TaxTMI 
TaxTMI 
2015 (4) TMI 727
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.... 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 Income-tax (Appeals) on this issue has not been accepted by the Departme....
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....tion 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 10 per cent. thereof, subject to available credit balance to this account. (iii) Alternat....
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..... 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 assessee is a banking company carrying on the business of banking. In its return of income the assessee claimed....
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....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 Tribunal, Bangalore Bench, decision dated June 23, 2000 in our own case for the assessment year 1987-88 (87 ITD 103) (sic 78 ITD and not 87 ITD). Our similar claims for the assessment year 2003-04 and the assess ment year 2004-05 are allowed by the Commissioner of Income-tax (Appeals), Mangalore. &n....
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....he 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 actual aggregate average rural advances (AARA) was Rs. 35,25,25,92,038 and not Rs. 46,56,87,24,770 as given earlier and 10 per cent of actual aggregate average rural advances would be Rs. 3,52,52,59,204. The assessee also gave a list of rural branches along with its revised computation of actual aggregate average rural advances. With regard to the proposal of the Ass....
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....t 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 provision for bad and doubtful debts, which according to the Assessing Officer, would not be the intention of 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. The Assessing Officer, however, allowed deduction of 7.5 per cent. of the total income as contemplated by section....
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..... 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 cannot be allowed. 21. Aggrieved by the order of the Assessing Officer, the assessee preferred appeal with regard to disallowance of deduction both under section 36(1)(vii) and 36(1)(viia) of the Act. 22. With regard to the deduction under section 36(1)(viia) of the Act, the assessee contended before the Commissioner of Income-tax (Appeals) that the Income-tax Appellate Tribunal in the assessee's ....
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....i) 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 assessee, the Commissioner of Income-tax (Appeals) held as follows : "31. As regards the disallowance of Rs. 1,70,62,86,485 claimed under section 36(1)(vii), bad debts written off under section 36(1)(vii) and provision for bad and doubtful rural debts under section 36(1)(viia) are two distinct and separate classes of debts. The bad....
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....or 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] 262 ITR 579 (Ker), and in CIT v. City Union Bank Ltd. [2007] 291 ITR 144 (Mad). The ratio of the case of Kerala High Court, after considering the provisions of section 36(1)(vii) and (viia), was that a scheduled bank might be having both urban and rural branches and advances were given from both branches. Having regard to the hazards involved in realising the advances made by rural branches, particularly to agriculturis....
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....bsp; 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 similar addition. In these circumstances, I delete the addition of Rs. 1,70,62,86,485 made in this assessment year as well. The Assessing Officer may allow the appellant's claim under section 36(1)(vii), subject to satisfaction of other applicable conditions. 25. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised grounds Nos. 2 and 3 and additional grounds referred to in the earlier....
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....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 socalled "rural" branches are not rural in the first place, and also had population above 10000, as per census 2001 for which population figures were published by the Directorate of Census Operations in the year 2002 itself. It was submitted that many of the "rural" branches ceased to be "rural" because of merger/amalgamation of such villages (in which the branch was located) into the municipalities of towns and cities by the respective M....
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....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 worked out on the basis of 2001 census because the assessee has in one of its letter dated February 19, 2008 claimed that aggregate average rural advances have been worked out based on 1991 census. The assessee in response to the same by its letter dated February 20, 2008 gave a working of aggregate average rural advances as per 2001 census data. The figure as originally given in the books in this regard was revised to Rs. 35,25,25,92,038. In paragraph III.1.4 of the Assessing Officer's order, the Assessing Officer has accepted such working given by the assessee. The C....
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.... 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 deduction in computing the income referred to in section 28 subject to the provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee during the previous year. "Provided that in the case of an assessee to which clause (viia) applies, the amount of the 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....
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....on 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 Court held : (i) The provisions of section 36(1)(vii) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other. (ii) Clear legislative intent of the relevant provisions and unam biguous language of the circulars with reference to the amendments to section 36 demonstrate that the deduction on account of provisions for bad and doubtful debts under section 36(1)(viia) is distinct and independent of the provisions of section 36(1)(vii) relating to allow ance of bad debts. The legislative intent was to encourage ....
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....ating 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 case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allow ance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). The CBDT itself has ....
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.... 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 follows : (1) Deduction under section 36(1)(vii) of the Act is available for deduction on account of bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actually written off in the books and debited to profit and loss account. Deduction cannot be claimed for creating provision for bad and doubtful debts of non-rural branches. It is like any other bad debt written off which is allowed as deduction in the case of the assessees who are not in banking business. (2) Deduction under section 36(1)(viia)(a) is allowed when a pro vision for bad and doubtful debts r....
