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Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE
IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA No.318/Bang/2014 (Assessment year: 2009-10) Joint Commissioner of Income-tax, LTU, Bangalore. … Appellant Vs. M/s. Vijaya Bank, Head Office, Central Accounts Dept. 41/2, MG Road, Bangalre-560001. … Respondent PA No.AAACV 4791 J AND ITA No.331/Bang/2014 (Assessment year: 2009-10) M/s. Vijaya Bank, HO, Central Accounts Dept. 41/2, M.G.Road, Bangalore. … Appellant Vs. Addl. Commissioner of Income-tax, LTU, Bangalore. … Respondent Revenue by : Shri P.Chandrashekar, CIT(DR) Assessee by : Shri S.Ananthan, CA and Smt.Lalitha Ramaswamy, CA Date of hearing : 07/06/2016 Date of pronouncement : 22/07/2016 O R D E R Per INTURI RAMA RAO, AM : These are cross appeals filed by the assessee-bank as well as the revenue directed against the order of the CIT(A), LTU, Bangalore, dated 28/11/2013 for the assessment year 2009-10.
ITA Nos.318 & 331/Bang/2014 Page 2 of 25 2. Briefly, facts of the case are that the assessee is a nationalized bank engaged in the business of banking. It filed return of income for the assessment year 2009-10 on 29/9/2009 declaring a total income of Rs.540,24,85,305/-. Against the said return of income, assessment was completed by the Addl. CIT (LTU), Bangalore, u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] vide order dated 30/08/2011 at a total income of Rs.1205,99,81,409/-. While doing so, the AO made the following disallowances:
The AO computed tax liability u/s 115JB of the Act. While doing so, the AO had not allowed set off of carried forward of loss of Rs.172,79,57,339/- as according to the AO, there was no computed loss allowed to be carried forward for assessment year 2008-09.
The AO had not allowed deduction in respect of provision for doubtful debts in respect of rural branches as provided in sec.36(1)(viia) of the Act on the ground that the assessee-bank had not created the requisite reserve as provided u/s 36(1)(viia) of the Act and made addition of Rs.171,14,39,327/-. The AO also disallowed the claim for bad debts u/s 36(1)(vii) of Rs.55,62,08,835/- on the ground that the credit balance available
ITA Nos.318 & 331/Bang/2014 Page 3 of 25 in the provision for bad and doubtful debts created under the provisions of sec.36(1)(viia) is much higher than the amount actually written off us 36(1)(vii). Accordingly, the AO held that deduction is not allowable u/s 36(1)(vii) and disallowed a sum of Rs.55,62,08,835/-. The AO also disallowed an amount of Rs.2,54,00,000/- u/s 14A of the Act. The AO held that the assessee was not entitled to depreciation in the value of securities held under the category of ‘Held to Maturity’ [HTM] by holding that it is not a capital loss and accordingly brought to tax a sum of Rs.151,48,15,234/-. The AO also disallowed deduction of Rs.111,89,71,243/- as loss on Mark to Market loss on Derivatives holding that it is artificial loss. Sundry assets written off of Rs.16,04,126/- was also added to the total income.
Being aggrieved by the assessment order, an appeal was preferred before the CIT(A), LTU, Bangalore, who vide order dated 28/11/2013, partly allowed the appeal. The CIT(A) had confirmed the disallowance made u/s 36(1)(viia) of Rs.171,14,39,327/- by holding that the assessee-bank was eligible for deduction under the provisions of sec.36(1)(viia) only to the extent provision is created. The CIT(A) had relied on the decision of the Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala vs. CIT (272 ITR 54). In respect of disallowance of bad debts claimed u/s 36(1)(vii), the CIT(A) confirmed the addition on the ground that the amounts were not actually written off in the books of account and also relied on the
ITA Nos.318 & 331/Bang/2014 Page 4 of 25 decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (320 ITR 577). So far as the disallowance u/s 14A is concerned, the CIT(A) also upheld the addition. The CIT(A), however, allowed the claim in respect of depreciation in the valuation of HTM investments of Rs.151,48,15,234/- and also Mark to Market loss on derivatives of Rs.111,89,71,243/- and allowed the claim of sundry assets written off of Rs.16,04,126/.
