ACIT, MANGALORE vs. M/S KARNATAKA BANK LTD.,, MANGALORE

6. Ground Nos. 1, 2.6 and 2.7 are general in nature and do not require any adjudication.

7. Ground No.2.1 challenges the finding of the ld.CIT(A) granting relief on account of addition of depreciation on valuation of investments. The facts leading to this addition, as set out by the Assessing Officer are as under: Page 6 of 48 7.1 On appeal before the ld.CIT(A) the ld.CIT(A) granted relief following the decision of the Tribunal in the assessee's own case for earlier years.

7.2 Being aggrieved, the revenue is in appeal before us.

7.3 We heard rival submissions and perused material on material on record. The issue in this ground of appeal is whether fall in value of investment of securities shown as investments in the books of account can be allowed as deduction. An identical issue was dealt with by us threadbare in the case of Canara Bank vs. JCIT (68 taxmann.com 128). The relevant paragraphs are reproduced hereunder:

“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 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 (supra) 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 Page 7 of 48 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".

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 Page 8 of 48 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 Ltd. v. Jt. CIT [2010] 320 ITR 577/187 Taxman 346 and UCO Bank v. CIT [1999] 237 ITR 889/104 Taxman 547 (SC) 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 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 therefrom 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. . . . . . . .”

Respectfully following the above decision, we hold that the CIT(A) was correct in law in allowing fall in value of investment as business loss. Page 9 of 48 8. Ground No. 2.2 challenges the finding of the CIT(A) deleting the addition of Rs.297,38,902/- made under section 14A of the Act. The facts set out by the Assessing Officer on this issue are as under:

8.1 On appeal before the ld.CIT(A), the ld.CIT(A) deleted the addition following the decision of the Tribunal in dated 25/02/20 11 for the assessment year 2007-08.

8.2 Being aggrieved, the revenue is in appeal before us.

8.3 We heard rival submissions and perused the material on record. An identical issue was decided by us in the case of Canara Bank (supra) wherein it was held that resort to disallowance under section 14A can be made only in case where the Assessing Officer recorded satisfaction as to how the claim of the assessee that no expenditure was incurred to earn exempt income is incorrect. After placing reliance on the decision of the jurisdictional High Court in CCI Ltd. v. Jt. CIT [2012] 206 Taxman 563 (Kar.) and Canara Bank vs. Asst.CIT (228 Taxman 212(Kar) it was held therein as follows: Page 11 of 48 “14.5 We heard the rival submissions and perused material on record. It is undisputed fact that the assessee earned tax-exempt income from the following sources: Interest on PSU bonds exempt u/s 10(15)(iv)(a) .. Rs. 21,80,65,168/- Interest exempt u/s 10(23G) .. Rs.2,56,23,50,763/- Dividend union exempt u/s 10(34) & (35) .. Rs. 57,47,34,029/- Total .. Rs.3,35,51,49,960/-

It is the contention of the assessee-bank that no expenditure was incurred for earning above exempt income which does not form part of the total income. The provisions of sec. 14A of the Act state that no deduction shall be allowed in respect of an expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Under the provisions of sub-sec. (2) of 14A of the Act, the AO is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, AO can determine the amount of expenditure which should be disallowed in accordance with methods prescribed i.e. rule 8D of the IT Rules. Therefore, at the first instance, himself examine the claim of the assessee that no expenditure was incurred to earn exempt income and it is only thereafter, and only if the AO is not satisfied on this account, and after making reference to accounts, he is entitled to adopt the method prescribed under rule 8D of the IT Rules. Rule 8D of the IT Rules read as under:— "METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME 8D(1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :— (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :............. "