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.... 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 the provision made is in excess of the opening balance of provision available in provision for bad and doubtful debts account, subject to the limits prescribed in section 36(1)(viia)(a) of the Act that will be allowed as deduction. Therefore, the additional ground No. (i) sought to be raised by the Revenue does not arise out of the order of the Assessing Officer or the Commissioner of Income-tax (Appeals) and the same cannot be therefore admitted for adjudication. Even assuming there was an error on the part of the Assessing Officer in this regard that could have been set right either in proceedings under section 263 of the Act or by the....
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....s 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 : Particulars Amount (Rs. in crores) 10% of aggregate average rural advances 35 7.5% of total income 5 Total eligible amount 40 Provision made in the books during the year 50 Deduction allowable under section 36(1)(viia)(a) 40 Example : 2 Particulars Amount (Rs. in crores) 10% of aggregate average rural advances 35 7.5% of total income 5 Total eligible amount 40 Provision made in the books during the year 30 Deduction allowable under section 36(1)(viia)(a) 30 In the first example, though the assessee made provision for bad and doubtful debts of Rs. 50 crores in the books of account, since 10 per cent of aggregate average rural advance....
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....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 is given the option to claim deduction under the proviso. The above being the purport of the provisions, we find no basis for additional ground No. (iii) sought to be raised by the Revenue. Ground No. (iii) is therefore held to be unsustainable on merits and does not even require an admission for adjudication as it does not arise out of the order of the Assessing Officer or the Commissioner of Income-tax (Appeals). 47. Now, we will deal with the main ground Nos. 2 and 3 raised by the Revenue. As far as ground No. 2 of the original grounds raised by the Revenue is concerned, the Assessing Officer disallowed the claim for deduction on account of bad debts written off in respect of non-rural debts. The Assessing Officer did not allow the claim of the....
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....owing 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. 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 Assessing 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). (b) Apart from the above the Assessing Officer also disallowed the sum of Rs. 2,95,55,54,682 out of Rs. 5,03,49,00,000 claimed as deduc tion under section 36(1)(viia) of the Act. The reasons given for dis allowing claim for deduction of Rs. 2,95,55,54,682 under section 36(1)(viia) of the Act by the Assessing Officer was that there was already credit balance in the provision for bad and doubtful debts as on April 1, 2005 balance brought for....
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....sp; "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 entitled to a deduction which is quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this is 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." 50. In the appeal before the Tribunal, in ground No. 3 of the original grounds of appeal, the Revenue has challenged the order of the Commissioner of Income-tax (Appeals) in so far as it relates to the deletion of a sum of Rs. 2,07,83,45,338 which is the difference between Rs. 5,03,49,00,000 and Rs. 2,95,55,54,682.....
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.... 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 Income-tax (Appeals) has held that only investments held under the category 'held for trading' can be considered as in the nature of stock-in-trade, and that investments falling under the category 'available for sale' and 'held to maturity' cannot be considered as stock-in-trade but only as investments." 52. While arriving at the business income for the purpose of income tax, the assessee deducted profit on sale of investments amounting to Rs. 71,85,54,022 and added back depreciation on investment amounting to Rs. 10,32,20,170 and amortisation amounting to Rs. 29,60,93,787. Apart from the above, the assessee also claimed loss on trading of investments amounting to Rs. 3,74,97,43,513 by filing an investment trading account as under : Opening stock of....
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....,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 trading account referred to in the earlier paragraph 52 of this order. The Assessing Officer ignoring the above submission, treated the aforesaid income as also part of the business income. Thus, the Assessing Officer made an addition of Rs. 4,46,82,97,535 (3,74,98,43,513 diminishing in value of securities claimed as deduction disallowed + Rs. 71,85,54,022 profit on sale of investments not offered to tax but brought to tax). 55. Aggrieved by the addition made by the Assessing Officer, the assessee preferred appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals) the assessee contended that it has been consistently and historically treating the entire investments as stock-in-trade in all these years and it was a legally accepted practice in the banking industry. It was also a pruden....
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....ul 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 identified in accordance with the guidelines of the Reserve Bank of India. In the absence of any such specific provision in the Act, the Assessing Officer should not have disallowed the claim by making reference to guidelines of the Reserve Bank of India. Reliance was placed on the decision dated January 7, 2005 of the Chennai Bench of the Income-tax Appellate Tribunal in the case of Bharat Overseas Bank Ltd. in I. T. A. No. 241/Mds/2001 for the assessment year 1996-97. 56. The Commissioner of Income-tax (Appeals) on a consideration of the above submissions, held as follows : "50. I have carefully considered the rival submissions. The view that investments of banks are stock-in-trade is supported by various judicial pronouncements including those in the cases of....
