TaxTMI 
TaxTMI 
2015 (4) TMI 727
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....nbsp; "2. Bad debts of non-rural branches written off under section 36(1)(vii)-Rs. 1,70,62,86,484. 2a. The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim of write off of bad debts relating to urban branches amounting to Rs. 1,70,62,86,484, without first setting off the bad debts against the credit balance in the provision for bad and doubtful debts account. 2b. The learned Commissioner of Income-tax (Appeals) erred in allowing reduction from provision for bad and doubtful debts, only of bad debts relating to rural branches, by not properly interpreting proviso to section 36(1)(vii) of the Income-tax Act which stipulates that 'the amount of deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account'. 2c. The learned Commissioner of Income-tax (Appeals) erred in not taking cognizance of the fact that the orders of the Commissioner of I....
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....med as deduction in the account books is necessary for claiming deduction under section 36(1)(viia)." 3. The Revenue sought to raise three additional grounds and these are connected to ground No. 3 raised by the Revenue in its original grounds of appeal vide letter dated June 11, 2012. These grounds read as follows : "The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of the hon'ble Tribunal : (i) assessee's claim of deduction under section 36(1)(viia) of Rs. 503.49 crores is not in accordance with the provisions under the Act, read with rule 6ABA of the Income-tax Rules, 1962, and hence not allowable to that extent ? (ii) Since (a) non-rural bad and doubtful debts may be written off and allowable under section 36(1)(vii) independently, and (b) only rural debts written off can be set off/debited against the provisions made under section 36(1)(viia) in the previous years, and/or to be made during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to....
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....y the Assessing Officer in the case of the assessee for both assessment years 2006-07 and 2007-08. 6. Learned counsel for the assessee opposed the admission of the additional ground for adjudication. According to him, the additional grounds sought to be raised by the Revenue seeks to enlarge the scope of the original grounds raised by the Revenue as also the very basis on which the Assessing Officer and the Commissioner of Income-tax (Appeals) proceeded to decide the issue. If the additional grounds are entertained, then the Tribunal will virtually enhance the assessment. According to him, the Tribunal can neither directly nor indirectly enhance assessment. In this regard, reference was made to two decisions of the hon'ble Supreme Court viz., Pathikonda Balasubba Setty [1967] 65 ITR 252 (Mys) and Mcorp Global P. Ltd. [2009] 309 ITR 434 (SC). 7. We will deal with the admissibility of the additional grounds sought to be raised after considering the issue that was originally sought to be raised by the Revenue. 8. Since ground Nos. 2 and 3 and the additional grounds sought to be raised are interlinked, we deem it convenient to deal with these grounds together. 9. The as....
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....5,68,72,477 11. The claim for deduction on account of provision for bad and doubtful debts under section 36(1)(viia) of the Act was claimed by the Assessing Officer at Rs. 5,03,49,00,000 comprising of the following two amounts : 10% Average rural advances Rs. 4,65,68,72,477 7.5% of gross total income (7.5% of Rs. 5,04,03,66,972) Rs. 37,80,27,523 Total Rs.5,03,49,00,000 12. In note Nos. 6 and 7 filed along with the computation of income the assessee has explained its claim for deduction under section 36(1)(vii) and 36(1)(viia) of the Act as follows : "6. We have made a provision for bad and doubtful debts (NPAs) for Rs. 2,95,55,54,682 in our books during the financial year 2005-06 (assessment year 2006-07). However, we are claiming deduction under section 36(1)(viia) to the extent of Rs. 4,65,68,72,477 being 10 per cent. of average rural advances of Rs. 46,56,87,24,770 and 7.5 per cent. of gross total income before allowing this deduction amounting to Rs. 37,80,27,523 relying on the Income-tax Appellate ....
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.... 1. Whether 10 per cent. of average rural advances have been calculated on the basis of 2001 census or on 1991 census. 2. The provision for bad and doubtful debts in respect of rural advances was created by debit to the profit and loss account of only a sum of Rs. 2,95,55,54,682 whereas the claim for deduction actually made under section 36(1)(viia) of the Act was a sum of Rs. 5,03,49,00,000. The Assessing Officer was of the view that as laid down by the hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 (P&H), claim for deduction under section 36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The Assess ing Officer therefore proposed to disallow a sum of Rs. 2,07,93,45,318 (difference between Rs. 5,03,49,00,000 and Rs. 2,95,55,54,682). 16. On the query of the Assessing Officer with regard to deduction under section 36(1)(viia) of the Act, the assessee submitted that 10 per cent. of the average aggregate rural advances is worked out on the basis of 2001 census and further clarified that the ac....
