ALLAHABAD BANK,KOLKATA vs. DCIT, CIRCLE - 7, KOLKATA

Both the appeals are heard together and are being disposed of by way of this consolidated order for the sake of convenience.

3 That without prejudice to the contentions raised in the preceding grounds the Ld. CIT(A) failed to appreciate that the provision for bad and doubtful debts, provision for stationery wastage, provision for intangible assets, provision for fraud and forgery were in respect of diminution in the value of the assets and these were not provisions for meeting the liabilities and as such not hit by the Provision of section 115JA of the IT Act.

4 That the Ld. CIT(A) failed to appreciate that the unabsorbed depreciation of Rs.22,61,00,000/- actually existed in the books, although the same was adjusted against the capital as a special measure in presenting the accounts n a prescribed manner permitted y the Government of India.

0 That the Ld. CIT(A) should have deleted the addition of Rs.243,31,65,575/- being profit on Investment Treading Account including profit on account of valuation in the closing stock.”

Grounds No. 2 and 5 raised by the assessee in its appeal have not been pressed by the Ld. counsel for the assessee at the time of hearing before us. The same are, therefore, dismissed as not pressed.

First issue raised by assessee in ground No.1 is that Ld. CIT(A) erred in confirming the action of Assessing Officer by disallowing the deduction of ₹2,63,42,926/- for interest charged to tax in earlier years.

Briefly stated facts are that assessee in the present case is a Public Sector Bank is governed by Banking Companies (A&T) Act, 1970 Banking Regulation Act, 1949 and various Rules and Regulations framed by Reserve Bank of India (RBI for sort) from time to time. During the course of assessment proceeding, AO Allahabad Bank v. DCIT, Cir-7 Kol. Page 4 noticed that assessee has claimed deduction for a sum of ₹2,63,42,926/- from the total income. The assessee explained that aforesaid sum represented interest income earned by assessee on its non-performing asset in the earlier years. Further, assessee explained that the aforesaid interest ought not to have been treated as income of earlier assessment year in terms of RBI Guidelines. According to RBI Guidelines no interest income on Non Performing Assets (NPAs for short) should be charged by the assessee in its profit and loss account. As such, the excess interest on NPAS declared by assessee in the earlier year has to be reversed in the year under appeal. However, AO after considering the submission of assessee has held that interest earned and credited in the earlier year cannot be reversed as it is not allowable item of expense / liability in the year under consideration. Accordingly, AO disallowed the deduction claimed by assessee and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld CIT(A) who upheld the action of AO by observing as under:- “I have carefully considered the above submission of the Ld. AR and have perused the various supporting papers and the records of the appellant, I find that the appellant’s claim is not justified. The appellant has shown excess interest income in earlier years on certain accounts, which have actually been converted into NPAS according to RBI guidelines and that according to the RBI Guidelines, no interest on NPAS becomes due to a banking company. As such the excess interest income shown by the appellant in earlier years has been reversed in the year under appeal on the basis of Audit Report, by passing an accounting entry. The reversal of such interest by an accounting entry cannot be said to be an expenditure incurred by the appellant laid out or expanded wholly and exclusively for the purpose of business or profession, as such, no deduction of the impugned amount can be allowed under section 37. Further, since, the above amount does not fall within the provisions of section 30 to 43D, as such, the same cannot be allowed as per section 29 of the Income Tax Act. Therefore, a wrong accounting entry in respect of the income in earlier years cannot be claimed as deduction as expenditure in the later years when such entry is reversed in the Accounts. Accordingly, this ground of appeal is dismissed.”