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....e 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 on trading loss in investments." 57. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue has raised ground No. 4 before the Tribunal. 58. We have heard the submissions of the learned Departmental representative and learned counsel for the assessee. The learned Departmental representative relied on the decision of the hon'ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. in I. T. A. No. 2886/2005 dated June 6, 2012 [2013] 356 ITR 532 (Karn) . In the aforesaid decision, the hon'ble High Court of Karnataka took a view that the guidelines issued by the Reserve Bank of India will not be relevant while computing income under the Income-tax Act. The hon'ble court further took the view that every investment held by a bank cannot be considered as stock-in-trade. The hon'ble High Cour....
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....pare 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 Bangalore Bench of the Income-tax Appellate Tribunal in Corporation Bank (supra) has also followed the above decision of the hon'ble Supreme Court as also the Income-tax Appellate Tribunal, Mumbai and the Income-tax Appellate Tribunal, Chennai. Following the above decisions, we are deciding this issue in favour of the asses see. This ground of appeal by the Revenue is dismissed." 60. Apart from the above, learned counsel for the assessee also submitted that the decision rendered by the hon'ble High Court of Karnataka in the case of ING Vysya Bank (supra) is per incuriam the decision of the hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 240 ITR 355 (SC). He brought to our notice that the hon'ble Supreme Court approved the practice of nationalised bank governed by the Banking Regulation Act, following mercantile system of accoun....
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.... 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. 500 crores of capital raised by the bank and negligible compared to Rs. 4,100 crores of total expenditure debited to profit and loss account. The Assessing Officer, however, held that the expenditure was capital in nature and disallowed the same. 65. The assessee submitted before the Commissioner of Income-tax (Appeals) that the expenditure incurred on raising the Tier-II bonds was incidental to the bank's business operations and was not a capital expenditure. Cost of raising debt was allowable as revenue expenditure. Reliance was placed on the apex court's decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) and the decision of the hon'ble High Court of Karnataka in the case of CIT v. ITC Hotels Ltd 2009-TIOL-678. 66. The Commissioner of Income-tax (Appeals) after considering the issue agreed with the appellant. He relied on the d....
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....e 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 Income-tax (Appeals) failed to appreciate the fact that the assessee-bank's contention that being a banking company, it does not incur any expenditure on earning exempt income also is not acceptable as the investment made for shares for earning exempt income will always have a notional interest cost attached to it and the same has to be proportionately arrived at and disallowed as no expense incurred on earning exempt income is allowable as per Income-tax Act." 69. It is not in dispute before us that identical issue was considered by this Tribunal in assessee's own case for the assessment year 2005-06 and this Tribunal remanded the issue for fresh consideration by the Assessing Officer in the light of the decision of the hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. [2010] 328 ITR 81 (Bom). The following are the relevant observations of the Tribunal : &n....
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....follows : "7. Deduction under section 35D-Rs. 2,45,15,858 7.a The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for deduction under section 35D amounting to Rs. 2,45,15,858 being one-fifth of Rs. 12,25,79,290. 7.b The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the expenses are admissible after commencement of business only in connection with either extension of industrial undertaking or setting up of new industrial unit. 7.c The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the words 'industrial undertaking' had been substituted with the word 'undertaking' only with effect from April 1, 2009 by the Finance Act, 2008 deduction under section 35D is not available to the bank in t....
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....e 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 considered as "deferred revenue expenditure" to be amortised under section 35D subject to the abovementioned conditions. The Assessing Officer held that the assessee has already commenced its banking business. The assessee is a banking company and cannot be considered as an industrial undertaking. The expenses are admissible, after commencement of business, only in connection with either extension of industrial undertaking or setting up of new industrial unit. Therefore, the assessee's case does not come within the purview of section 35D of the Act. According to the Assessing Officer, this position is made amply clear in the amendment proposed to section 35D in the Finance Act, 2008, wherein the word "industrial undertaking" has been substituted with the word "undertaking". This proposed amendment was with effect from April 1, 2009 and is, therefore, not applicable to this assessment year. The Assessing Officer relying on the case of Brooke Bond India Ltd. v. CIT reported in [1997] 225 ITR 798 (SC), wherein the hon'ble S....
