ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, , ELURU vs. THE ELURU CO-OPERATIVE URBAN BANK LIMITED, ELURU

There is a delay of 27 days in filing the Revenue’s appeal before the Tribunal. In this regard, the Revenue has filed an affidavit of ACIT, Circle-1, Eluru wherein it was stated as under:

On perusal of the contents of the affidavit (supra), we are of the considered opinion that the delay of 27 days in filing appeal before the Tribunal is neither deliberate nor intentional and therefore we hereby condone the delay and proceed to adjudicate the appeal on merits.

The Revenue has raised the following grounds of appeal before the Tribunal.

The brief facts of the case are that the assessee is a Co-operative Urban Bank Limited filed its return of income for the AY 2010-11 on 30/09/2010 declaring total income of Rs. 8,72,100/-. Subsequently, the case was selected for scrutiny. In response to the statutory notices u/s. 143(2) and 142(1) of the Act, the assessee’s Representative furnished various details called for by the Ld. AO. After examining the books and the information furnished by the Assessee’s Representative, the Ld. AO completed the assessment as follows:

Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the CIT(A)-11, Hyderabad. The Ld. CIT(A) considering the submissions made by the assessee’s Representative allowed the claim for provisions of bad and doubtful debts as per First proviso to sub-clause (a) of section 36(1)(viia) of the Act. The Ld. CIT(A) also allowed the loss on sale of Government securities in accordance with the guidelines issued by the RBI. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.

The Ld. DR supporting the order of the Ld. AO argued that as per the provisions of section 36(1)(viia)(a) of the Act as claimed by the assessee is in excess of 7½ % of the income claimed and reported, and hence the excess deduction claimed should be disallowed. The Ld. DR also argued that the applicability of first proviso to sub-clause (a) of section 36(1)(viia) was not raised before the Assessing Officer. The Ld. DR also submitted that the assessee has not disclosed the sale and purchase of government securities in the P & L Account and hence the loss incurred under the sale of Government securities held as investments should be considered as a capital loss only and not as business loss. The Ld. DR also referred to para 4.2 of the order of the Ld. CIT(A) stating that the trading in securities is not reflected in the P & L Account.

Per contra, the Ld. AR argued that the provision for bad and doubtful debts is in accordance with RBI guidelines. The Ld. AR referred to section 36(1)(viia) of the Act which is reproduced below for convenience:

The Ld. AR argued that as per section 5 of the Banking Regulations Act, an Urban Cooperative Bank is also a non-Scheduled Bank and hence the First proviso is applicable for the assessee. The Ld. AR relied on the judgment in the case of ACIT vs. Chanasma Nagrik Sahakari Bank Ltd reported in (2018) 167 ITD 0151 (Ahmedabad) as well as the following the decisions:

The Ld. AR also submitted a statement as below:

The Ld. AR conceded that the provision towards standard assets is not liable for deduction under the Income Tax Act, 1961. The Ld. AR also submitted that the Government Securities were held under the category of “Available For Sale” and hence the loss after adjustment of the reserves already created in the earlier years is being debited to the P & L Account of the current year.

We have heard both the sides and perused the materials available on record and the orders of the authorities below. We find that the issue of eligible deduction under the First proviso was not raised before the Ld. AO. We have also noted that this option of claiming deduction under the first proviso was exercised by the assessee only before the Ld. CIT(A). The relevant sub-clause (a) to section 36(1)(viia) is extracted herein below for reference:

From the above, we note that the Cooperative Bank is basically mentioned in sub clause (a) of section 36(1)(viia) of the Act whereas in the first proviso only a scheduled and non-scheduled bank is being referred in the Act. We therefore note that the term “Cooperative Bank” is specifically excluded in the first proviso to sub clause (a) of section 36(1)(viia) of the Act. Accordingly, the Ld. AO has rightly computed the deduction eligible U/s. 36(1)(viia) of the Act. We therefore uphold the order of the Ld. AO on this ground.

With respect to Grounds No. 5 to 7 on the loss incurred by the sale of Government Securities, we find merit in the arguments of the Ld. AR

Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless there are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and AFS securities forcing stock-in-trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The above Instruction was issued by CBDT vide Instruction No.17/2008 dated 26/11/2008. The Hon’ble Mumbai held that the banks are required as per RBI’s guidelines to show these in the balance sheet as investments would not affect the nature of the asset. The banks by the very nature of the business may have to park surplus trading funds in securities and although intended to be trading assets may have to keep them for longer periods if funds are not required. The treatment of securities of AFS categories has to be seen in contradiction and contrast with securities of HTM category which are purchased and held for the purpose of investment only. The Circular and Instruction of the CBDT being squarely applicable, leaves no doubt on the allowability of the assessee’s claim.

In the instant case, the impugned loss arose on sale of Government securities emanated from the investments which were classified under AFS category. In view of that, we find merit in the claim of the assessee that the loss arising out of sale of Government Securities is of trading loss notwithstanding the securities are grouped under the head investment owing to the prescribed format of the RBI. We find that the order of the Ld. CIT(A) is in consonance with the CBDT instructions as well as the facts of the case and does not require any interference. Accordingly, grounds raised by the Revenue on this aspect are dismissed.

In the result, appeal of the Revenue is partly allowed.

The assessee has raised the following grounds in its cross objection:

While dealing with the Revenue’s appeal, the grounds related to the addition made by the AO with regard to loss on sale of Government securities, we have upheld the decision of the Ld. CIT(A) and dismissed the Grounds raised by the Revenue. Therefore, to this extent, the cross objection raised by the assessee is treated as allowed.

With regard to disallowance of provision towards standard assets / NPA reserve of Rs. 2,93,452/-, we have upheld the decision of the Ld. AO and therefore, to this extent the cross objection raised by the assessee is dismissed.

In the result, cross objection filed by the assessee is partly allowed.

Ex-consequenti, the appeal of the Revenue and the Cross Objection filed by the assessee are partly allowed.

Visakhapatnam गधर्ा फ़धईऱ / Guard file 6. आदेशधनुसधर / BY ORDER