Page 12 of 48 14.6 Sub-rule(1) of rule 8D extracted above states that, the AO having regard to accounts of the assessee and not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income can go on to determine disallowance under sub-rule (2) to rule 8D of the IT Rules. Sub-rule (2) does not come into operation until and unless specific condition in sub-rule (1) is satisfied. This position is reiterated by the Hon'ble High Court of Delhi in the case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390 (Delhi) and Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203. The AO had not given any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn exempt income was incorrect. In the absence of such finding, resort cannot be had to the provisions of sub-rule (2) of rule 8D as held by the Hon'ble High Court in the cases cited supra. Furthermore, it is undisputed fact that exempt income is earned from securities which are held as a part of stock-in-trade. The Hon'ble Bombay High Court in the case of India Advantage Securities Ltd (supra) held that provisions of sec.14A have no application in case assets are held as stock-in-trade. Therefore, provisions of sec.14A cannot be applied in the present case. Furthermore, in the assessee's own case, the Hon'ble High Court of Karnataka held that no notional expenditure can be attributed to exempt income in the case cited supra. Accordingly, we hold that no disallowance can be made u/s 14A of the Act. The ground of appeal of revenue is dismissed.

8.4 The facts in the present case are identical to the facts in the case of Canara Bank (supra). Respectfully following the decision of the co- ordinate bench in the case of Canara Bank (supra) we hold that no disallowance under section 14A is warranted. Hence, the ground of appeal No.2.2 raised by the revenue is dismissed.

9. Ground No.2.3 challenges the finding of the CIT(A) granting relief on account of addition made on broken period interest. The facts set out by the Assessing Officer on the above addition are as under:

9.1 On appeal, before the ld.CIT(A), relief was granted by the ld.CIT(A)placing reliance on the order of the Tribunal in the assessee's own case for the assessment year ITA 711/Bang/2010 dated 25/02/2011 for assessment year 2007-08.

9.2 Being aggrieved, the revenue is an appeal before us.

9.3 We heard rival submissions and perused the material on record. This issue is no longer res integra as the jurisdictional High Court in the ITA 147/08 dated 12/9/2012 in the assessee’s own case, following the decision of Hon’ble Bombay High Court in the case of CIT vs. Bank of Rajasthan Ltd. (326 ITR 526)(Bom) held as under: “16. It is declared u/s 5 of the Act that when interest is accrued or deemed to have been accrued, it is liable to tax. The word ‘accrued’ has defined the legal connotation. The interest that becomes due or liable to be payable whether or not it is paid, the interest is accrued or deemed to have been accrued. If the interest does not become due and not liable to pay such part of the interest arise, it cannot be said that the interest has become accrued. It appears from the facts of the case that the assessee is a bank. For its accounting purpose, it has shown the proportionate interest entitled to received on the Government securities. But for the assessment year, 1lthough it is not accrued, in the legal sense and in terms of Page 15 of 48 sections 5 and 145 of the I.T.Act. The contention of the Revenue that in the books of accounts, the proportionate interest shown for the broken period in the balance sheet, should be construed as the income accrued, is not tenable. In other words, the income which has become due and payable should alone be considered as income accrued and that should be offered as tax. The contention that Assessing Officer is entitled to tax on the interest income although not due and payable as accrued, is untenable. The fact that the assessee in its internal books of accounting mentions the proportionate interest, which is entitled to receive, in its balance sheet for the purpose of profit and loss cannot be deemed as income accrued, unless such income has become due and payable. On the basis of such amount, the AO has no right to charge the interest, which has not become due and payable.

The decision of the ld.CIT(A) is in consonance with the law laid down by with the Hon'ble jurisdictional High Court in the case of the assessee, therefore, we do not find any reason to interfere with the order of the ld.CIT(A). The ground of appeal filed by the revenue is dismissed.