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....age rural advances as admitted by the assessee as per revised census of 2001 was Rs. 352.53 crores. According to the Assessing Officer, even if bad debts written off of Rs. 1,79,21,88,992 is reduced, still the balance in the provision for bad and doubtful debts account was Rs. 7,33,35,58,177. Since the balance so available in provision for bad and doubtful debts account was more than 10 per cent of aggregate average rural advances, the Assessing Officer held that deduction on the basis of new provision of Rs. 2,95,55,54,682 cannot be allowed. In this regard, the Assessing Officer referred to the contention of the assessee which was to the effect that in each year the assessee can create 10 per cent. of aggregate average rural advances and concluded that the expression "not exceeding ten per cent. of the aggregate average advances" used in section 36(1)(viia) of the Act cannot mean that provision can be created each year irrespective of the available balance in the provision for bad and doubtful debts account. The Assessing Officer also referred to a situation where there is no claim for bad debts in a year, even then the assessee will be entitled to claim deduction by way of provis....
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....e." 20. The Assessing Officer held that as laid down in the proviso to section 36(1)(vii) bad debts written off should first be adjusted towards provision created under section 36(1)(viia) of the Act and only if the bad debts written off is more than the credit balance in the provision for bad and doubtful debts account can deduction under section 36(1)(vii) be allowed to the extent of such excess. He thereafter found that the credit balance in the provision for bad and doubtful debts as on April 1, 2005 balance brought forward was Rs. 9,12,57,47,169 and the provision created during the year as on March 31, 2006 provision for NPA's of Rs. 2,95,55,54,682 making a total credit balance of Rs. 12,08,13,01,851. He found that the assessee had claimed bad debts written off of rural advances of Rs. 8,59,02,507 and even if that is adjusted still there would be sufficient credit balance in the provision for bad and doubtful debts account which would be in excess of the sum of Rs. 1,70,62,86,485 claimed as deduction under section 36(1)(vii) of the Act by the assessee. The Assessing Officer therefore held that the deduction under section 36(1)(vii) of the Act claimed by the assessee can....
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....er words, this was a specific deduction given by the statute, irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts. Respectfully following this decision, I hold that the Assessing Officer was not justified in disallowing the amount claimed under section 36(1)(viia) and delete the disallowance." 23. With regard to deduction under section 36(1)(vii) of the Act, the assessee contended that the proviso to section 36(1)(vii) is applicable only to bad debts written off of rural debts and not to non-rural debts. Since the claim of deduction of Rs. 1,70,62,86,485 made by the assessee under section 36(1)(vii) of the Act pertained to bad debts of non-rural debts, the credit balance in the provision for bad and doubtful debts account should not be looked into at all. The assessee placed reliance on several decisions for the above proposition, viz., South Indian Bank Ltd. v. CIT [2003] 262 ITR 579 (Ker), Dhanalakshmi Bank Ltd. v. CIT [2003] 262 ITR 579 (Ker), Deputy CIT v. Catholic Syrian Bank Ltd. [2004] 267 ITR (AT) 52 (Cochin) [SB] and CIT v. City Union Bank Ltd. [2007] 291 ITR 144 (Mad). 24. On the above submissions of the ....
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....twice under section 36(1)(vii) and 36(1)(viia) simultaneously. The facts in that case were that the appellant bank had, in the return for the assessment year 1993-94 filed on December 30, 1993, claimed a sum of Rs. 38,28,836 as bad debts actually written off. It had also claimed provision for bad and doubtful debts under section 36(1)(viia) in a sum of Rs. 1,10,94,360. The Assessing Officer did not allow the claim for deduction of debts amounting to Rs. 38,28,836 actually written off. The Commissioner of Income-tax (Appeals) rejected the upheld the order of Assessing Officer and the Income-tax Appellate Tribunal held that deduction under section 36(1)(vii) was allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to advances of rural branches, subject to the imitation that an amount should not be deducted twice under section 36(1)(vii) and 36(1)(viia) simultaneously. 35. The hon'ble jurisdictional High Court considered the questions of law answered by two judgments of the Kerala and Madras High Courts in South Indian Bank Ltd. v. CIT [2003] 26....
