TaxTMI 
TaxTMI 
2016 (8) TMI 74
X X X X Extracts X X X X
X X X X Extracts X X X X
....or short] vide order dated 30/08/2011 at a total income of Rs. 1205,99,81,409/-. While doing so, the AO made the following disallowances: The AO computed tax liability u/s 115JB of the Act. While doing so, the AO had not allowed set off of carried forward of loss of Rs. 172,79,57,339/- as according to the AO, there was no computed loss allowed to be carried forward for assessment year 2008-09. 3. The AO had not allowed deduction in respect of provision for doubtful debts in respect of rural branches as provided in sec.36(1)(viia) of the Act on the ground that the assessee-bank had not created the requisite reserve as provided u/s 36(1)(viia) of the Act and made addition of Rs. 171,14,39,327/-. The AO also disallowed the claim for bad debts u/s 36(1)(vii) of Rs. 55,62,08,835/- on the ground that the credit balance available in the provision for bad and doubtful debts created under the provisions of sec.36(1)(viia) is much higher than the amount actually written off us 36(1)(vii). Accordingly, the AO held that deduction is not allowable u/s 36(1)(vii) and disallowed a sum of Rs. 55,62,08,835/-. The AO also disallowed an amount of Rs. 2,54,00,000/- u/s 14A of the Act. The AO hel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed Commissioner of Income Tax (Appeals) failed to appreciate the fact that section 36(1)(viia) being an incentive provision should be interpreted liberally. 2.3. Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the short fall in provision has been made good by the appellant bank and as such, the appellant bank is eligible for the deduction as claimed by it. 2.4. The Learned Commissioner of Income Tax (Appeals) erred in holding that the decisions relied on by the appellant bank are not applicable to the facts of this case. 3. The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of Rs. 55,62,08,835/- u/s 36(1)(vii). 3.1. The Learned Commissioner of Income Tax (Appeals) erred in holding that the bad debts were not written off by the appellant bank on the basis of the alternate submission of the learned Assessing Officer. 3.2. The Learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that in the original assessment proceedings, the learned Assessing Officer had accepted the fact that the bad debts were written off. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The Commissioner (Appeals) erred in allowing the assessee's claim of mark to market loss on derivatives of Rs. 111,89,71,243/-, as this expenditure was not considered as revenue expenditure while finalizing accounts and was claimed only in the computation income. 4. The Commissioner (Appeals) erred in allowing the assessee's claim of sundry assets written off of Rs. 16,04,125/-For these and such other grounds that may be urged at the time of hearing." 7. Now, we shall take up the assessee-bank's grounds of appeal in ITA No.331/Bang/2014. Ground No.1 is general in nature and does not require any adjudication. 8. Ground No.2 relates to the disallowance of a sum of Rs. 171,14,39,327 /- u/s 36(1)(viia) of the Act. Learned AR of the assessee-bank submitted that the amount was disallowed u/s 36(1)(viia) by the AO and confirmed by the CIT(A) on the ground that no requisite provision was created in the books of account. The deduction was limited to the extent of actual amount of provision created in the books of account. It is not dispute that the assessee-bank is eligible for deduction u/s 36(1)(viia). The only ground on which the AO has restricted the deduction is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....amount of provision is laid down in the Income-tax Rules. Thus, the provisions are plain and unambiguous. On a plain reading of the provision, it is clear that creation of requisite reserve in the books of account is a condition precedent for allowance of the claim. The Hon'ble Punjab & Haryana High Court, in the case of State Bank of Patiala (supra) held that the amount of deduction u/s 36(1)(viia) should be restricted to the extent of the amount of provision created for bad and doubtful debts in respect of rural branches. The same position was again reiterated by the Hon'ble Punjab & Haryana High Court in the case of Haryana State Industrial Development Corporation vs. CIT (344 ITR 460). The Hon'ble Punjab & Haryana High Court in the case of State Bank of Patiala vs. CIT (272 ITR 54) held as follows: "6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to clau....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lied upon the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (343 ITR 270) in support of its claim that the claims u/s 36(1)(vii) and 36(1)(viia) are independent of each other. Obviously, the CIT(A) accepted this view but however considering the evidence filed by the AO before him, held that bad debts were not actually written off as there was no corresponding debit in P&L Account. The CIT(A) placing reliance on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. (320 ITR 577)held that the provision created in respect of bad debts is not allowable. 9.1 Before us, learned AR of the assessee submitted that for allowance of deduction u/s 36(1)(vii) it is enough if the debts are written off in the books of account and it is not necessary to establish that debts have become really bad. In this connection, he relied on the decision of the Hon'ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (323 ITR 397). As regards write off of debt, he submitted that debit in P&L account and reducing the provision for bad debts from sundry debtors in the balance sheet amounts to write off as held by the Hon'ble Supreme Court in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g amount from Loans and Advances/debtors on the asset side of the balance sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision "for impugned bad debt". In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in its books, as indicated above. 