10. Ground Nos.2.4 and 2.5 challenge the finding of the ld.CIT(A) deleting addition made on account of bad debts written off. The facts as set out by the Assessing Officer in paragraph 3 to 3.7 are as under:

10.1 Being aggrieved, the assessee preferred an appeal before the ld.CIT(A) who granted relief.

10.2 Being aggrieved, the revenue is in appeal before us. We heard rival submissions and perused the material on record. An identical issue Page 18 of 48 was decided by us in the case of Canara Bank (supra) 68 tax.com 128 wherein it was held as follows:

13.6 We heard the rival submissions and perused the material on record. The assessee made a claim for deduction of bad debts, working of which is as under: AMOUNT PARTICULARS (Rs.) Bad debts written off during the year (for all branches) .. 9,93,93,02,594 Less: Bad debt of rural branches adjusted against the provision .. 90,55,15,985 during the FY 2005-06 9,03,37,86,609 13.7 Provisions of section 36(1)(vii) grants deduction for amount of bad debts or part thereof written off by the assessee as irrecoverable in the accounts subject to provisions of sec.36(2) of the Act. The case of the AO is that the assessee-bank had not written off bad debts in the books of account as it is only a mere provision and therefore, disallowed the claim. Then the question as to what is meant by write off. Similar issue had come up before the Hon'ble Apex Court in the case of Vijaya Bank (supra) wherein it was held that debiting the profit and loss account by an amount of provision for bad debts, reducing provision for bad and doubtful debts from debtors account in balance-sheet amounts to write off. In the present case, it is undisputed fact that provision for bad and doubtful debts was reduced from sundry debtors account in the balance-sheet. Therefore, it satisfies the law laid down by the Hon'ble Apex Court in Vijaya Bank (supra). The same reasoning was followed in the decisions cited by the learned counsel for the assessee-bank. The ld. CIT(A) also, after considering the law and the precedents on the issue, had come to the conclusion that it amounts to write off and the claim was allowed. Since the findings of the ld. CIT(A) are in line with the law laid down by the Hon'ble Apex Court, we uphold the order of the ld. CIT(A) and dismiss the grounds of appeal (No. 2) filed by the revenue.

10.3. In the present case facts relating to this issue have not been brought out by the Assessing Officer. Therefore we remand this issue back to the file of the Assessing Officer for the limited purpose of verifying that the amount of claim under section 36(1)(vii) should be limited to the amount written off in the books of account i.e. provision for bad debts debited to P and L account and reduced from sundry advances account. It may not be out of place to mention here that the provisions of section 36(1)(vii) and 36(1)(viia) are independent of each other and the assessee is entitled to deduction u/s 36(1)(vii) in addition to the amount of deduction for provision for bad and doubtful debts u/s 36(1)(viia) of the Act. Page 19 of 48 11. In the result the appeal filed by the revenue is partly allowed for statistical purposes.

Cross Objection No.52/Bang/2011 (Assessment year 2008-09):

The cross objection is not maintainable as the cross objection does not arise out of the order of the ld.CIT(A). A separate remedy is available under the provisions of Act against the order of the ld.CIT(A) passed u/s 154 of the Act.

ITA Nos.1334/Bang/2012 and (Assessment year: 2009-10):

ii) An addition on account of broken period interest of Rs.6,45,73,400/- iii) Bad debts written off of Rs.7,72,64,647/- iv) Disallowance u/s 40(a)(ia) on ATM charges of other banks - Rs.6,44,93,357/-.

15.1 Being aggrieved by the assessment order, an appeal was preferred by the ld.CIT(A), who vide impugned order, granted relief on account of broken period interest and also on account of bad debts written off. However, the ld.CIT(A) confirmed the addition on account of disallowance u/s 14A of the Act and also u/s 40(a)(ia) of the Act.

15.2 Being aggrieved by this order both the assessee as well as the revenue is in appeal before us.

16. Ground Nos.1 to 12 challenge the finding of the ld.CIT(A) confirming the disallowance u/s 14A of the Act. The Assessing Officer set out the facts in paragraph 1 of the assessment order as under:

We heard rival submissions and perused the material on record. It is undisputed fact that facts of the present case are identical to the facts in the assessment year 2008-09 in ITA No.753/Bang/2011. Therefore, for parity of reasons given therein, the grounds of appeal 1 to 12 filed by the assessee are allowed.