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....he main part of sub-section (vii) and would be entitled to the deduction. In respect of that part of debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of the debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia) . . . 43. It is clear from the above analysis of the provisions of section 36(1) that the Assessing Officer could not disallow a claim under section 36(1)(vii) in respect of an urban bad debt, either under the proviso to clause (vii) or under clause (v) of section 36(2). Thus his action in disallowing the claim under section 36(1)(vii), holding that the claim for bad debt was less than the credit balance in the provision for bad and doubtful debts account, is based on an incorrect interpretation of the legal provisions. The Commissioner of Income-tax (Appeals) had, in his order dated March 25, 2009 in I. T. A. No. 2/ UDP/CIT(A)/07-08 in the appellant's own case for the assessment year 2005-06, deleted a sim....
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....the deduction referred to in (b) above, "rural branch" has been defined under Explanation (ia) to section 36(1)(viia) of the Act as a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year. It is the stand of the learned Commissioner of Income-tax-Departmental representative before us that the assessee-bank had never submitted the list of "rural branches" during the course of assessment proceedings, which have been taken into consideration for the computation of provision for bad and doubtful debts claimed under section 36(1)(viia)(a) in the years under appeal. It is only on August 24, 2012, that it has submitted a list of 745 "rural branches" with corresponding population figures. It was his submission that the assessee has not submitted even after specific request by the Assessing Officer, the census year, or any other basis, from where the population figures of "rural" branches have been quoted. According to him, scrutiny of the names of rural branches reveals that many of the socal....
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.... 9684 17980 TP 302 9659 18983 CT 336 4514 CMC BUA 663 3935 9090 MC 30. According to him the table given above clearly establishes that the assessee-bank has misrepresented facts regarding the classification of "rural" branches, and hence rural advances. The provisioning (PBDD) has to be made based on the analysis of such correct rural advances as per the Reserve Bank of India norms. It was his submission that since this goes to the root of the matter, the additional of the Department may kindly be admitted, in the interest of justice and to arrive at the correct amount of provision actually made by the assessee in respect of such actual rural branches. 31. We have considered the submissions of the learned Departmental representative. In the course of assessment proceedings before the Assessing Officer, a query was raised by the Assessing Officer by his letter March 12, 2008 regarding the claim of the assessee with regard to deduction on account of provision for bad and doubtful debts under section 36(1)(viia) of the Act as to whether the aggregate average rural advances was wo....
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....during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to 10 per cent. thereof, subject to available credit bal ance to this account. (iii) Alternatively, and without prejudice to the grounds above, if the computation of the provision has to also include any amount not exceeding 7.5 per cent of the total income, such income should be restricted to the total income of rural branches, or to the amount as prescribed under the Reserve Bank of India prudential norms." 33. The submission of the learned Departmental representative before us was that ground No. (i) and ground No. (ii) would arise because of the decision of the hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. [2012] 343 ITR 270 (SC) rendered subsequent to the impugned order of the Commissioner of Income-tax (Appeals) which will have a bearing on original ground No. 3 raised by the Revenue. It is therefore necessary to examine the decision of the hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. [2012] 343 ITR 270 (SC). 34. Section 36(1)(vii) of the Income-tax Act, 1961 (the Act) allows deduct....
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....hat there was already credit balance in the provision for bad and doubtful debts account under section 36(1)(viia)(a) of the Act, which was in excess of the claim of the assessee for deduction on account of bad debts. The Assessing Officer after making reference to proviso to section 36(1)(vii) of the Act and also section 36(2)(v) of the Act was of the view that the assessee could not be allowed the deduction claimed because (i) the amount claimed as deduction on account of bad debts was not the excess available in the credit of the provision for bad and doubtful debts account created under section 36(1)(viia)(a) of the Act ; and (ii) that under section 36(2)(v) of the Act the amount of bad debts written off should first be debited in the provision for bad and doubtful debts account created under section 36(1)(viia)(a) of the Act. The stand of the assessee was that since the claim of deduction of bad debts made by the assessee was under section 36(1)(vii) of the Act and pertained to bad debts of non-rural debts, the credit balance in the provision for bad and doubtful debts account should not be looked into at all because it pertains only to rural branches. The hon'ble Supreme ....
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....s, limits its application to the case of a bank to which clause (viia) applies. Indisputably, clause (viia)(a) applies only to rural advances. 38. The hon'ble Chief Justice, His Lordship Mr. S. H. Kapadia, in his concurring judgment had summed up the position in the following words : "The provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) are distinct and independent of the provisions of section 36(1)(vii) relating to allowance of bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the circulars issued by the CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the ca....
