Banking deductions on securities depreciation and bad debts upheld where RBI norms and retrospective section 36(1)(viia) apply.

A bank's provision for depreciation on government securities classified as available for sale is treated as a real business deduction when it follows RBI guidelines, mark-to-market valuation and consistent accounting practice; the claim is not a mere reserve. The amendment extending section 36(1)(viia) to co-operative banks is applied retrospectively from 1 April 2007, so the deduction for provision for bad debts is available for the relevant assessment year. The document notes that both disallowances were therefore unsustainable and the assessee's relief was maintained.

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Issues: (i) whether the provision for depreciation on government securities held by a bank in the available for sale category was allowable as a deduction; (ii) whether the deduction for provision for bad debts under section 36(1)(viia) of the Income-tax Act, 1961 applied to a co-operative bank for the assessment year in question.

Issue (i): whether the provision for depreciation on government securities held by a bank in the available for sale category was allowable as a deduction.

Analysis: The banking business includes investment activity, and securities held by banks are to be treated as banking stock-in-trade in the light of the statutory framework and Reserve Bank of India guidelines. Where securities are classified as available for sale, they are to be valued on a mark-to-market basis and net depreciation, if any, is to be provided for in the accounts. The assessee consistently followed the same accounting method, the treatment was in accordance with RBI directions and CBDT instructions, and the claim had been accepted in earlier years. The provision was therefore a real and allowable business deduction and not a mere inadmissible reserve.

Conclusion: The disallowance of the provision for depreciation on government securities was not sustainable and the allowance of the claim was upheld in favour of the assessee.

Issue (ii): whether the deduction for provision for bad debts under section 36(1)(viia) of the Income-tax Act, 1961 applied to a co-operative bank for the assessment year in question.

Analysis: The amendment extending the benefit to co-operative banks was held to be retrospective from 1 April 2007, as clarified by the Notes on Clauses to the Finance Bill, 2007. The provision was treated as substantive, and the assessee's claim fell within the amended statutory ambit for assessment year 2007-08. The Assessing Officer's view that the benefit applied only from the subsequent year was rejected.

Conclusion: The disallowance of the deduction under section 36(1)(viia) was unsustainable and the deletion of the addition was upheld in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on both issues, and the relief granted by the first appellate authority was sustained in full.

Ratio Decidendi: A bank's provision for depreciation on government securities classified as available for sale is allowable where it is made in accordance with RBI guidelines and consistently followed accounting treatment, and the amendment extending section 36(1)(viia) to co-operative banks operates retrospectively from 1 April 2007.

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