17. Ground Nos.13 to 15 challenge the finding of the ld.CIT(A) confirming addition under section 40(a)(ia)of the Act. The facts as set out by the Assessing Officer in paragraph 4 of the assessment order are as under:

17.1 On appeal ld.CIT(A) confirmed the addition.

17.2 Being aggrieved, the assessee is in appeal before us in the present appeal.

17.3 The learned AR of the assessee argued that charges are paid to other banks for use of ATMs by the customers and payments are made to National Financial Switch and Cash Tree Consortium. The charges are not liable for TDS in the light of the CBDT circular No.56 of 12 dated 31/12/2012 and the decision of the Honorable Supreme Court in the case of CIT vs. Kotak Securities Ltd.(383 ITR 1)(SC).

17.4 On the other hand, the learned CIT(DR) placed reliance on the orders of the lower authorities.

17.5 We heard rival submissions and perused the material on record. The only issue in the present grounds of appeal is whether the assessee Page 29 of 48 is liable for tax deduction at source on the charges paid to National Financial Switch and Cash Tree Consortium for use of ATM of other banks by its customers and whether failure to do so attracts the disallowance u/s 40(a)(ia) of the Act. These charges are known as cash management service charges which does not attract TDS provisions in the light of the CBDT circular No.56 of 12 dated 31/12/2012 :

NOTIFICATION NO. SO 3069(E) [NO.56/2012 (F. NO. 275/53/2012-IT(B)], DATED 31-12-2012 [SUPERSEDED BY NOTIFICATION NO. SO 2143(E) (NO.47/2016 (F.NO.275/53/2012-IT(B), DATED 17-6-2016] In exercise of the powers conferred by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax under Chapter XVII of the said Act shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), excluding a foreign bank, namely:— (i) bank guarantee commission; (ii) cash management service charges; (iii) depository charges on maintenance of DEMAT accounts; (iv) charges for warehousing services for commodities; (v) underwriting service charges; (vi) clearing charges (MICR charges); (vii) credit card or debit card commission for transaction between the merchant establishment and acquirer bank.

Furthermore, the Hon'ble Supreme Court in the case of Kotak Securities (supra) held that consultancy managerial services involving services rendered by human efforts where services are made available to all customers and there is nothing special, exclusive or customer service charges, it does not par take character of managerial or Technical Services. In the light of this decision we hold that the assessee bank is not liable for tax deduction at source on these payments. We direct the Assessing Officer to delete addition on account of technical service.

Page 30 of 48 19. The revenue raised the following grounds of appeal in ITA No.1369/Bang/2012:

20. Ground Nos.1, 4 and 5 are general in nature and do not require adjudication.

22. In the result, the appeal filed by the revenue is dismissed. & 1397/Bang/2012 (Assessment year: 2010-11): 23. These are cross appeals filed by the assessee as well as the revenue directed against the order of the ld. Commissioner of Income-tax (Appeals), Mysore [CIT(A)], dated 29/05/2012 for the assessment year 2010-11. Page 31 of 48 24. Brief facts of the case are that the return of income for the assessment year 2010-11 was filed on 23/09/2010 declaring loss of Rs.46,02,49,411/- and income under section 115JB of Income Tax Act,1961 [hereinafter referred to as ‘the Act’]. Subsequently, this return was revised declaring Nil income under the provisions of section 115-JB of the Act. Against the said return of income, the assessment was completed by the Assessing Officer under section 143(3) vide order dated 09/02/2012 at total income of Rs.123,81,35,120/-. While doing so, the assessing officer made the following disallowances:

i. Addition on account of disallowance u/s 14A -Rs.2,13,44,978/- ii. Addition on account of Broken period interest on Government securities - Rs17,73,56,324/- iii. Addition on account of bad debts written off -Rs.41,85,00,000/- iv. Depreciation on investments- Rs. 96,12,04,010/-.