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....ses are incurred after commencement of business in connection with expansion of industrial undertaking or in connection with setting up of a new industrial unit. Admittedly, the assessee was not an industrial undertaking. This aspect has been overlooked by the Commissioner of Income- tax (Appeals). Even assuming that the claim is not one made under section 35D of the Act, the assessee's claim for deduction as a revenue expenditure on the basis that the issue of share capital was for meeting the working capital requirement cannot also be sustained. The fact that the capital raised by issue of shares is for meeting the working capital requirement or otherwise, will not be a relevant consideration. This aspect has been made clear by the hon'ble Supreme Court in the case of Brooke Bond India Ltd. [1997] 225 ITR 798 (SC), wherein at page 801 in the concluding part of the judgment, the hon'ble Supreme Court observed that by issue of shares there is increase in capital and therefore there is a expansion of capital base of the company and therefore the expenses will retain the character of capital expenditure. In view of the above, we are of the view that the action of the Comm....
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....n was not a contingent liability and should have been allowed as a deduction. Without prejudice to this contention, it was submitted that at least the amount of Rs. 2,97,026 actually paid during the year in respect of the accumulated points ought to have been allowed as deduction. 83. The Commissioner of Income-tax (Appeals) after considering the submissions on the issue and perusing the terms and conditions prescribed by the bank for redemption of reward points found that customers could encash reward points in multiples of 500 points at Rs. 0.50 per point, by making a written request to the bank's credit card centre. Unlike other banks, the assessee-bank allows cash reimbursement, rather than making offers for providing goods and services "in kind", in exchange for the reward points. Viewed in this perspective, the bank's liability to cardholders against accumulated reward points is certain, ascertained, and quantifiable, and is therefore not a contingent liability. However, he observed that since all cardholders do not necessarily encash reward points at the same time, or even during the same year, the bank does not incur actual expenditure in a particular year in respe....
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....e equivalent of reward points in cash or kind. In the case of the assessee, the reward points are given in the form of cash reimbursement. The fact that the customers did not make claim for such reimbursement will not stop the accrual of liability. In our view, the liability of the assessee insofar as accumulated reward points are concerned is certain and the Revenue has not disputed the basis of quantification of such liability. In such circumstances, we are of the view that in the light of the principles laid down by the hon'ble Supreme Court in the case of Bharat Earth Movers [2000] 245 ITR 428 (SC), the claim for deduction should be allowed. We accordingly direct the Assessing Officer to allow the claim of the assessee in this regard. Grounds Nos. 1 and 2 raised by the assessee are accordingly allowed. 88. Ground No. 3 raised by the assessee reads as follows : "3. That the learned Commissioner of Income-tax (Appeals) ought to have accepted the appellant's contention that not being a company under the Companies Act, 1956 but being a bank governed by the provisions of the Banking Companies (Acquisition a....
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....of the Mumbai Bench of the hon'ble Income-tax Appellate Tribunal in the case of Maharashtra State Electricity Board v. Joint CIT [2002] 82 lTD 422 (Mum), where it was held that a company which was not constituted as a company within the meaning of section 3 of the Companies Act, 1956, could not be deemed as a company within the meaning of section 616(c) of the Companies Act and since such company was not required to distribute any dividend, it would not come under the mischief of section 115JA. 92. The Commissioner of Income-tax (Appeals) was of the view that this decision is not applicable to the assessee's case because the decision was rendered in the context that the concept of an annual general meeting was alien to the Electricity Board and the reference to section 616(c), which was relevant to a company engaged in the generation or distribution of electricity. 93. The assessee-bank does conduct annual general meetings, declares dividends, and is not engaged in generation or distribution of electricity. The Mumbai bench of the hon'ble Income-tax Appellate Tribunal has, in the case of Union Bank of India v. Joint CIT in their order dated July 25, 2006 in I. T. A. N....
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....or the assessee, however, submitted that the Tribunal in its earlier order noted direct judgments on the point, viz., (1) Order dated September 30, 2010 in I. T. A. No. 3390/2009 passed by Income-tax Appellate Tribunal 'G' Bench, Mumbai in the case of Krung Thai Bank PCL v. Joint DIT (IT) [2012] 49 SOT 70 (Mum) (URO) ; (2) Order dated June 30, 2011 in ITA Nos.4702 to 4706/2010 passed by the Income-tax Appellate Tribunal, Mumbai 'F' Bench in the case of Union Bank of India ; and (3) Order dated August 3, 2011 in I. T. A. No. 469/2010 passed by the Income-tax Appellate Tribunal 'C' Bench, Chennai in the case of Indian Bank, did not adjudicate on the applicability of section 115JB, but following an earlier order in the assessee's own case for the earlier years (at which point of time the above Tribunal's decisions were not available), restored the matter to the Assessing Officer to compute book profits based on recast profit and loss account prepared in....
