2013 (4) TMI 770 - AT - Income Tax

Tribunal Rules in Favor of Assessee on Various Tax Matters

M/s. Andhra Pradesh Grameena Vikas Bank, Warangal. Versus ACIT, Aayakar Bhavan, Station Road, Warangal And Vice-Versa

The Tribunal upheld the CIT (A)'s decisions in favor of the assessee regarding the deletion of addition of broken period interest, disallowance of ... Addition on broken period interest - Held that:- The conclusion arrived at by the assessing officer that the HTM category of securities are investments and cannot be considered as stock in trade is also found to be not the correct view. The Hon’ble AP High Court in case of SBH (1984 (7) TMI 66 - ANDHRA PRADESH High Court) has held that the amount required to be kept in India as per section 24 of the banking Regulation Act, 1949 in the form of cash, gold and encumbered securities is part of stock in trade of the assessee. Hence, it cannot be held that HTM category of securities is not stock in trade of the assessee. In aforesaid view of the matter, we uphold the conclusion of the CIT (A) to the effect that broken period interest is an allowable deduction. Accordingly, we dismiss the ground raised by the revenue on this issue. Disallowance of amortisation of government securities - Held that:- After perusing the order of the CIT (A), we do not find any infirmity in his view. As has been held by us in the earlier part of this order (supra), HTM category of securities being stock in trade, the assessee is entitled to claim amortization. Hence, the order passed by the CIT (A) is upheld and the ground raised by the revenue is dismissed. Addition being provision for staff frauds - Held that:- Circular No.35 dated 24-11-1965 of CBDT also clarifies that the loss to embezzlement by an employee is an allowable expenditure u/s 37 of the Act. In aforesaid view of the matter, we do not find any infirmity in the order of the CIT (A) in allowing the expenditure claimed by the assessee on account of staff fraud. Hence, this ground raised by the Revenue is dismissed. Accrued interest on non performing assets (NPAs) - Held that:- Assessing Officer has not denied the fact that the amount represents unrealized interest on NPA. Admittedly, so far as interest on NPA is concerned the assessee was recognizing it as per the prudential norms for income recognition issued by the RBI for recognition and asset classification and accordingly has not included the interest on NPA as its income. In our view, such recognition of income by the assessee is in accordance with law and as per accepted accounting norms. When the recovery of the principal amount itself has become doubtful, it cannot be said that interest on such amount has accrued as income to the assessee. Disallowance of provision made for gratuity - Held that:- The assessee has submitted certain documents in support of his claim that the group gratuity scheme of the SBI Life Insurance Company is an approved gratuity fund and it is also a fact on record that the payment to the said fund was made before the due date of submission of return of income for the relevant assessment year. In aforesaid view of the matter, assessee’s claim is required to be examined. Therefore, considering the fact that the evidence produced by the assessee were not considered by the revenue authorities while disallowing the claim of the assessee, we remit the matter back to the file of the assessing officer who shall decide the issue afresh after taking into account all the evidences available on record and further evidences that may be produced by the assessee before him. We direct the assessing officer to afford a reasonable opportunity of being heard to the assessee before deciding the issue. Deduction u/s 36(1)(viia) - Held that:- Keeping in view the ratio laid down by the Hon’ble Supreme Court in case of Goetz India Ltd. (2006 (3) TMI 75 - SUPREME Court ) we direct the assessing officer to examine the claim of deduction made by the assessee u/s 36(1)(viia) of the Act and decide the same in accordance with law after considering all the materials and evidences that may be produced by the assessee Revision u/s 263 - to bring to tax an amount being the provision made towards standard assets - Held that:- Standard assets cannot be equated with bad and doubtful debts which in other words is known as NPAs. CIT in our opinion was legally correct in coming to a conclusion that the assessment order passed u/s 143(3) of the Act is erroneous and prejudicial to the interest of revenue as the assessing officer has allowed the deduction claimed towards provision made on standard assets without proper application of mind. So far as the decision of Hon’ble Supreme Court in case of Catholic Syrian Bank Ltd. Vs. CIT (2012 (2) TMI 262 - SUPREME COURT OF INDIA ) is concerned the same is not applicable