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.... assessment year 2007-08, if the assessee writes off bad debts relating to rural advances amounting to Rs. 60 crores, then he has to debit the provision for bad and doubtful debts account, by Rs. 60 crores in view of the provisions of section 36(2)(v) of the Act. In the assessment year 2007-08, the assessee will not get any deduction on account of write off of bad debts relating to rural branches because, he still has a balance of Rs. 40 crores in the provision for bad and doubtful debts account, since the proviso to clause (vii) will be applicable. Hence the balance in the provision for bad and doubtful debts account, at the end of the year will be Rs. 40 crores. 39. In the assessment year 2008-09, if the assessee writes off bad debts relating to rural advances amounting to Rs. 50 crores, then he can get a deduction of Rs. 10 crores on account of bad debts written off relating to rural branches in the assessment year 2008-09 because, the deduction allowed as provision for bad and doubtful debts was only Rs. 100 crores, and Rs. 10 crores is in excess of the amount already allowed as provision. 40. The ratio laid down by the hon'ble Supreme Court can be summed up as follow....
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....vious year shall be aggregated separately ; (b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a) ; (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation.-In this rule, "rural branch" and "scheduled bank" shall have the meanings assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36." 42. Now, with regard to additional ground No. (i) sought to be raised by the Revenue, there is no dispute by the Assessing Officer in the order of assessment that the provision of Rs. 503.49 crores is not in accordance with rule 6ABA of the rules. The case of the Assessing Officer was that (i) deduction under section 36(1)(viia)(a) will be allowed only to the extent provision is created in the books ; (ii) even when such provision is created in the books, if there is opening balance in the provision for bad and doubtful debts account. that has to be taken into account and it is only where th....
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.... advances is computed in accordance with rule 6ABA of the Rules ; (c) 7.5 per cent of the total income. The opening balance in the provision for bad and doubtful debts account is irrelevant for allowing the said claim. That becomes relevant only when a claim for deduction on account of bad debts written off in respect of rural advances is made by an assessee. If such a claim is made then the proviso to section 36(1)(vii) of the Act and section 36(2)(v) of the Act will come into play. For allowing deduction under section 36(1)(viia)(a) of the Act, no bifurcation of provision for bad and doubtful debts account is required. What is relevant is the provision made in the books of account of the assessee. We will demonstrate this with examples : Example 1 : (Rs.) Provision made during the year 50 crores 10% of rural advances 35 crores 7.5% of total income before deduction under section 36(1)(viia) 5 crores Example 2 Provision made during the year 30 crores 10% of rural advances 35 crores 7.5% of total income before deduction under section 36(1)(viia)(a) 5 crores Deduction under section 36(1)(viia)(a) Example 1 : &n....
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....t years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year." The section clearly lays down that deduction of 7.5 per cent of the total income has to be allowed as deduction. The plea of the learned Departmental representative to restrict the allowance to 7.5 per cent of the total income of the rural branches is contrary to the provisions of the Act. The deduction on account of provision for bad and doubtful debts in respect of non-performing assets contemplated by the first proviso to section 36(1)(viia)(a) is based on classification of non-performing assets as per the prudential norms of the Reserve Bank of India. The Assessing Officer did not dispute the classification as made by the assessee in its books of account. The deduction under the first proviso to section 36(1)(viia)(a) of the Act is in addition to what is allowed under section 36(1)(viia)(a) of the Act and the assessee i....
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....ental representative however sought to put forth a plea with regard to bifurcation of provision for bad and doubtful debts account into one in relation to rural branches and the other relating to non-rural branches. We have already dealt with this argument while dealing with the additional grounds raised by the assessee. The provision for bad and doubtful debts account is not relevant while allowing deduction under section 36(1)(vii) of the Act in respect of bad debts of non-rural branches written of. We find no merits in ground No. 2 raised by the Revenue. 48. As far as ground No. 3 raised by the Revenue in the original grounds of appeal is concerned, the Assessing Officer disallowed the entire claim for deduction of Rs. 5,03,49,00,000 on the following ground. (a) The provision for bad and doubtful debts in respect of rural advances was created by debit to the profit and loss account of only a sum of Rs. 2,95,55,54,682 whereas the claim for deduction actually made under section 36(1)(viia) of the Act was a sum of Rs. 5,03,49,00,000. The Assessing Officer was of the view that as laid down by the hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v.....
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....the Legislature. The Assessing Officer thus refused to allow the claim of the assessee for deduction of 10 per cent. of aggregate average rural advances. 49. The Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer by following the decision of the Income-tax Appellate Tribunal in the assessee's own case reported in 78 ITD 103 wherein it was held that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an assessee is entitled to 10 per cent. of the aggregate average rural advances as deduction under section 36(1)(viia) of the Act. The relevant observations of the Tribunal in the aforesaid decision was as follows : "20. The learned Commissioner of Income-tax has also acted under the misconception that deduction under clause (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is ....