Being aggrieved by that part of the order of the CIT(A), which is against the assessee-bank, assessee-bank is in appeal in ITA No.331/Bang/2014. The assessee-bank raised the following grounds of appeal: 1. “The order of the learned Commissioner (Appeals) is bad in law and against the facts of the case. 2. The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 171,14,39,327 /- u/s 36(1)(viia). 2.1. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the appellant bank is entitled to deduction u/s 36(1)(viia) to the extent of amount calculated under the section and not with reference to the provision made in the books of accounts. 2.2. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that section 36(1)(viia) being an incentive provision should be interpreted liberally. 2.3. Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the short fall in provision has been made good by the appellant bank and as such, the appellant bank is eligible for the deduction as claimed by it.
ITA Nos.318 & 331/Bang/2014 Page 5 of 25 2.4. The Learned Commissioner of Income Tax (Appeals) erred in holding that the decisions relied on by the appellant bank are not applicable to the facts of this case. 3. The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of Rs. 55,62,08,835/- u/s 36(1)(vii). 3.1. The Learned Commissioner of Income Tax (Appeals) erred in holding that the bad debts were not written off by the appellant bank on the basis of the alternate submission of the learned Assessing Officer. 3.2. The Learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that in the original assessment proceedings, the learned Assessing Officer had accepted the fact that the bad debts were written off. 3.3. The order of the Learned Commissioner of Income Tax (Appeals) is based on surmises & conjunctures. 3.4. The learned Commissioner of Income Tax (Appeals) erred in holding that the bad debts were not written off since there was no debit to the Profit & Loss Account. 3.5. The Learned Commissioner of Income Tax (Appeals) erred in not admitting the evidences placed by the appellant bank. 3.6. The learned Commissioner of Income Tax (Appeals) erred in not following the decision of the Hon'ble Supreme Court in the appellant bank's own case. 3.7. The learned Commissioner of Income Tax (Appeals) erred in following the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd [2010] 320 ITR 577 the facts of which are totally different. 4. The learned Commissioner of Income Tax (Appeals) erred in sustaining the disallowance of Rs.2.54,00,000/- u/s 14A of the Income-tax Act, 1961. 4.1. The learned Commissioner of Income Tax (Appeals) erred in sustaining the disallowance of the expenditure without pointing out the nexus between the expenditure and income.
ITA Nos.318 & 331/Bang/2014 Page 6 of 25 4.2. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the learned Assessing Officer had not recorded any finding based on cogent reasons as to the disallowance made by the appellant bank was not correct. 4.3. The learned Commissioner of Income Tax (Appeals) erred in holding that the provisions of section 14A r.w. Rule 8D are applicable to the appellant banks case. For all these and other grounds which may be urged at the time of the hearing of this appeal, the appellant prays that its appeal be allowed.”
The revenue, being aggrieved by the relief granted to the assessee-bank in respect of loss on HTM investments and mark to market loss on derivatives and sundry assets written off, revenue is in appeal before us in ITA No.318/Bang/2014. The revenue raised the following grounds of appeal: 1. The order of Ld. Commissioner (Appeals) is opposed to law and facts of the case. 2. The Commissioner (Appeals) erred in allowing the assessee's claim of depreciation of Rs. 151,48,15,234/- on HTM category of securities, as this was not considered as revenue expenditure while finalizing accounts and was claimed only in the computation income. 3. The Commissioner (Appeals) erred in allowing the assessee's claim of mark to market loss on derivatives of Rs.111,89,71,243/-, as this expenditure was not considered as revenue expenditure while finalizing accounts and was claimed only in the computation income.
The Commissioner (Appeals) erred in allowing the assessee's claim of sundry assets written off of
ITA Nos.318 & 331/Bang/2014 Page 7 of 25 Rs. 16,04,125/-For these and such other grounds that may be urged at the time of hearing.”
Now, we shall take up the assessee-bank’s grounds of appeal in ITA No.331/Bang/2014. Ground No.1 is general in nature and does not require any adjudication.
