/2017 Page 12 of 12 in favour of the assessee-bank in assessee’s own case for the assessment year 2010-11 (supra) wherein it is held as follows:

“28. We heard rival submissions and perused the material on record. There is no dispute that the assessee-bank has recognized as income in the profit and loss account on account of unrealized Forward exchange contracts. However, same was claimed as deduction in the computation of income. It is also undisputed fact that income is recognized only on hypothetical basis which has not accrued to the company. In the light of these facts, the issue is whether this income is liable to tax as accrued income within the meaning of section 5 of the Act. It is salutary principle that income- tax is not leviable on hypothetical income. No income can be taxed unless otherwise accrued and realized. Reliance in this regard can be placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Shoorji Vallabhdas & Co. (46 ITR 144)(SC) and Godhra Electricity Co. Ltd vs. CIT (225 ITR 746)(SC). This issue was settled by the Hon’ble Madras High Court in the case of Indian Overseas Bank vs. CIT (183 ITR 200). In the light of these judgments, we hold that no income can be taxed on notional basis unless and otherwise income accrued to the assessee.” Respectfully following the decision of the co-ordinate bench in the assessee’s own case (supra), we allow this ground of appeal.

Order pronounced in the open court on 23rd March, 2018.

Sd/- sd/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Copy to : 1 Appellant 2 Respondent 3 CIT(A) 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file

By order Senior Private Secretary Income-tax Appellate Tribunal Bangalore