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....f revaluing the investments, held as on March 31, 2006, at cost or market value whichever is less. 4.b. The learned Commissioner of Income-tax (Appeals) erred in not considering the fact that during the year the assessee has made profit of Rs. 71,85,54,022 on sale of investments, which is credited to the profit and loss account, as against loss of Rs. 3,74,97,43,513 as claimed. 4.c. The learned Commissioner of Income-tax (Appeals) failed to consider that as per the guidelines issued by the Reserve Bank of India, the assessee can claim depreciation only in respect of invest ments held under the category 'held for trading' and 'available for sale', and there was no depreciation admissible to the assessee during this year. 4.d. The learned Commissioner of Income-tax (Appeals) erred in not considering the orders of his predecessor in the case of Corpo ration Bank, Mangalore, for the assessment year 2005-06-I. T. A. No. 66/MNG/CIT(A)/MNG/07-08 dated April 25, 2008-wherein the Commissioner of In....
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....year is less than the cost price, the depreciation in its value is claimed as a deduction. The Assessing Officer did not accept the claim of the assessee. He was of the view that the entire investment portfolio in the case of a bank cannot be considered as stock-in-trade. He was of the view that investments under the category "available for sale" and "held for trading" can be considered as stock-in-trade, but in the case of investments under the category "held to maturity", they were purely of the nature of investments and not in stock-in trade, therefore the loss claimed on diminution of value cannot be allowed. These observations of the Assessing Officer are found in paragraph IV.8 of his order. He ultimately disallowed the entire claim of the assessee for deduction of diminution in the value of investments of Rs. 3,74,97,43,513 by referring to the reasons given for making such disallowance in the assessee's own case for the assessment year 2005-06. 54. Apart from the above, the assessee had also claimed profit on sale of investments at Rs. 71,85,54,022 but did not offer it to tax for the reason that the profit on sale of investment is already reflected in the investment t....
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....hares) at lower of cost or market value, in accordance with the generally accepted accounting practice, which had been upheld in a number of judicial decisions. It was highlighted that the classification made in the books as HTM was purely temporary since banks had a right to reclassify the investments into other categories once in a year with the permission of its board of directors. Further, as per the said Reserve Bank of India circulars, there was no prohibition on banks selling securities in HTM category before maturity. It was argued that wherever the intention of the Act was to compute income in accordance with the Reserve Bank of India circulars, the same had been provided for. For example, in the case of section 43D read with rule 6EA, the Act clearly provided that interest in relation to such categories of bad and doubtful debts, as may be prescribed having regard to the guidelines issued by the Reserve Bank of India, would be charged to tax in the year in which it was credited to the profit and loss account, or when it was recovered, whichever was earlier. Similarly, in section 36(1)(viia), a deduction was allowed in respect of such categories of doubtful and lost assets....
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....basis of the accounting system regularly maintained by the assessee. The method by which the assessee-bank is valuing securities by treating them as stock-in-trade is in accordance with the accounting principles and the revenue itself is treating the profit on maturity of such securities as business income. Therefore, such securities cannot be treated as capital assets. 52. Following the above decision of the hon'ble Supreme Court, and in line with its decision dated January 24, 2008 in I. T. A. No. 253/ Bang/2007 in the case of Asst. CIT (LTU) v. Vijaya Bank, the hon'ble Income-tax Appellate Tribunal has held that the assessee-bank is entitled to value all investments at lower of cost or market value by treating such investments as stock-in-trade, and has deleted the dis allowance made on loss on valuation. The hon'ble High Court of Kar nataka has, in the case of CIT v. Corporation Bank Ltd. [1998] 174 ITR 616 (Karn), also upheld the Income-tax Appellate Tribunal's decision. Respectfully following these judicial pronouncements, I delete the disallowance of Rs. 71,85,54,022 on sale of investments and Rs. 3,74,97,43,513 o....
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....cost for the purpose of statutory balance-sheet, and for the Income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the Departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of Income-tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case.' The Bangal....