Ground No.2 relates to the disallowance of a sum of Rs.171,14,39,327 /- u/s 36(1)(viia) of the Act. Learned AR of the assessee-bank submitted that the amount was disallowed u/s 36(1)(viia) by the AO and confirmed by the CIT(A) on the ground that no requisite provision was created in the books of account. The deduction was limited to the extent of actual amount of provision created in the books of account. It is not dispute that the assessee-bank is eligible for deduction u/s 36(1)(viia). The only ground on which the AO has restricted the deduction is on account of short-fall in creation of provision. The relevant provisions of section 36(1)(viia) read as under: “36(1)(viia) in respect of any provision for bad and doubtful debts made by – (a) a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or a non- scheduled bank, an amount (not exceeding seven and one-half per cent] of the total income (computed before making deduction under this clause and Chapter VIA) and an amount exceeding 34[ten] per cent of the aggregate average ad made by the rural branches of such bank computed in prescribed manner: Provided that a scheduled bank or a non-scheduled referred to in this sub-clause shall, at its option, be allowed any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as
ITA Nos.318 & 331/Bang/2014 Page 8 of 25 doubtful assets or loss assets in accord the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets - in the books of account of the bank on the last day of the year: Provided further that for the relevant assessment year commencing on or after the 1st day of April, 2003 and ending the 1st day of April, 2005, the provisions of the first prov. have effect as if for the words "five per cent", the words cent" had been substituted: Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed the Central Government: Provided also that no deduction shall be allowed under the t proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession. Explanation.—For the purposes of this sub-clause, "re' assessment years" means the five consecutive assessment commencing on or after the 1st day of April, 2000 and before the 1st day of April, 2005”
From a bare reading of the above provision, it is crystal clear that provision should be created in the books of account so as to enable the assessee to claim deduction in respect of advances of rural branches. The methodology for calculating the amount of provision is laid down in the Income-tax Rules. Thus, the provisions are plain and unambiguous. On a plain reading of the provision, it is clear that creation of requisite reserve in the books of account is a condition precedent for allowance of the claim. The Hon’ble Punjab & Haryana High Court, in the case of State Bank of Patiala (supra) held that the amount of deduction u/s
ITA Nos.318 & 331/Bang/2014 Page 9 of 25 36(1)(viia) should be restricted to the extent of the amount of provision created for bad and doubtful debts in respect of rural branches. The same position was again reiterated by the Hon’ble Punjab & Haryana High Court in the case of Haryana State Industrial Development Corporation vs. CIT (344 ITR 460). The Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala vs. CIT (272 ITR 54) held as follows: “6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to clause (vii) of section 36(1) of the Act, which reads as under :
"Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause."
This also clearly shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under section 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein deductions had been allowed under various provisions which also required creation of reserve after the assessee had created such reserve in the account books before the completion of the assessment. It has been correctly pointed out that in all those cases, reserves/provisions had been made in the books of account of the same assessment year and not of the subsequent assessment year.
ITA Nos.318 & 331/Bang/2014 Page 10 of 25 8. In the present case, the assessee has not made any provision in the books of account for the assessment year under consideration, i.e., 1985-86, by making supplementary entries and by revising its balance-sheet. The provision has been made in the books of account of the subsequent year.”
Thus, having regard to the plain provisions of section 36(1)(viia) as well as the decision of the Hon’ble Punjab & Haryana High Court in the cases cited supra, we hold that the deduction u/s 36(1)(viia) should be restricted to the extent of the amount of provision created in the books of account during the previous year relevant to assessment year under consideration. There is no provision in the Act enabling the assessee-bank to make good short-fall of earlier years in the subsequent years. Therefore, the contention advanced on behalf of the assessee-bank that in the subsequent year, the short-fall in previous year was made good, cannot be accepted. Ground No.2 raised by the assessee-bank is dismissed.
