J.C.I.T vs. M/S CANARA BANK,

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

BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER

ITA No.979/Bang/2013 (Assessment year: 2009-10) ITA No.1493/Bang/2014 (Assessment year: 2010-11) and ITA No.931/Bang/2016 (Assessment year: 2011-12) M/s. Canara Bank, BSCA Section, Head Office, 112, JC Road, Bengaluru-560002. … Appellant PAN:AAACC 6106 G Vs. Joint Commissioner of Income-tax, LTU, Bengaluru. … Respondent AND ITA No.1035/Bang/2013 (Assessment year: 2009-10) ITA No.1440/Bang/2014 (Assessment year: 2010-11) and ITA No.903/Bang/2016 (Assessment year: 2011-12) Joint Commissioner of Income-tax, LTU, Bengaluru. … Appellant Vs. M/s.Canara Bank, Bengaluru. … Respondent

Assessee by : Shri G.Sarangan, Senior Advocate and Shri S.Ananthan, CA. Revenue by : Shri G.R. Reddy, CIT(DR)

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 2 of 59 Date of hearing : 22/06/2017 Date of pronouncement : 15/09/2017 O R D E R Per BENCH:

These are cross appeals filed by the assessee as well as the revenue directed against different orders of the Commissioner of Income- tax(Appeals) [CIT(A)] for assessment years 2009-10 to 2011-12. Since common issues are involved in all these appeals, we proceed to dispose of the same by this common order.

The assessee is a Government of India undertaking engaged in business of banking. Return of income for the assessment year 2009-10 was filed on 30/09/2009 declaring total income of Rs1691,78,60,322/-. The assessment against said return of income was completed by the Addl.CIT, LTU, [hereinafter referred to as the Assessing Officer (AO)] vide order dated 11/11/2011 passed u/s 143(3) of the Income-tax Act,1961 [hereinafter referred to as 'the Act']of the Income-tax Act,1961 [hereinafter referred to as 'the Act'] after making the following disallowances:

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 3 of 59 3. Being aggrieved by the above assessment order, an appeal was preferred before the CIT(A), LTU, Bengaluru, who, vide order dated 29/03/2013 allowed the appeal partly. While doing so, the CIT(A) has confirmed the addition on account of bad debts of Rs.543,00,00,000/- holding that corresponding amount has not been reduced by write off of NPA.

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7.1 In appeal before the CIT(A), the CIT(A) confirmed the addition by holding that it is only a provision made for NPA account in the books of account. He further held that the assessee-bank had not complied with the conditions stipulated by the Hon’ble Apex Court in the case of Southern Technologies vs. Joint CIT (320 ITR 577).

7.2 We heard rival submissions and perused material on record. The conditions which are required to be complied with for allowance of bad debt are that the amount of bad debt should have formed part of income in earlier years and it should have been written off in the books of account. The contention of the CIT(A) is that the provision for bad debts was not actually written off and squared off from debtor’s account in the books of account. What constitutes write off has been settled by the

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 5 of 59 Hon’ble Apex Court in the case of Vijaya Bank vs. CIT (323 ITR 166). In the said case, the Hon’ble Apex Court held that reducing provision for bad debts from debtor’s account in the balance sheet and debiting the provision for bad debts to P&L Account constitutes write off. The co- ordinate bench of the Tribunal in the case of Joint CIT vs. Vijaya Bank in ITA Nos.318 & 331/Bang/2014 dated 22/07/2016, to which both of us, are parties, after referring to the decision of the Hon’ble Apex Court in the case of T.R.F.Ltd. vs. CIT (323 ITR 397) and Vijaya Bank (supra) held as follows: “9.2 We heard rival submissions and perused the material on record. The only ground on which the CIT(A) confirmed the addition made on account of bad debts is that debts have not been written off in the books of account. Similar issue had come up before the Hon’ble Supreme Court in the case of Vijaya Bank (supra) wherein the Hon’ble Supreme Court held that debiting P&L Account by provision for bad debts and reducing the same from the sundry debtors in the balance sheet amounts to write off. The relevant part of the judgment is extracted below: “7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1-4-1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee-bank had correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from Loans and

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 6 of 59 Advances/debtors on the asset side of the balance sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision “for impugned bad debt”. In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in its books, as indicated above.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 7 of 59 Courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed.”