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....laim of the assessee. The later decision of the hon'ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the Revenue in its appeal is without merit. Consequently, the same is dismissed. 63. Ground No. 5 raised by the Revenue reads as follows : "5. Expenditure on issue of bonds-Rs. 3,43,80,712. 5.a. The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for deduction of stamp duty on bonds amounting to Rs. 3,43,80,712. 5.b. The learned Commissioner of Income-tax (Appeals) failed to consider the fact that the amount incurred for issue of bonds (series 7 and 9) as expenditure for earning the income is in fact incurred for expansion of capital and has to be considered as a capital expenditure and not an admissible revenue expenditure." 64. The assessee claimed stamp duty expenses amounting to Rs. 3,43,80,712 under the head contingencies. It clarified to the Assessing Officer that stamp duty expenses were one time statutory expenses payable at certain percentage of the value of bonds issued to public. The expenditure on stamp duty was meagre compared to Rs....
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....sp; "6. Estimated expenditure on earning tax free income under section 14A-Rs. 1,84,93,358 6.a The learned Commissioner of Income-tax (Appeals) erred in deleting the disallowance of Rs. 1,84,93,358 on account of estimated expenditure on earning income exempt under section 10(23G) by placing reliance on the following decisions : i. Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450 (SC) ; ii. Wimco Seedlings Ltd. v. Deputy CIT (Asstt.) [2007] 293 ITR (AT) 216 (Delhi) (hon'ble Delhi Bench of Income-tax Appellate Tri bunal) ; and iii. Maruti Udyog Ltd. v. Deputy CIT [2005] 92 lTD 119 (Delhi) (hon'ble Delhi Bench of Income-tax Appellate Tribunal). 6.b The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the Department has taken a stand of dis allowing proportionate expenditure in earning the exempted income for the earlier assessment year also. 6.c The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the issue is still in dispute for various assessment years before appellate authorities. 6.d The learned Commissioner of Inco....
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....he assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.' 33. Respectfully following the Bombay High Court decision, we are inclined to restore this issue back to the file of the Assessing Officer with a direction to decide the issue afresh by following the ratio of the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. [2010] 328 ITR 81 (Bom), after giving effective opportunity of hearing to the assessee. This issue is allowed for statistical purpose." 70. Following the aforesaid decision, we remand the issue to the Assessing Officer for fresh consideration to be decided on the lines indicated by the Tribunal in the order for the assessment year 2005-06. 71. Ground No. 7 raised by the Revenue reads as follows : "7. Deduction under section 35D-Rs. 2,45,15,858 7.a The le....
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....) claim for deduction of expenses in connection with issues for public subscription of shares or debentures of the company, being underwriting commission, brokerage, charges for typing, printing and advertisement of the prospectus are to be allowed as deduction over a period of five years. The assessee had treated the expenditure of Rs. 12,25,79,290 as "deferred revenue expenditure" and made a claim for one-fifth of this expenditure, as admissible deduction under section 35D during the year. 74. The Assessing Officer was of the view that section 35D of the Act allows amortisation of certain preliminary expenses. The deduction is admissible only if the following conditions are fulfilled. (i) An Indian company incurs after March 31, 1970. (ii) Any expenditure specified under sub-section (2). (iii) Before commencement of its business. (iv) After commencement of business in connection with extension of industrial undertaking or in connection with setting up a new industrial unit. 75. The Assessing Officer was of the view that the expenses incurred in connection with issue of shares being incurred for expansion of capital base is a capital expenditure and the same was ....
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....orrowed capital, but is a one-time expenditure incurred to facilitate issue of shares. As capital was raised to meet the bank's working capital needs in keeping with the Reserve Bank of India's capital adequacy norms, the expenditure was incurred in the course of business and was incidental to the appellant's regular banking business. Under these circumstances, the expenditure is allowable under section 37(1). However, since the appellant has chosen to amortise the expenditure over five years in terms of its own accounting policy which is consistently followed, I direct that the expenditure debited in the current year may be allowed as a general deduction under section 37(1)." 77. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised ground No. 7 before the Tribunal. 78. We have considered the rival submissions. In our view, the order of the Commissioner of Income-tax (Appeals) cannot be sustained. Firstly, the provisions of section 35D of the Act were applicable only when the expenses are incurred after commencement of business in connection with expansion of industrial undertaking or in connection with setting up of a new ind....
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....lating a minimum of 500 reward points, provided they made subsequent credit purchases. The Assessing Officer held that encashment of reward points by cardholders depended on many conditions and was therefore only a contingent liability. The accumulated reward points were 38,72,634 valued at Rs. 38,72,634, but this could be claimed as deduction only in the year all the reward points were actually encashed. 82. Before the Commissioner of Income-tax (Appeals), the assessee stated that the reward points had actually accrued and the bank was liable to incur the expenditure when cardholders exercised their option to redeem their reward points. As the assessee followed mercantile system of accounting, it had provided for the accrued points which the customers could redeem. The Assessing Officer had failed to appreciate that, as per the prescribed rules, the accumulated points could be utilised by customers at any point of time and, therefore, there was a contractual and legal liability on the part of the bank to redeem the points. Therefore, the provision was not a contingent liability and should have been allowed as a deduction. Without prejudice to this contention, it was submitted t....