to the facts of the instant case. The allowance of deduction on standard assets was not an issue for consideration before the Hon’ble Supreme Court. We uphold the order of the CIT on this issue and dismiss the appeal. Issues Involved:1. Deletion of addition of broken period interest.2. Disallowance of amortization of government securities.3. Deletion of addition for provision for staff frauds.4. Deletion of addition on account of accrued interest on non-performing assets (NPAs).5. Disallowance of provision made for gratuity.6. Disallowance of deduction claimed under section 36(1)(viia).7. Revision of assessment order under section 263 for provision made towards standard assets.Issue-wise Detailed Analysis:1. Deletion of Addition of Broken Period Interest:The assessee, a regional rural bank, included broken period interest for the interest payable to it while maintaining statutory liquidity ratio (SLR) with the RBI. The assessing officer disallowed this, treating it as capital expenditure based on the Supreme Court's decision in Vijaya Bank vs. CIT and CBDT Circular No.665. However, the CIT (A) allowed the deduction, treating the securities as stock in trade, supported by the Kerala High Court's decision in CIT vs. Nedungadi Bank Ltd. The Tribunal upheld CIT (A)'s decision, referencing similar judgments from Mumbai High Court and the Tribunal's own past decisions.2. Disallowance of Amortization of Government Securities:The assessee claimed amortization of Rs. 19,14,62,383 on government securities classified as HTM. The assessing officer rejected this, citing no specific provision in the IT Act and incorrect computation. The CIT (A) allowed the claim, treating HTM securities as stock in trade and following established accounting standards, but corrected the computation to Rs. 18,88,58,186. The Tribunal upheld CIT (A)'s decision, affirming the treatment of HTM securities as stock in trade.3. Deletion of Addition for Provision for Staff Frauds:The assessee made a provision of Rs. 44,44,087 for staff frauds, which the assessing officer disallowed, arguing potential recovery and lack of evidence for losses. The CIT (A) allowed the deduction, equating staff frauds to embezzlement and referencing the Tribunal's decision in ITO vs. J & K Bank Ltd. The Tribunal upheld CIT (A)'s decision, noting the assessing officer's reliance on presumptions and supporting the view with Supreme Court and CBDT Circular No.35 precedents.4. Deletion of Addition on Account of Accrued Interest on NPAs:The assessee did not recognize interest on NPAs on an accrual basis, following RBI prudential norms. The assessing officer added this interest to income, citing the assessee's mercantile accounting system. The CIT (A) reversed this, supported by Supreme Court and Tribunal decisions, recognizing interest on NPAs only upon realization. The Tribunal upheld CIT (A)'s decision, referencing similar judgments from Delhi High Court and the Tribunal's past decisions.5. Disallowance of Provision Made for Gratuity:The assessee claimed a provision for gratuity of Rs. 2,74,49,761, made to SBI Life Insurance's group gratuity scheme. The assessing officer disallowed this, questioning the scheme's approval status. The CIT (A) also rejected the claim, citing procedural issues with additional evidence submission. The Tribunal remitted the matter back to the assessing officer for re-examination, directing consideration of all evidence and a reasonable opportunity for the assessee to be heard.6. Disallowance of Deduction Claimed Under Section 36(1)(viia):The assessee claimed a deduction of Rs. 10,46,19,487 under section 36(1)(viia) in a revised computation submitted late. The assessing officer and CIT (A) rejected this, citing the late submission under section 139(5). The Tribunal directed the assessing officer to examine the claim on merits, referencing the Supreme Court's decision in Goetz India Limited vs. CIT, which allows Tribunal's power under section 254.7. Revision of Assessment Order Under Section 263 for Provision Made Towards Standard Assets:The CIT revised the assessment order, directing the addition of Rs. 15,23,19,692 for provision on standard assets, which the assessing officer had allowed. The CIT's decision was based on the Tribunal's past ruling in Andhra Bank vs. DCIT, distinguishing standard assets from bad and doubtful debts. The Tribunal upheld the CIT's revision, affirming the non-allowability of provision for standard assets under section 36(1)(viia).Conclusion:- Department's appeals in ITA Nos. 1121/Hyd/11 and 1459/Hyd/11 are dismissed.- Assessee's appeals in ITA Nos. 967/Hyd/11 and 1387/Hyd/11 are allowed for statistical purposes.- Assessee's appeal in ITA No. 502/Hyd/11 is dismissed.Order Pronouncement:The order was pronounced in the open court on 29th April, 2013.