Banking assessee wins on bad debts, depreciation, rural advances; loses leave encashment under Section 43B(f)

ITAT Chennai decided multiple issues for a banking assessee. The tribunal upheld disallowance of leave encashment provision under Section 43B(f), requiring actual payment. However, it allowed deduction under Section 36(1)(viii) for special reserve created from previous year profits, despite timing of transfer. The tribunal quashed several CIT(A) enhancements on technical grounds for raising new issues not in original assessment. Key allowances included: bad debts written off without adjustment against provisions, leave encashment provision as ascertained liability for MAT computation, 60% depreciation on ATMs as computers, and rural advances computation based on outstanding rather than incremental advances. The tribunal consistently followed its own precedents and HC decisions favoring the assessee on banking-specific issues including stale drafts, ex-gratia payments, and Section 14A disallowance for stock-in-trade securities.

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Issues Involved:
1. Disallowance of Provision for Leave Encashment
2. Disallowance of Deduction u/s 36(1)(viii)
3. Depreciation on Investments
4. Addition of Reversal of NPA Provision
5. Disallowance of Bad Debts u/s 36(1)(vii)
6. Addition of Provision for Leave Encashment while computing Book Profit u/s 115JB
7. Enhancement of Income by CIT(A)
8. Disallowance of Ex-Gratia Payment
9. Disallowance u/s 14A
10. Addition of Interest on NPAs
11. Depreciation on ATMs
12. Deduction u/s 36(1)(viia)
13. Income Received in Advance
14. Interest Accrued but not Due on Government Securities

Summary:

1. Disallowance of Provision for Leave Encashment:
The Tribunal upheld the disallowance of Rs. 16,79,49,238/- towards provision for leave encashment as per Section 43B(f) of the Income Tax Act, 1961, which allows deduction only on actual payment.

2. Disallowance of Deduction u/s 36(1)(viii):
The Tribunal allowed the deduction of Rs. 30,00,00,000/- claimed u/s 36(1)(viii), holding that the reserve created in the subsequent financial year from the profits of the previous year satisfies the requirement of the section.

3. Depreciation on Investments:
The Tribunal quashed the enhancement made by the CIT(A) on the disallowance of depreciation on investments, holding that the CIT(A) cannot introduce new sources of income not considered by the AO during assessment proceedings.

4. Addition of Reversal of NPA Provision:
The Tribunal quashed the enhancement made by the CIT(A) regarding the addition of Rs. 24,27,60,018/- being the reversal of NPA provision, stating that the CIT(A) cannot consider new issues not raised by the AO.

5. Disallowance of Bad Debts u/s 36(1)(vii):
The Tribunal allowed the deduction of bad debts written off relating to non-rural advances without adjusting the same against the provision for bad and doubtful debts u/s 36(1)(viia), following the decision in the case of Karnataka Bank Ltd vs DCIT.

6. Addition of Provision for Leave Encashment while computing Book Profit u/s 115JB:
The Tribunal held that the provision for leave encashment is an ascertained liability and cannot be added back while computing book profit u/s 115JB.

7. Enhancement of Income by CIT(A):
The Tribunal quashed the enhancement made by the CIT(A) on various issues, holding that the CIT(A) cannot introduce new sources of income not considered by the AO during assessment proceedings.

8. Disallowance of Ex-Gratia Payment:
The Tribunal upheld the deletion of disallowance of ex-gratia payment, following the decision in the assessee's own case for earlier years.

9. Disallowance u/s 14A:
The Tribunal upheld the deletion of disallowance u/s 14A, following the decision in the assessee's own case and the Supreme Court decision in the case of South Indian Bank Ltd vs CIT.

10. Addition of Interest on NPAs:
The Tribunal upheld the deletion of addition made towards interest on NPAs, following the decision in the assessee's own case and the Supreme Court decision in the case of Vasisth Chary Vyapar Ltd vs CIT.

11. Depreciation on ATMs:
The Tribunal upheld the deletion of disallowance of depreciation on ATMs, holding that ATMs are akin to computers and eligible for 60% depreciation.

12. Deduction u/s 36(1)(viia):
The Tribunal upheld the deletion of disallowance of deduction u/s 36(1)(viia), holding that the computation should consider aggregate average advances outstanding at the end of the financial year.

13. Income Received in Advance:
The Tribunal deleted the addition made towards income received in advance, following the decision of the Hon'ble Madras High Court in the assessee's own case.

14. Interest Accrued but not Due on Government Securities:
The Tribunal upheld the deletion of addition made towards interest accrued but not due on government securities, following the decision of the Hon'ble Madras High Court in the assessee's own case.

Conclusion:
The appeals filed by the assessee for both assessment years were partly allowed for statistical purposes, and the appeals filed by the revenue for both assessment years were dismissed.

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