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....credit cardholder. In other words, on the eligibility of the credit cardholder to encash the reward points, liability of the assessee accrues irrespective of whether the cardholder actually encashes the reward points or not. 86. The learned Departmental representative relied on the order of the Commissioner of Income-tax (Appeals). 87. We have considered the rival submissions. We are of the view that the Commissioner of Income-tax (Appeals) has fallen into error in rejecting the claim of the assessee for deduction. As laid down by the hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC), the criteria for allowing deduction on account of a provision is that the liability to incur the expenditure which is claimed by way of a provision should be certain and secondly the quantification of such liability should be scientific/reasonable. In the present case, as per the terms of issue of credit cards, on accumulation of minimum points, the customers were free to encash those points. The assessee was legally bound to provide equivalent of reward points in cash or kind. In the case of the assessee, the reward points are given in the form of cash ....
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....ies Act. Therefore, the minimum alternate tax computed in accordance with the redrawn profit and loss account was in order. 90. Before the Commissioner of Income-tax (Appeals), the assessee stated that the Assessing Officer had erred in adopting the net profit as per the profit and loss account prepared on the basis of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, for computing the book profit under section 115JB. He ought to have called for and adopted the profit and loss account as required under section 115JB(2) and prepared as per Schedule VI of the Companies Act. The assessee also questioned the various other adjustments made by the Assessing Officer in computing the book profit. On February 16, 2010, the assessee filed an additional ground of appeal, questioning the applicability of section 115JB, while the other adjustments made by the Assessing Officer in computing the book profit under that section were challenged in the original grounds. 91. On the applicability of section 115JB, the assessee placed reliance on the decision of the Mumbai Bench of the hon'ble Income-tax Appellate Tribunal in the case of Maharashtra State Electricity ....
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....s of Parts II and III of Schedule V to the Companies Act, the Assessing Officer ought to consider only the revised profit and loss account for purposes of computation of book profit under section 115J, and not the profit as per the profit and loss account prepared in accordance with the Banking Regulation Act. Following the same reasoning, the Commissioner of Income-tax (Appeals) directed that computation of minimum alternate tax may be done on the basis of the profit and loss account redrawn by the assessee in accordance with the Companies Act. The assessee was directed to furnish the profit and loss account redrawn in accordance with Schedule VI of the Companies Act. 94. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the assessee has raised ground No. 3 before the Tribunal. 95. At the time of hearing, it was submitted by the learned Departmental representative that the issue can be remanded for fresh consideration as was done by the Tribunal in the assessment year 2005-06 in I. T. A. No. 504/Bang/2009, order dated January 13, 2012. Learned counsel for the assessee, however, submitted that the Tribunal in its earlier order noted direct judgments on the p....
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....nbsp; "5. Learned counsel for the assessee, however, contends that the provisions of minimum alternate tax do not apply to the assessee, and, for this reason, very foundation of impugned reassessment proceedings is devoid of legally sustainable merits. His line of reasoning is this. The provisions of minimum alternate tax can come into play only when the assessee prepares its profit and loss account in accordance with Schedule VI to the Companies Act. It is pointed out that, in terms of the provisions of section 115JB(2), every assessee is required to prepare its profit and loss account in terms of the provisions of Parts II and III of Schedule VI to the Companies Act. Unless the profit and loss is so prepared, the provisions of section 115JB cannot come into play at all. However, the assessee is a banking company and under proviso to section 211(2) of the Act, the assessee is exempted from preparing its books of account in terms of requirements of Schedule VI to the Companies Act, and the assessee is to prepare its books of account in terms of the provisions of the Banking Regulation Act. It is thus contended that the provisions of section 115JB do no....
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....is an appeal by the Revenue, while I. T. A. No. 668/ B/10 is an appeal by the assessee. Both these appeals are directed against the order dated March 25, 2010 of the Commissioner of Income-tax (Appeals), Mangaluru relating to the assessment year 2007-08. I. T. A. No. 709/B/2010 (Revenue's appeal) 102. We shall first take up for consideration the Revenue's appeal in I. T. A. No. 709/B/2010. 103. Ground No. 1 raised by the Revenue is general in nature and calls for no adjudication. Ground No. 2 raised by the assessee reads as follows : 2. Estimated expenditure on earning tax free income under section 14A-Rs. 7,23,63,117. 2.a The learned Commissioner of Income-tax (Appeals) erred in deleting the disallowance of Rs. 7,23,63,117 on account of estimated expenditure on earning income exempt under section 10(23G) by placing reliance on the following decisions : i. Rajasthan State Warehousing Corporation v. CIT [2000] 242 ITR 450 (SC) ; ii. Wimco Seedlings Ltd. v. Deputy CIT [2007] 107 lTD 267 (Delhi) (hon'ble Delhi Bench of Income-tax Ap....