We have heard rival contentions and perused the materials available on record. At the outset, it was observed that the issue raised by assessee is squarely covered in its own case for the AY 2000-01 in ITA No.2967/Kol/2003 dated 09.12.2015, wherein it has been decided by the Coordinate Bench of this Tribunal, the relevant extract is reproduced below:- “6. The ld. counsel for the assessee drew our attention to the Prudential norms of the Reserve bank of India applicable and also placed reliance on certain judicial pronouncements rendered on identical facts. The first decision was that the decision of the Hon'ble Delhi High Court in the case of CIT vs Industrial Finance Corporation of India Ltd. in ITA No.1444 of 2010 dated 11.07.2011. in the aforesaid decision the Hon'ble Delhi High Court held on similar claim observing s follows:- ‘It may not be necessary to go into the validity of the reasons given by the Tribunal as in any case, the assessee was entitled to this deduction. If the income which is earlier recognized is not to be allowed to be reversed in the subsequent assessment years, in any case it is permissible for the assessee to write off such an income in the concerned assessment ears when it was found that the amount was not recoverable. Reference in this connection can be made to the judgment of the Supreme Court in the case of Vijaya Bank vs CIT & Anr. (2010) 231 CTR (SC) 209 ; (2010) 37 CTR (SC)14; (2010) 35 DTR (SC)156: (2010) 323 ITR 397 (SC).’

The next decision is the decision rendered by ITAT, Hyderabad Bench in the case of Andhra bank vs DCIT in ITA No.218/H/10 order dated 04.04.2013. in the aforesaid decision ITAT took the following view:- ’59, The next is regarding deduction of Rs.23600000 being unrealized interest on NPA which is reduced from the interest income. the assessee had recognized interest of Rs.23600000/- on certain accounts during the assessment year 2005-06 the same was offered to tax also. These accounts became NPA during the assessment year 2006-07 the assessee therefore reversed interest of Rs.2.36 crores and reduced the same from the interest income for the assessment year 2006-07. The same was disallowed by the AO and confirmed by the CIT(A).

The assessee submits that these issue is covered by the decision of the Delhi High Court in the case of CIT vs. Industrial Finance Corporation reported in 201 Taxmannn 75. In that case also the assessee reversed the income offered to it for tax in the earlier years on the ground that accounts are become NPAs. The assessee has also raised additional ground, which is as follows:- “1. Without prejudice to Ground No.7 the learned CIT(A) ought to have allowed the unrealized interest of Rs.236,00,000/- on Non- Performing Assets as deduction u/s. 36(1)(vii) of the Act by treating the same as bad debts written off.”

1 The Delhi High Court held that income which was earlier recognized is not to be allowed in the subsequent year in case it is permissible for the assessee to write off such income in concerned assessment year when it was found that it was not recoverable. In this connection they have also referred to the decision of the Apex Court in the case of Vijay Bank reported in 323 ITR 166 and TRF Ltd reported in 323 ITR 397. The Delhi High Court upheld the claim of the assessee for deduction of interest reversed.

2 Respectfully following the above we direct the AO to allow deduction of Rs.2.36 crores being unrealized interest offered for tax in the earlier year now reversed by the assessee.”

Second issue raised in modified ground No.3 by assessee dated 20.03.2012, which reads as follows:- “Modified Ground No.3 “That on facts as well as on law, the Learned CIT(A) was not justified in confirming the disallowance of Rs.29,82,08,941, being bad debt written off by the appellant in respect of advances pertaining to non-rural branches on the ground that the bad debt so written-off did not exceed the credit balance in the provision for bad and doubtful debt account s per the proviso to section 36(1)(vii) of the Income Tax Act, 1961”

During the year, assessee has written off bad debts for Rs.46,60,59,010/- which was debited in the profit and loss account of assessee. During the assessment proceedings, AO noticed that as per the provision of Sec.36(vii), the assessee to which clause (viia) applies then bad debts exceeding the credit balance in the provisions account for bad and doubtful debts made under that clause if the bad debts exceeds to the said provision. In the instant case, the bad debts written off in the profit and account do not exceed the credit balance in the provision of bad and doubtful debts. Therefore, AO disallowed the bad debts written off and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) who has upheld the action of AO by observing as under:- “The Ld. AR argues before me that the claim of bad Debt, which has actually been written off, is admissible according to the provisions of section 36(1)(vii) and in accordance with the Board’s Circular No.258 dated 14-06-79 and Circular 421 dated 12-06-85. The AR submitted that these bad debts have been written off applying the portion of provision for bad debt, which was not allowed as deduction u/s. 36(1)(viia). The similar issue came for my consideration in the appellant’s appeal for the immediately preceded three assessment years where on the similar facts & circumstances of the case, I hold that the claim was not admissible to the appellant. Following my earlier decision in the matter, I hold that this claim is not admissible and the disallowance made by the AO is confirmed.”