The assessee-bank had not produced any evidence that similar treatment was given in its books of account. Therefore, in the interests of justice, we remit this issue back to the file of the AO to allow the same as deduction after satisfying himself that provision for bad debts is debited to P&L account and reduced the same from sundry debtor’s account in the balance sheet. ”

7.3 The provisions of section 36(1)(vii) and 36(1)(viii) operate in different fields. Both are independent provisions as held by the Hon’ble Supreme Court in the case of Catholic Serian Bank Ltd. vs. CIT (343 ITR 270). Therefore, reliance placed by the AO on the decision in the case of full bench decision of the Hon’ble Kerala High Court in the case of South Indian Bank Ltd. (supra) which is reversed by the Hon’ble Apex Court in the case of Catholic Serian Bank Ltd. (supra) therefore, is misplaced and had no relevance to the facts of the case. Therefore, this issue requires remand to the AO for examining whether provision for bad debts is actually reduced from sundry debtors account in the balance-sheet and the provision for bad debts is debited to P&L Account. If these conditions are satisfied, we direct the AO to allow same as deduction.

7.4 In the result, Ground of appeal No.2 is partly allowed for statistical purposes.

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The AO was of the opinion that ratio of expenditure to income is 89.33% at entity level. Therefore AO held that deduction claimed u/s 36(1)(viii) is excessive and unreasonable and therefore, restricted the deduction to a sum of Rs.111,19,00,000/- thus making addition of Rs.288,18,00,000/-

8.1 On appeal before the CIT(A), the CIT(A) confirmed the addition. Being aggrieved, assessee is in appeal before us.

8.2 We heard rival submissions and perused the material on record. This issue had come up for consideration before the co-ordinate bench of Tribunal in the case of Joint CIT vs. Vijaya Bank for assessment year 2008-09 in ITA No.578 & 653/Bang/2012 dated 27/02/2015 wherein it was held as follows: “46. We have considered the rival submissions. A plain reading of the provisions of Sec.36(1)(viii) of the Act clearly shows that what is relevant is profits derived from eligible business computed under the head "Profits and gains of business or profession" and not the profits derived by the entity as a whole as has been done by the AO and CIT(A). We therefore hold that the method of computation of deduction as done by the AO and CIT(A) is incorrect. The profits derived from eligible business computed under the head “Profits and gains of business or profession” as done by the Assessee has been accepted by the AO and CIT(A). There should be no difficulty in accepting the claim made by the Assessee for deduction u/s.36(1)(viii) of the Act. The Assessee has also filed before us an alternate method of computation of deduction u/s.36(1)(viii) of the Act to demonstrate that such alternate method will result in claim for deduction being made at Rs.37,14,84,183/-. The said computation is given as Annexure-2 to this order. We deem it appropriate to direct the AO to examine the computation given as annexure-2 to

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 9 of 59 satisfy himself that the claim as made originally was correct. The AO is thereafter directed to consider the claim of the Assessee for the correct amount of eligible deduction u/s.36(1)(viii) of the Act. The relevant grounds are thus treated as allowed.” There is no dispute about the eligibility of the assessee-bank for deduction u/s 36(1)(viii) of the Act. The only dispute is with regard to method of computation of deduction. The provisions of section 36(1)(viii) read as under:

“36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— . . . . . . . . . (viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserve account:

Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.” There is no dispute as to the satisfaction of the conditions prescribed in the said provision. The dispute is only with regard to method of computation of profits of eligible business. The AO was of the opinion that eligible profits should be in the same ratio as it bears to total profits of the bank to the total cost. Neither the provisions of the Act nor the rules prescribe the method of computation of eligible business. Therefore, the computation of income should be done by one of generally accepted methods. It is the contention of the assessee-bank that expenses which are directly attributed to assessee’s business have been allocated to eligible business and common expenses and general overheads are allocated or apportioned among the eligible business and non-eligible business in proportion to turnover of the respective businesses. The methodology adopted by the assessee-bank is in conformity with well-accepted method. However, we remit this issue to the file of the AO to verify the methodology adopted by the assessee is in accordance with stated method or not. If so, to accept the same.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 10 of 59 8.3 This ground of appeal is therefore partly allowed for statistical purposes.