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....earned Commissioner of Income-tax (Appeals) erred in not appreciating the fact that the assessee is following the mercantile system of accounting in respect of interest from securities for the pur pose of final accounts as per annual report under the Companies Act but had deviated and sought to reduce a sum of Rs. 2,95,47,10,034 as interest accrued but not fallen due for the purpose of taxation under the Income-tax Act. 3.d The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the assessee while acknowledging the interest income as accrued in the annual report for the year ending March 31, 2007 and the basis on which accounts finalised and dividends paid, has sought to defer the taxation under the Income-tax Act of the above amount on the ground that it is yet to receive the same. This in other words, represents dual treatment of the same income under dif ferent acts and the assessee has followed receipt or cash system of accounting in respect of interest accrued during the assessment year 2007-08 by offering it for taxation under the Income-tax Act in the subsequent year which is not permissible under the amended provi sions of section 145. 3.e ....
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....pted by the Department and there is no cause to disturb the method of accounting followed by the assessee. It was submitted that this issue had been decided in favour of the assessee by the hon'ble High Court of Madras in the case of Bilahari Investments P. Ltd. v. CIT [2007] 294 ITR 353 (Mad) and affirmed by the hon'ble Supreme Court in CIT v. Bilahari Investment P. Ltd. [2008] 299 ITR 1 (SC), in the case of Tamilnadu Mercantile Bank Ltd. [2007] 291 ITR 137 (Mad), CIT v. City Union Bank Ltd. [2007] 291 ITR 144 (Mad), Deputy CIT v. HDFC [2006] 98 lTD 319 (Mum), and CIT v. FederaI Bank Ltd. [2008] 301 ITR 188 (Ker). 108. The Commissioner of Income-tax (Appeals) found that the assessee has consistently offering to tax interest on securities only on due date basis and not on the basis of the alleged accrual. He referred to the order of the Tribunal dated November 21, 2008 in I. T. A. No. 1160(BNG)/07 in the case of Karnataka Bank Ltd., for the assessment year 2004-05, wherein the Income-tax Appellate Tribunal has observed that the issue of broken period interest on Government securities stood covered in favour of the assessee as considered by the Commissioner of Income-tax ....
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....on record to show that the assessee had changed its method of accounting. Thus the Commissioner of Income-tax (Appeals) deleted the addition of Rs. 2,95,47,10,034 as interest accrued on Government securities. 109. At the time of hearing before us, it was agreed by the parties that the issue raised by the Revenue in this appeal has already been decided by the hon'ble Madras High Court in the case of CIT v. Tamilnadu Mercantile Bank Ltd. [2007] 291 ITR 137 (Mad). The question of law before the hon'ble Madras High Court was as follows (page 138) : "Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that interest on securities is taxable only on specified dates when it became due for payment and not on accrued basis ?" 110. The hon'ble Madras High Court held as follows (headnote) : "In view of the deletion of section 18 of the Income-tax Act, 1961, with effect from April 1, 1989, the third proviso to section 145(1) was inserted with effect from April 1, 1989,....
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....CIT v. Federal Bank Ltd. [2008] 301 ITR 188 (Ker). In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the Revenue in the past. In view of the aforesaid decision, we are of the view that the order of the Commissioner of Income-tax (Appeals) does not call for any interference. Consequently, ground No. 3 raised by the Revenue is dismissed. 112. Grounds Nos. 4 and 5 and additional grounds being ground No. 5 (f) raised by the Revenue in the covering letter dated May 1, 2012 and grounds i to iii raised by the Revenue in its covering letter dated June 11, 2012 are identical to grounds Nos. 2 and 3 and the additional grounds raised in the assessment year 2006-07, except for change in the quantum of deduction claimed. For the detailed reasons given while deciding those grounds in the assessment year 2006-07, we are of the view that the ground No. 4 has to be dismissed and ground No. 5 allowed. Similarly, the additional grounds sought to be raised are all dismissed either as not admissible or maintainable on merits. 113. Ground No. 6 raised by the Revenue is with regard....