Before us ld AR submitted paper book which is running pages from 1 to 258 and stated that assessee has written off a sum of Rs.46,60,59,010/- as bad debts and out of the said sum, Rs.29,82,08,941/- represents the bad debts in respect of advances pertaining to non-rural branches. Therefore, the aforesaid sum is outside the purview of Sec. 36(viia) of the Act and stated that the issue may be decided on merit.

We have heard rival contentions and perused the materials available on record. At the outset, we find that the issue raised by assessee is squarely covered by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case in ITA No.2070/Kol/2009 dated 16.03.2016, whereas the issue was decided by the Co-ordinate Bench of this Tribunal in favour of assessee and against the Revenue, the relevant extract portion reproduced below:- “22. The issue involved in Ground No 4 of the Revenue’s appeal for AY 2005-06 relates to the deletion by the ld. CIT(Appeals) of the addition of Rs.75,00,00,000/- made by the Assessing Officer by way of disallowance of assessee’s claim for bad debts written off under section 36(1)(vii) of the Act.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As agreed by the ld. representatives of both the side, this issue involved in Ground No.4 of the Revenue’s appeal for A.Y 2005-06 now stands squarely covered by the decision of the Hon'ble Supreme Court in the case of Catholic Syrian bank Limited (2012) 3 SCC 784 whereby the view taken by the Cochin Special Bench of ITAT has been affirmed by the Hon'ble Apex Court. Respectfully following the said decision of the Hon'ble Supreme Court in the case of Catholic Syrian bank Limited, we uphold the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No.4 of the Revenue’s appeal.”

Issue No.3 as well as additional ground raised by assessee which admitted by us inter-connected with the issues relating to that Ld. CIT(A) erred in confirming the action of AO by making the disallowance for the computation of book profit u/s. 115JA of the Act.

We have heard the arguments of both the sides and also perused the relevant materials available on record as agreed by the Ld. representative of both the sides. The preliminary issue involved in this context is whether the provisions of Section 115JA are applicable to the assessee-bank and the same is squarely covered in favour of assessee, inter alia, by the decision of the Hon'ble Kerala High Court in the case of Kerala State Electricity Board – vs DCIT reported in 329 ITR 91, and Mumbai Bench of ITAT in the case of Maharashtra State Electricity Board –vs- ACIT reported in 220 ITR 422 and another decision of Mumbai Bench of ITAT in the case of Union Bank of India vs. ACIT (supra). As held by the Mumbai Bench of ITAT in the case of Union Bank of India (supra), provision of Sec. 115JA is not applicable to the assessee- Bank as it not required to prepare its profit & loss account in accordance with Schedule VI of the Companies Act, 1956 but it prepares its profit & loss account as per the Banking Regulation Act, 1949. Respectfully following the ratio of these judicial pronouncements, we hold that the provision of Sec. 115J is not Allahabad Bank v. DCIT, Cir-7 Kol. Page 9 applicable in the case of the assessee and accordingly delete the additions made by the AO and confirmed by the Ld. CIT(A) while computing the book profit of the assessee by applying the said provision. Hence, Issue No.3 raised in ground 4 and additional ground raised by assessee thus allowed.

In the result, assessee’s appeal is partly allowed.

Ground Nos 1 to 3.4 raised by assessee read as follows:- “1.0 That the Ld. CIT(A) was wrong in confirming the disallowance to the extent of Rs.44,13,35,718/- being the amount of bad debt written off by the appellant.

0 That the CIT(A) was wrong in confirming the disallowance of Rs.3,47,10,898/- out of the contribution to the recognized provident fund.