Page 32 of 48 27. The assessee raised the following grounds of appeal in ITA No.1335/Bang/2012:

ITA No.753/Bang/2011 Page 37 of 48 28. Ground Nos.1 and 2 challenge the finding of the ld.CIT(A) that the assessee bank is liable to tax under section 115 JB of the Act. This issue is covered by the decision of the co-ordinate bench of Tribunal in the case of Canara Bank vs. Joint CIT in & 1035/Bang/2013, 1440 & 1493/Bang/2014 and 903 & 931/Bang/2016 dated 15/09/2017 wherein it was held as follows:

“13. Ground of appeal No.5 is on the applicability of the provisions of section 115JB of the Act. This issue had come up before the co- ordinate bench in the case of assessee for asst. year 2005-06 in dated 18/06/2012 wherein it was held as follows:

Page 38 of 48 Respectfully following decision of the co-ordinate bench we hold that the assessee-bank is not liable for tax u/s 115JB for the year under consideration. The ground Nos.1 & 2 filed by the assessee are allowed.

30. Ground Nos.15 and 16 challenge the finding of the ld.CIT( A) confirming the addition under section 40(a)(ia) of the Act on the payments made to NFS for use of ATM of other banks by its customers, This issue was also decided in favour of the assessee bank in assessment year 2009-10 in ITA No.1334/Bang/2012. For the reasons stated therein, the grounds of appeal filed by the assessee are allowed.

33. Ground Nos.1, 4 and 5 are general in nature and do not require any adjudication.

& 1335/Bang/2013 (Assessment year: 2011-12): 37. These are cross appeals filed by the assessee as well as the revenue directed against the order of the learned Commissioner of Income- tax(Appeals), Mysore, [CIT(A)] dated 18/07/2013 for the assessment year 2011 12. Page 40 of 48 38. Brief facts of the case of are that the assessee-bank filed return of income for the assessment year 2011-12 declaring total income of Rs.21,02,59,270/- on 26/09/2011. The said return was revised on 09/03/2012 declaring income of Rs.21,52,90,550/-. Against the said return of income, the assessment was completed by the assessing officer vide order dated 19/02/2013 under section 143(3) at total income of Rs.146,04,21,978/- and also computed liability under section 115JB of Rs.72,71,14,332/-. While doing so, the assessing officer made the following disallowances: i. Addition under section 14A Rs.2,66,30,863/-; ii. Addition on account of Broken period interest - Rs.3,79,90,970/- iii. Provision for bad and doubtful debts - Rs.58,53,14,051/-; iv. Disallowance under section 40(a)(ia) - Rs.12,69,81,187/- and v. (v) depreciation on investment Rs.32,68,90,162/-.

42. Ground Nos.1 and 11 are general in nature and do not require any adjudication.

43. Ground No.2 challenges the finding of the ld.CIT(A) confirming the liability of the assessee-bank under section 115-JB of the Act. This issue is covered in favour of the assessee-bank by our decision in for the assessment year 2010-11. For the reasons stated therein, we hold that the assessee-bank is not liable to tax under section 115 JB of the Act. Ground No.2 filed by the assessee is allowed.

Page 46 of 48 45. Ground No.9 challenges the finding of the ld.CIT(A) confirming the disallowance of provision for bad and doubtful debts under section 36(1)(viia) of the Act. Now the law is quite settled by the decision of the Hon’ble High Court of Karnataka in the assessee’s own case reported in 349 ITR 705 and the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. vs. CIT (343 ITR 270) wherein Hon'ble Supreme Court held that the provisions of section 36(1)(vii) and 36(1)(viia) are independent of each other. We remit this issue back to the file of the Assessing Officer to compute the amount of allowance in accordance with the provisions of section 36(1)(viia) after affording a reasonable opportunity of being hard to the assessee.

49. Ground Nos.1, 6 and 7 are general in nature and do not require any adjudication.