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9.1 On appeal before the CIT(A), the CIT(A)disallowed the same vide para. 9.2 to 9.4 as under:

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9.2 We heard rival submissions and perused material on record. Securities of HTM category form part of stock-in-trade. It is settled proposition of law that stock-in-trade should be valued at cost or market price whichever is less. Where assessee had paid premium at the time of acquisition of securities which are held as stock-in-trade, same should be allowed as deduction while computing income. This issue was considered by the co-ordinate bench in the case of ING Vysya Bank Ltd. vs. ACIT in ITA No.443/Bang/2012 dated 14/08/2013 wherein it has been held as follows:

“10. We have heard the rival submissions. The issue raised by the assessee in ground No.2 is no longer res integra and has been decided by this Tribunal in the case of M/s. Sir M.Visweswaraya Cooperative Bank Ltd. Vs. JCIT ITA No.1122/Bang/2010 for AY 07-08 order dated 11.5.2012. The following were the relevant observations of the Tribunal: “03. Let us first take up the issue relating to amortization of premium on investment in government securities. Relevant

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 13 of 59 grounds read as under : " i) The learned Commissioner (Appeals) ought to have appreciated that the appellant has to invest surplus fund in Government Securities as per RBI guidelines and the premium paid while investing in Government Securities that are bought in open market would have to be amortized till the maturity date of the security and thus the premium was written off was liable to be allowed as depreciation of value of securities ; ii) The learned Commissioner (A) ought to have appreciated that the classification of securities for RBI purposes would not take away the benefit which the appellant was entitled to and he ought to have appreciated that the case law referred were distinguishable and accordingly he ought to have allowed the deduction as claimed in full."

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 14 of 59 06. The learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) had failed to see the reason that a issue similar to that of the present one had been allowed by various benches of the Hon'ble Tribunals, namely : • Catholic Syrian Bank Ltd., v. ACIT – Cochin (2010)38 SOT 553 ; • Khanapur Coop.Bank Ltd., v. ITO ITA.141/PNJ/ 2011(Panaji); • Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang) The learned counsel also placed reliance on Board's Instructions No.17 of 2008(vii) and pleaded that the claim of the assessee be allowed as the assessee had the powers to debit in its P&L account a sum of Rs.29,02 lakhs of amortization of premium. 07. Per contra, the learned DR was unable to controvert to the submissions of the learned counsel for the assessee. 08. We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal, as under :

(i) Catholic Syrian Bank Ltd v. ACIT – (2010) 38 SOT 553 (Coch) :

An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analyzing the issue in depth, the bench has observed that with regard to amortization of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities. United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 ; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd., (ITA No.126/Coch/2004, dated. Sept, 2005 followed." (ii) The Khanapur Co-op Bank Ltd v. ITO – ITA

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 15 of 59 No.141/PNJ/2011, dated.8.9.2011 : The Hon'ble Bench of Panaji Tribunal had recorded its findings that "6. Likewise, the premium amortized at Rs.1,78,098/- is claimed to be in respect of securities held under the category 'held to maturity'. The Assessing Officer has taken them as long term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the CBDT Instruction No.17 of 2008 dated.26.11.2008 as reproduced herein above, the premium paid on such government securities is required to be amortized over the period remaining to maturity ………." (iii) In the case of Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang), for the assessment year 2004-05, the earlier bench had also held a similar view. In the light of the above discussion and the case laws discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.” 11. We are of the view that in the light of the decision on the issue considered by the Tribunal, the claim made by the assessee has to be allowed. Accordingly, the AO is directed to allow the claim of the assessee for deduction. ”

The fact that the assessee had agreed for disallowance before the AO is of no consequence as it is settled principle of law that there is no estoppel against law. Therefore, respectfully following the decision of the co-ordinate bench cited supra, we direct the AO to allow the same as deduction.

9.3 In the result, the appeal bearing ITA No.979/Bang/2013 filed by the assessee is partly allowed for statistical purposes.

ITA No.1035/Bang/2013 (Assessment year: 2009-10) : 10. The revenue raised the following grounds of appeal:

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10.1 Ground of appeal Nos.1 and 6 are general in nature and do not require adjudication.