Ground No.3 relates to disallowance of bad debts of Rs.55,62,08,835/- u/s 36(1)(vii) of the Act. Originally, the AO disallowed the assessee-bank’s claim on the ground that it is a case of overlapping of the amount claimed u/s 36(1)(viia). During the course of appellate proceedings before the CIT(A), the assessee-bank relied upon the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. (343 ITR 270) in support of its claim that the claims u/s 36(1)(vii) and 36(1)(viia) are independent of each other. Obviously, the CIT(A) accepted
ITA Nos.318 & 331/Bang/2014 Page 11 of 25 this view but however considering the evidence filed by the AO before him, held that bad debts were not actually written off as there was no corresponding debit in P&L Account. The CIT(A) placing reliance on the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd. (320 ITR 577)held that the provision created in respect of bad debts is not allowable.
9.1 Before us, learned AR of the assessee submitted that for allowance of deduction u/s 36(1)(vii) it is enough if the debts are written off in the books of account and it is not necessary to establish that debts have become really bad. In this connection, he relied on the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (323 ITR 397). As regards write off of debt, he submitted that debit in P&L account and reducing the provision for bad debts from sundry debtors in the balance sheet amounts to write off as held by the Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT (323 ITR 166).
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:
ITA Nos.318 & 331/Bang/2014 Page 12 of 25 “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, theExplanation 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 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
ITA Nos.318 & 331/Bang/2014 Page 13 of 25 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.
Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-bank to close each and every individual account of loans and advances or debtors as a pre- condition for claiming deduction under section 36(1)(vii) of 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction under section 36(1)(vii) of1961 Act, twice over. [See Order of CIT (A) at pages 66, 67 and 72 of the Paper Book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under section 36(1)(vii), twice over. The Order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of section 36(1)(vii) of 1961 Act. We cannot decide the matter
ITA Nos.318 & 331/Bang/2014 Page 14 of 25 on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor’s account if the Assessing Officer has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in 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.
Ground No.4 relates to addition of Rs.2,54,00,000/- u/s 14A of the Act. Learned AR of the assessee submitted that the assessee-bank suo motu disallowed a sum of Rs.5,20,530/- out of administrative expenses of treasury department. The AO, without rendering any finding as to how this claim is incorrect, made arbitrary disallowance of Rs.2,54,00,000/- . The CIT(A) also confirmed the same without assigning any reasons.
10.1 On the other hand, learned Departmental Representative relied on the orders of the lower authorities.
10.2 We heard rival submissions and perused the material on record. It is undisputed fact that the assessee-bank earned
ITA Nos.318 & 331/Bang/2014 Page 15 of 25 interest from tax-free bonds of Rs.2,29,20,547/- and dividend exempt u/s 10(34) of Rs.4,83,12,766/-. It is also undisputed that the securities are held as part and parcel of banking business and stock-in-trade for income-tax purposes. Similar issue had come up for consideration before us in the case of Canara Bank in ITA Nos.479 & 530/Bang/2009, 530 & 601/Bang/2010, 793 & 813/Bang/2011 dated 30/03/2016, wherein we 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: 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:
ITA Nos.318 & 331/Bang/2014 Page 16 of 25 “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 :............................... ” 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
ITA Nos.318 & 331/Bang/2014 Page 17 of 25 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.”
Similarly, we hold that no disallowance is called for under the provisions of sec.14A of the Act.
Now, shall take up the revenue’s appeal bearing ITA No.318/Bang/2014. Ground Nos.1 and 5 are general in nature and do not require any adjudication.
Ground No.2 challenges the direction of the CIT(A) allowing loss on account of depreciation in the value of HTM securities of Rs.151,48,15,234/-. The AO disallowed the same holding that the loss was on capital account. The CIT(A), following the decision of the jurisdictional High Court in the case of assessee’s own case for assessment year 2003-04 held that HTM securities were held as part of banking business and therefore, form part of the stock-in-trade. As a result, any loss arising thereon should be recognized as revenue loss and same should be allowed.
ITA Nos.318 & 331/Bang/2014 Page 18 of 25 12.1 Learned Departmental Representative placed reliance on the order of the AO and prayed that same may be disallowed the loss incurred is capital in nature. 12.2 On the other hand, learned AR of the assessee placed reliance on the decision of the co-ordinate bench in assessee’s own case in ITA No.578/Bang/2012 dated 27/2/2015 for assessment year 2008-09.