0 That the Ld. CIT(A) was wrong in confirming the disallowances made y the AO in respect of the following items in computing its Book Profit u/s. 115JA of the Income Tax Act, 1961: a) Provision for bad and doubtful debts Rs.56,45,23,296/- b) Provision for fraud and forgery Rs. 28,38,334/- c) Adjustment of unabsorbed depreciation brought forward as per book Rs.22,61,00,000/- 3.1That the Ld. CIT(A) failed to appreciate that the Provision for bad and doubtful debts for Rs.56,45,23,296/- made by the appellant in its book was an ascertained liability as the same was worked out on the basis of RBI guidelines, Banking Companies (A&T) Act, 1970, Baking Regulation Act, 1949 and is also supported by the decision of Bombay High Court reported in 251 ITR 15, distinguishing the Madras High Court decision reported in 244 ITR 256. 3.2 That the Ld. CIT(A) failed to appreciate that the provisions for fraud and forgery was made as per guidelines issued by RBI and duly approved by the Auditors appointed by RBI and as such this item of provision was not in the nature of contingent and unascertained liability but was an ascertained liability on actuarial calculation basis as per RBI guidelines.

3 Without prejudice to the contention raised in the preceding grounds the Ld. CIT failed to appreciate that provision for bad and doubtful debts and provision for fraud and forgery were in respect of diminution in the value of assets and these were not provisions for meeting the liabilities and as such were not hit by the provision of sec.115JA of the Income Tax Act.

4 That the Ld. CIT(A) failed to appreciate that the unabsorbed depreciation of Rs.22,61,00,000/- actually existed in the book although the same was adjusted against the capital as a special measure in presenting the account in a prescribed manner permitted by the Govt. of India.

That the order passed by the Ld. AO is against the law and facts of the appellant’s case.

That the appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal before or at the time of hearing of this appeal.”

At the outset, ground No.1 and ground No.3 as well as inter-connected ground No. 3.1 to 3.4 of assessee’s appeal, it is observed that the both issues are involved therein relating to the disallowance of bad debt written off by assessee and facts and issues are same except figures involved as in ITA No.1691/Kol/2002 of assessee’s appeal following our decision on these issues as embodied in para 12 to 14 of this order, the grounds of assessee are allowed. We hold accordingly.

Ground No.2 raised by assessee is that Ld. CIT(A) erred in confirming the disallowance of Rs.3,47,10,898/- out of contribution to the recognized PF fund.

We have heard both the parties and perused the materials available on record. We find that the AO has made the addition of the amount of the employee contribution as there was a delay in payment to PF authorities. However, from the assessment order we find that all the payment of employees contribution were made before the due date of filing of Income Tax Return as specified u/s.139(1) of the Act. Now, this issue stands covered in favour of assessee and against the Revenue by the decision of Hon’ble jurisdictional High Court in the case of CIT v. M/s Vijay Shree Limited vide ITAT No.245 of 2011 in GA No.2607 of 2011 dated 7th September, 2011, wherein it has been held as under:- “After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. ITA No.1691/Kol/2002 & 77/Kol/2004 A.Ys 98-99 & 99-00 Allahabad Bank v. DCIT, Cir-7 Kol. Page 11 Such being the position, the deletion of the amount paid by the Employees’ contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act.

Remaining grounds No.4 & 5 are general in nature and do not require any adjudication.

In the result, assessee’s appeal is allowed.

In combined result, assessee’s appeal ITA No.1691/Kol/2007 is partly allowed and that of ITA No.77/Kol/2004 is allowed. Order pronounced in the open court 08/06/2016 (S.S.Viswanethra Ravi) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp "दनांकः- 08/06/2016 कोलकाता । आदेश क" ""त"ल"प अ"े"षत / Copy of Order Forwarded to:- 1. अपीलाथ"/Appellant-Allahabad Bank, 2, Neteaji Subhas Road, Kolkata-700 001

""यथ"/Respondent-DCIT, Circle-7, P-7, Chowringhee Square, Kolkata-700 069 3. संबं"धत आयकर आयु"त / Concerned CIT Kolkata 4. आयकर आयु"त- अपील / CIT (A) Kolkata

"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड" फाइल / Guard file. By order/आदेश से, // उप/सहायक पंजीकार आयकर अपील"य अ"धकरण, कोलकाता ।