10.2 Ground of appeal No.2 challenges the direction of the CIT(A) restricting disallowance u/s 14A to 2% of the exempt income. The factual background leading to the addition u/s 14A as set out by the AO vide paras. 3 to 3.8 is as follows:

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10.3 On appeal before the CIT(A), the CIT(A) accepted that disallowance u/s 14A should be restricted to suo motu allowance made by the assessee at Rs.91,69,320/-. This issue has come up for consideration before the co-ordinate bench (same Hon’ble Members) for earlier assessment year wherein it was held as follows: “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:

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 21 of 59 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 ;

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 22 of 59 (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 :............................... ” 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 Karnataka in the case of Maxopp Investment Ltd. vs. CIT (347 ITR 272), and Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81). 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.”

10.4 As extracted above, no disallowance u/s 14A can be made in absence of finding as to correctness or otherwise of the computation made by the assessee. In the present year, the assessee-bank itself has offered to tax a sum of Rs.91,69,320/- which was upheld by the CIT(A). Since the assessee is not in appeal, we uphold the disallowance. Accordingly, the finding of the CIT(A) does not call for an interference. The ground of appeal is dismissed.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 23 of 59 Nos.684/Bang/2012 & 813/Bang/2011. This ground of appeal is dismissed.

12.1 On appeal before the CIT(A), the same was allowed vide para.8.3 of the order as follows:

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12.2 We heard rival submissions and perused material on record. This issue has come up for consideration before the co-ordinate bench in ITA No.318/2014 wherein it was held as under: “Ground No.4 relates to the direction of the CIT(A) deleting the addition on account of sundry assets written off. The AO disallowed the same treating it as bad debt written off. 14.1 Learned Departmental Representative relied on the order of the AO. On the other hand, learned AR of the assessee submitted that sundry debts written off represent penalties imposed in respect of accounts which are inoperative for not maintaining of minimum required balance etc. The system automatically debits the customer’s account with such charges wherever required. However, in some cases such charges were not recovered at all as the customers chose not to revive their accounts. Such outstanding balances/sundry assets were written off. It is submitted that whenever there was recovery the same were offered to tax. Sundry assets do not mean bad debts as bad debts pre-suppose existence of a debtor. There was no debtor and creditor relationship in these cases, as no money was lent to them. It is nothing but non-recovery of services charges. 14.2 We heard rival submissions and perused the material on record. In the present case, amounts written off represent services charges. It is undisputed fact that in the year of recovery the same were offered to tax. Therefore, we do not find any fault with the reasoning adopted by the CIT(A) in allowing the same as the conditions prescribed u/s 36(1)(vii) are not applicable to the present case. Therefore, this ground of appeal is also dismissed. ”

Respectfully following the decision of the co-ordinate bench in the case cited supra, dismiss this ground of appeal.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 25 of 59 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 ITA No.305/Bang/2011 dated 18/06/2012 wherein it was held as follows:

13.1 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. Therefore, we do not find any infirmity in the order of the CIT(A). This ground of appeal is dismissed.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 26 of 59 13.2 In the result, the appeal filed by the revenue is dismissed.

Assessee’s appeal in ITA No.1493/Bang/2014 for assessment year 2010-11 : 14. The assessee raised the following grounds of appeal:

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ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 31 of 59 was reduced from sundry debtor’s in the balance sheet and debited to P&L Account. Similarly for this assessment year also, the issue is remanded back for the limited purpose of verifying the same and to allow it as deduction.

17.1 According to the AO, the assessee-bank computed wrong computation of Average Aggregate Advances (AAA) for the following reasons:

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 32 of 59 Show cause notice dated 26/9/2012 was issued to the assessee-bank. In response to the same, the assessee furnished reply vide its letter dated 18/12/2012 as under:

Finally, the AO computed deduction of Rs.324,94,36,110/- working of which is as under:

From above working, it is clear that while calculating AAA of rural branches, the AO has considered only incremental advances alone whereas the assessee-bank calculated AAA on the outstanding advances. Thus, variation between amount of claim made by the assessee-bank and allowed by the AO i.e. on account of two accounts – (i) branches which are urban and rural branches having population of more than 10,000 and branches for which no information was furnished by the assessee and on account of methodology of computation to arrive at the AAA of rural branches.

17.2 On appeal before the CIT(A), the CIT(A) held as follows:

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ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 34 of 59 18.1 On the other hand, ld.CIT(DR) placed reliance on the orders of the authorities below.

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.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 35 of 59 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 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).

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 36 of 59 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 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. Thus, these grounds of appeal are allowed for statistical purposes.

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ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 41 of 59 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 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.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 42 of 59 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”. 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)

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 43 of 59 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 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.

21.3 Thus, grounds of appeal No. 4 & 5 filed by the assessee are allowed.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 44 of 59 compute profits of eligible business in the manner as prescribed by us therein.

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

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 45 of 59 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.

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The above submission of the assessee-bank has been rejected by the AO by holding that the assessee-bank recognized income in the profit and loss account made as on 31st March 2010 and therefore the same cannot be claimed as deduction while computing total income.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 47 of 59 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.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 48 of 59 31. Ground of appeal No.1 relates to depreciation claimed on leased assets given to M/s.Rajinder Steels Ltd., M/s.Kedia Castle Delton Ltd., and Kedia Distilleries. This issue is only consequential in nature for the year under consideration. We held in the revenue’s appeal bearing ITA No.1035/Bang/2013 for the assessment year 2009-10 vide para.11 that depreciation cannot be disallowed on leased assets given to M/s.Rajinder Steels Ltd., M/s.Kedia Castle Delton Ltd., and Kedia Distilleries. For parity of reason, we hold that depreciation cannot be disallowed on leased assets given to M/s.Rajinder Steels Ltd., M/s.Kedia Castle Delton Ltd., and Kedia Distilleries. This ground of appeal filed by the revenue is dismissed.

Assessee’s appeal viz., ITA No.931/Bang/2016 for assessment year 2011-12: 34. The assessee-bank raised the following grounds of appeal:

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ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 53 of 59 the Act. In the assessee’s appeal for assessment year 2010-11 in ITA No.1493/Bang/2014, we held that for the purpose of calculating Average Aggregate Advances (AAA), only loan outstanding should alone be considered, not fresh advances made during the period. However, this issue was remitted back to the file of the AO to verify and identity rural branches less than 10,000 population as per latest census and the AAA of such rural branches alone be considered. Accordingly, even during this year also, we remit this issue back to the file of the AO to allow the claim on the lines indicated in para.18.3 in ITA No.1493/Bang/2014 for assessment year 2010-11. This ground of appeal is partly allowed for statistical purposes.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 54 of 59 40. Ground of appeal No.7 challenges confirmation of disallowance of Rs.7,30,768,117/- u/s 40a(ia) of the Act. It is the claim of the assessee- bank that a sum of Rs.7,30,768,117/- claimed as deduction which was disallowed in earlier years but claimed on payment basis u/s 40a(ia) of the Act, but the AO denied the claim holding that the assessee-bank had failed to provide evidence in support of the claim.

40.1 On appeal before the CIT(A), it was contended that tax audit report of all the branches have been furnished before the AO and if there is any non-compliance with TDS provisions ought to have disclosed same in the tax audit report. However, the CIT(A) has not accepted this contention. Hence, the assessee-bank is before us in the present ground of appeal.

40.2 We heard rival submissions and perused the material on record. No doubt, the assessee-bank is entitled for deduction of amount which was disallowed in earlier assessment proceedings for non deduction of tax at source in the year of deducting tax at source. The onus always lies on the assessee to prove that TDS provisions have been complied with during the year in which the claim was made. Therefore, we remit this issue to the file of the AO with a direction that the assessee-bank shall furnish evidence in respect of compliance with TDS provisions.

40.3 This ground of appeal is partly allowed for statistical purposes.

Revenue’s appeal (ITA No.903/Bang/2016) for assessment year 2011-12: 41. The revenue raised the following grounds of appeal:

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43.1 The assessee-bank is required to contribute towards gratuity fund of the employees of the bank every year on the basis of actuarial valuation as per Accounting Standard 15 issued by the Chartered Accountants of India. During the financial year relevant to assessment year under consideration, liability towards gratuity fund as per actuarial valuation worked out to Rs.1428 crores which includes additional liability on account of enhancement in the gratuity limit. However, the fund available is only Rs.747.75 crores. Therefore, the assessee-bank was required to make a further contribution to the extent of Rs.681.15 crores towards the fund as on 31/3/2011. The Reserve Bank of India had permitted banks to amortize additional liability on account of enhancement of gratuity limit over a period of 5 years. Accordingly, a sum of Rs.13753 crores was debited to P&L Account. The balance was carried forward for future amortization. However, in the computation of total income, the entire additional liability has been claimed as deduction. As regards contribution of pension fund, additional liability on account of reopening of pension option to employees as a consequence of which the assessee-bank was required to make further contribution of Rs.2373.12