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.... the Banking Regulation Act. It is thus contended that the provisions of section 115JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Parts II and III of Schedule VI to the Companies Act. Since the provisions of section 115JB do not apply to the assessee-company, the reasons recorded for reopening the assessment are clearly wrong and insufficient. We are urged to quash the reassessment proceedings on this short ground. 6. The learned Departmental representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of learned counsel, according to the Departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute. 7. The plea of the assessee is indeed well taken, and it meets our approval. The provisions of section 115JB can only come int....
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....007] 107 lTD 267 (Delhi) (hon'ble Delhi Bench of Income-tax Appellate Tribunal) ; and iii. Maruti Udyog Ltd. v. Deputy CIT [2005] 92 lTD 119 (Delhi) (hon'ble Delhi Bench of Income-tax Appellate Tribunal). 2.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. 2.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. 2.d The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the assessee-bank's contention that being a banking company, it does not incur any expenditure on earning exempt income also is not acceptable as the investment made for shares for earning exempt income will always have a notional interest cost attached to it and the same has to be proportionately arrived at and disallowed as no exp....
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.... amended provi sions of section 145. 3.e The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the securities have been classified as current investments and hence may be sold freely at will at any point of time. In such a situation, though the purchaser of the security is entitled to receive the full accrued interest on the security on the specified due date, he still has to part with the proportional interest accrued on the said security as on the date of sale to the seller. In view of the same, it is incorrect to state that unless right to receive the accrued interest arises it does not accrue at all or that there is no legal right to receive the interest. The same issue is pending with the hon'ble Income-tax Appellate Tribunal in the case of Karnataka Bank Ltd., Mangalore. 106. The Assessing Officer noted that the appellant had not offered to tax an amount of Rs. 2,95,47,10,034 representing interest income credited to profit and loss account but not offered to tax. Since the bank's accounting policy was to recognise revenue and expenses on accrual basis and broken period interest was to be treated as revenue as per the Reserve Bank of Ind....
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....d by the Commissioner of Income-tax (Appeals) following the Income-tax Appellate Tribunal's decision in that bank's case and hence did not call for any further interference. The Commissioner of Income-tax (Appeals) also followed his own order dated December 31, 2004 in I. T. A. No. 255/MNG/CIT(A)MNG/2003-04, in the case of Karnataka Bank Ltd. for the assessment year 1998-99, in which he held that Assessing Officer's action in bringing to tax interest on securities, even though interest had not legally and rightfully accrued or become due to the appellant in view of the specified dates for interest on Government securities, as laid down therein, was not sustainable. Accordingly, he held that the Assessing Officer was not justified in bringing to tax the interest on securities and deleted the addition made on that score. The Commissioner of Income-tax (Appeals) was also of the view that the Income-tax Act envisages levy of tax on real income and not on income which is not followed by the right to receive income. Mere entries in the books of account do not create a right to receive. Unless the right to receive arises in respect of accrued interest, it is not income under s....
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....h effect from April 1, 1989, which is a saving clause. Although the amendment was with effect from April 1, 1989, it clearly provides that any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where no method of accounting is regularly employed by the assessee. In other words, if the assessee is maintaining cash system of accounting, the aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on such securities might become due. The assessee, while filing the return of income for the assessment years 1989-90 and 1990-91, claimed exclusion of the sums represent ing the accrued interest for the periods till March 31, 1989, and till March, 31, 1990, for the respective assessment years, in respect of the securities held by it on the ground that it did not become due in the respective previous years and that even after the omission of section 18, the i....
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....e is with regard to loss on valuation of investment. The said ground is identical to ground No. 4 raised by the Revenue in the assessment year 2006-07. For the detailed reasons given while deciding those grounds, ground No. 6 raised by the Revenue is dismissed. 114. Ground No. 7 raised by the Revenue reads as follows : "7. Deduction under section 35D-Rs. 3,13,56,154. 7.a The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for deduction under section 35D amounting to Rs. 3,13,56,154. 7.b The learned Commissioner of Income-tax (Appeals) failed to appreciate that expenses are admissible after commencement of busi ness only in connection with either extension of industrial undertak ing or setting up of new industrial unit. 7.c The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the words 'industrial undertaking' had been substituted with the word 'undertaking' only with effect from April 1, 2009 by the Finance Act, 2008 deduction under section 35D is not available to the bank in the current assessment." 115. As far as a sum of Rs. 2,45,15,858 which is a part of sum of Rs. 3,13,56,154 disputed ....