8. Coming to the second question, we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed." The assessee-bank had not produced any evidence that similar treatment was given in its books of account. Therefore, in the interests of justice, we remit this issue back to the file of the AO to allow the same as deduction after satisfying himself that provision for bad debts is debited to P&L account and reduced the same from sundry debtor's account in the balance sheet. 10. Ground No.4 relates to addition of Rs. 2,54,00,000/- u/s 14A of the Act. Learned AR of the assessee submitted that the assessee-bank suo motu disallowed a sum of Rs. 5,20,530/- out of administrative expenses of treasury department. The AO, without rendering any finding as to how this claim is incorrect, made arbitrary disallowance of Rs. 2,54,00,000/- . The CIT(A) also confirmed the same without assigning any reasons. 10.1 On the other hand, learned Departmental Representative relied on the orders of the lower authorities. 10.2 We heard rival submissions and perused the material on record. It is undisputed fact that the assessee-bank earned interest from tax-f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub- rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :............................... " 14.6 Sub-rule (1) of rule 8D extracted above states that, the AO having regard to accounts of the assessee and not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income can go on to determine disallowance under sub-rule (2) to rule 8D of the IT Rules. Sub-rule (2) does not come into operation until and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment year 2008-09. 12.3 We heard rival submissions and perused the material on record. An identical issue had come up for consideration before us in the case of Canara Bank in ITA Nos.479 & 530/Bang/2009, 530 & 601/Bang/2010, 793 & 813/Bang/2011 dated 30/03/2016 wherein we held as follows: "9.5 We heard the rival submissions and perused the material on record. The short issue in this ground of appeal is whether fall in value of investments made pursuant to SLR requirements of RBI can be allowed as a deduction while computing business income of a banking company. Notwithstanding treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of RBI governing SLR requirement. Even otherwise, the Hon'ble jurisdictional High Court in the case of Karnataka Bank vs. CIT (356 ITR 539) held that circular issued by the RBI for treatment in the books of account is not relevant for classifying the investments whether stock-in-trade or not. In the present case, undisputedly, assessee-bank has changed its method of accounting by classifying the investments from investments to stock-in-trade. In such a situation, pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and gains of business and profession". 3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 4. In the light of the Supreme Court's decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned. (Sd.) . . . . . . . D. S. Chaudhry, CIT (A&J), CBDT, New Delhi. From the reading of the above circular, it is clear that investments held by the banking concern are treated as a part of business of the banking company and therefore, the income arising from such investments is treated as part of business income falling under the head 'pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esent case, as in the earlier years, for the purpose of income-tax proceedings, the investments were treated as stock-in-trade.. . . . . ." Since facts of the present case are identical to the facts stated in the case of Canara Bank (supra), we have no reason not to follow the decision in the case of Canara Bank. Accordingly we hold that loss arising on valuation of HTM category of securities should be allowed as revenue loss. This ground of appeal is dismissed. 13. Ground No.3 relates to loss on account of mark to market loss of Rs. 111,89,71,243/-. The AO disallowed the same holding that the securities were held as investments in books of account and loss arising, if any, is only capital in nature. The CIT(A) adopted the same reasoning applied in respect of HTM category of securities and held that derivatives are held as stock-in-trade under banking company and therefore, loss arising thereon on the valuation as at the end of the accounting year following the principle cost or market price whichever is lower, should be allowed as deduction. 13.1 We heard rival submissions and perused the material on record. As the facts emerge from the assessment order, it is clear that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee's strength that the Institute of Chartered Accountants of India in its guidelines have also approved of the rule of prudence which really means that while anticipated losses can be taken note of while valuing the closing stock, anticipated profits cannot be recognized. The anticipated loss, in the light of the judgment of the Supreme Court cited above, cannot be treated as a contingent liability." The decision of the CIT(A) is in consonance with the above principle of law. Accordingly, we do not find any reason to interfere with the finding of the CIT(A) on this issue. Accordingly, this ground of appeal is also dismissed. 14. Ground No.4 relates to the direction of the CIT(A) deleting the addition on account of sundry assets written off. The AO disallowed the same treating it as bad debt written off. 14.1 Learned Departmental Representative relied on the order of the AO. On the other hand, learned AR of the assessee submitted that sundry debts written off represent penalties imposed in respect of accounts which are inoperative for not maintaining of minimum required balance etc. The system automatically debits the customer's account with such charges wherever....