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 56 of 59 crores as on 31/3/2011 and this additional liability was permitted to be amortized over a period of 5 years by the Reserve Bank of India. Accordingly, in the books of account, 1/5th of additional liability i.e. Rs.370.5 crores was debited to P&L account for the year 31/3/2011 and the balance amount was carried forward for amortization. However, in the computation of total income, entire liability was claimed as deduction. The AO has restricted deduction to the extent of the amount debited to P&L Account only and the balance was disallowed. The facts as set out by the AO are as under:

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 57 of 59 43.2 Being aggrieved, an appeal was preferred before the CIT(A), who, vide impugned order allowed the claim taking into consideration that payment to this fund were made before due date for filing of return of income and also placing reliance on the decision of the co-ordinate bench of Hyderabad in the case of DCIT vs. Andhra Bank in ITA Nos.167 to 169/Hyd/14 & 244 to 246/Bang/14 dated 18/07/2014, allowed the claim.

43.3 Being aggrieved, the revenue is in appeal before us in the present ground of appeal.

43.4 Ld.CIT(DR)/ vehemently argued that the additional liability was not debited to P&L Account and therefore, the same was not eligible for deduction.

43.5 On the other hand, learned counsel for the assessee contended that treatment in the books of account has no relevance for allowability of an item of expenditure. Learned counsel for the assessee further contended that even otherwise contribution to Gratuity Fund as well as Pension Fund can be allowed on payment basis in terms of provisions of section 43B of the Act. He placed reliance on (i) the decision of the co- ordinate bench of Hyderabad in the case of Andhra Bank (supra); (ii) the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Amco Batteries (155 Taxman 167(Kar) and (iii) decision of the Hon’ble Supreme Court in the case of Taparia Tools Ltd. vs. Joint CIT (2015) 372 ITR 605)(SC).

43.6. We heard rival submissions and perused the material on record. The only issue in this ground of appeal relates to whether additional liability arising on account of gratuity on account of enhancement of gratuity limit and the contribution to Pension Fund on account of employees reopening of the option for pension, can be allowed as a deduction though only 1/5th additional liability was debited to P&L Account. There is not dispute as regards crystallization of liability during the year under consideration. The only reason cited y the AO for

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 58 of 59 disallowance is that the assessee has not debited to P&L Account, the entire amount of the additional liability. Now, it is settled law that absence of entries in books of account or treatment in the books of account has no bearing on the allowability of actual expenditure, once it is established that liability had crystallized and which is in the revenue in nature. Reliance in this regard can be placed on the decision of the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (82 ITR 363). This proposition of law has been reiterated in plethora of decisions subsequently by various High Courts as well as the Hon’ble Apex Court. Therefore, reasoning of the AO does not hold water. Even otherwise, these payments were subject to provisions of section 43B. Section 43B permits deduction only in the year of payment. Therefore, we do not find any fallacy in the reasoning of the CIT(A).

43.7 This ground of appeal is dismissed. 44. Ground of appeal No.3 of appeal relates to applicability of provisions of section 115JB to a banking company. This issue is covered in favour of the assessee and against the revenue for reason stated by us in the revenue’s appeal ITA No.1035/Bang/2013 for assessment year 2009-10 and ITA No.1440/Bang/2014 for assessment year 2010-11. For the same reasoning, we dismiss this ground of appeal.

ITA Nos.979 & 1035/B/13 .......903/B/16 Canara Bank Page 59 of 59 47. In the result, ITA Nos.ITA 979/Bang/2013, 1493/Bang/2014 and 931/Bang/2016 are partly allowed for statistical purposes and ITA Nos.1035/Bang/2013, 1440/Bang/2014 & 903/Bang/2016 are dismissed.

Order pronounced in the open court on this 15th, September, 2017

Sd/- sd/- (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bengaluru D a t e d : 15/09/2017 srinivasulu, sps 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