12.3 We heard rival submissions and perused the material on record. An identical issue had come up for consideration before us in the case of Canara Bank in ITA Nos.479 & 530/Bang/2009, 530 & 601/Bang/2010, 793 & 813/Bang/2011 dated 30/03/2016 wherein we held as follows: “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
ITA Nos.318 & 331/Bang/2014 Page 19 of 25 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”. 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
ITA Nos.318 & 331/Bang/2014 Page 20 of 25 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 2005-06 onwards. Therefore, the
ITA Nos.318 & 331/Bang/2014 Page 21 of 25 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.. . . . . .” Since facts of the present case are identical to the facts stated in the case of Canara Bank (supra), we have no reason not to follow the decision in the case of Canara Bank. Accordingly we hold that loss arising on valuation of HTM category of securities should be allowed as revenue loss. This ground of appeal is dismissed.
Ground No.3 relates to loss on account of mark to market loss of Rs.111,89,71,243/-. The AO disallowed the same holding that the securities were held as investments in books of account and loss arising, if any, is only capital in nature. The CIT(A) adopted the same reasoning applied in respect of HTM category of securities and held that derivatives are held as stock-in-trade under banking company and therefore, loss arising thereon on the valuation as at the end of the accounting year following the principle cost or market price whichever is lower, should be allowed as deduction.
ITA Nos.318 & 331/Bang/2014 Page 22 of 25 13.1 We heard rival submissions and perused the material on record. As the facts emerge from the assessment order, it is clear that though derivatives are shown as investments in the books of account. However, for income-tax purposes, the same were claimed as stock-in-trade and this practice was continuously followed by the assessee-bank. Thus, for income-tax purposes, derivatives form part of the stock-in-trade. When derivatives are held as stock-in-trade, then the salutary principle for valuation of stock in trade that stock has to be valued at cost or market price whichever is lower should be followed. Loss, if any, arising as a result of such valuation should be allowed as a loss. The same reasoning was followed by the co-ordinate bench of Mumbai in the case of Edelweiss Capital Ltd. vs. ITO [2010] 8 taxmann.com 157(Mum) wherein the co-ordinate bench held as under: “....When the derivatives are held as stock-in-trade then whatever rules apply to, the valuation of stock- in-trade will have to be necessarily apply to their valuation also. It is a well settled position in law that "while anticipated loss is taken into account in valuing the closing stock, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy". This is what the Supreme Court held in the case of Chainrup Sampatram v. CIT (1953) 24 ITR 481, speaking through Hon'ble Justice Patanjali Sastri, the then Chief Justice of India (pages 485 - 486 of the Report). At page 486 the Supreme Court further observed that "loss due to a fall in price below cost is allowed even if such loss has not been actually realized". Quoting from the case of case of Whimster &
ITA Nos.318 & 331/Bang/2014 Page 23 of 25 Co. v. Commissioners of Inland Revenue [1926] 12 TC 813, the Supreme Court observed that the profits that are chargeable to tax are those realized in the year and that an exception is recognized where a trader purchased and still holds goods which are fallen in value in which case though no loss has been realized nor it has occurred, nevertheless at the close of the year he is permitted to treat these goods as of their market value. This decision of the Supreme Court governs the facts of the present case. It is to the assessee's strength that the Institute of Chartered Accountants of India in its guidelines have also approved of the rule of prudence which really means that while anticipated losses can be taken note of while valuing the closing stock, anticipated profits cannot be recognized. The anticipated loss, in the light of the judgment of the Supreme Court cited above, cannot be treated as a contingent liability.”
The decision of the CIT(A) is in consonance with the above principle of law. Accordingly, we do not find any reason to interfere with the finding of the CIT(A) on this issue. Accordingly, this ground of appeal is also dismissed.
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
ITA Nos.318 & 331/Bang/2014 Page 24 of 25 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.
In the result, the appeal filed by the revenue is dismissed. The appeal filed by the assessee-bank is partly allowed.
Order pronounced in the open court on 22nd July, 2016
Sd/- sd/- (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bangalore D a t e d : 22/07/2016 srinivasulu, sps
ITA Nos.318 & 331/Bang/2014 Page 25 of 25
Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore