AI Drafter 
TaxTMI 
TaxTMI 
2017 (11) TMI 1425
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....eclaring a total income of Rs. 1691,78,60,322. The assessment against the said return of income was completed by the Additional Commissioner of Income-tax, LTU, (hereinafter referred to as the Assessing Officer (AO)) vide order dated November 11, 2011 passed under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") of the Income-tax Act, 1961 (hereinafter referred to as "the Act") after making the following disallowances : S No.. Nature of additions/disallowances Amount (Rs.) Amount added to income : 1. Amount received from CANFINA 35,00,00,000 Expenditure/claims disallowed : 2. Bad debts claimed under section 36(1)(vii) 543,00,00,000 3. Depreciation on leased assets (Rajinder Steels and the Kedia group) 8,82,307 4. Notional expenses attributing to exempted income under section 14A 7,09,00,000 5. Disallowance of deduction under section 36(1)(viii)-Income from long-term finance 259,81,00,000 6. Write off of miscellaneous items 37,60,646 7. Amortisation of premium on securities-HTM category 115,88,22,975 Total 9,61,24,65,9....
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....ommissioner of Income-tax (Appeals) failed to appreciate the fact that the appellant-bank had adopted a reasonable method for arriving at the profit from the eligible business. 4. The learned Commissioner of Income-tax (Appeals) erred in not allowing the amortisation amount of Rs. 115,88,22,975 being the premium paid on investments classified as held to maturity category. 4.1. The learned Commissioner of Income-tax (Appeals) erred in sustaining the addition on surmises and conjuncture. 4.2. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the appellant-bank had not agreed to the said disallowance. For the above referred grounds or any other grounds that may be prayed at the time of hearing, the appellant prays that the order of the learned Commissioner of Income-tax (Appeals) be set aside and the disallowance and the additions made by the learned Assessing Officer be deleted." 6. Ground of Appeal No. 1 is general in nature and does not require adjudication. 7. Ground of Appeal No. 2 challenges the addition of Rs. 543,00,00,000 by disallowing the claim for bad debts written off. The Assessing Officer (AO) d....
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.... (supra) wherein the hon'ble Supreme Court held that debiting the profit and loss account by provision for bad debts and reducing the same from the sundry debtors in the balance-sheet amounts to write off. The relevant part of the judgment is extracted below (page 171 of 323 ITR) : '7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, the learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj) was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from April 1, 1989 hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from April 1, 1989 a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss ....
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....e that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the yearend in the balance- sheet is shown as net of the provisions for the impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction under section 36(1)(vii) of the 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction under section 36(1)(vii) of the 1961 Act, twice over. (See order of the Commissioner of Income-tax (Appeals) at pages 66, 67 and 72 of the paper book), which refers to the apprehensions of the Assessing Officer). In this context, it may....
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....bad debts is debited to the profit and loss account. If these conditions are satisfied, we direct the Assessing Officer to allow the same as deduction. 7.4 In the result, ground of Appeal No. 2 is partly allowed for statistical purposes. 8. Ground of Appeal No. 3 relates to the disallowance of the claim made under section 36(1)(viii) of the Act. The assessee-bank claimed deduction of Rs. 400 crores under section 36(1)(viii) of the Act in respect of profits derived from the eligible activity viz., (i) industrial or agricultural development, (ii) development of infrastructure facility in India ; and (iii) development of housing in India. The computation made by the assessee-bank in respect of the said activities is as under : "Calculation of profits earned from long-term finance under section 36(1)(viii) Income from long-term finance 5212.45 Less : Expenditure 3039.51 2172.94 Profit from long-term finance 20 per cent. of profits from long-term finance A 434.59 Reserve created in books B 400.00 Limited to twice the amount of capital and reserves Capital 410.00 Gen....
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....he claim as made originally was correct. The Assessing Officer is thereafter directed to consider the claim of the assessee for the correct amount of eligible deduction under section 36(1)(viii) of the Act. The relevant grounds are thus treated as allowed." There is no dispute about the eligibility of the assessee-bank for deduction under section 36(1)(viii) of the Act. The only dispute is with regard to method of computation of deduction. The provisions of section 36(1)(viii) read as under : "36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-. . . (viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent. of the profits derived from eligible business computed under the head 'Prof its and gains of business or profession' (before making any deduction under this clause) carried to such reserve account : Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and ....
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....by letter dated November 4, 2011. The assessee has stated as under : 'While valuing the HTM category of securities at the year end, the same will not be marked to market price but difference between the book value and face value will be apportioned over the remaining period of maturity. The difference between the book value and the face value will be the premium/broken period interest paid at the time of purchase of the particular security. Every year, at the year end, 1/9th of the amount (difference between the book value and the face value = premium/interest amount, V is the remaining number of years to maturity) will be debited to amortisation account and investment account will be credited. Amortisation amount will be debited to the profit and loss account. As we treat all categories of securities as stock-in-trade, the amortisation accounted in the books of account is not added to the income in the return of income. The amount of 'loss on revaluation of securities/amortisation of premium' amounting to Rs. 115.88 crores. This amount is inclusive of premium/interest paid for the securities purchased in the earlier years. If the Assessing Officer is ....
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....of the particular security. Contrary to the practice followed by the appellant-bank from the financial year 2008-09 of treating HTM category as investment and HFT and AFS as stock-in-trade, the appellant submitted before the Assessing Officer vide letter dated November 4, 2011 as follows 'As we treat all categories of securities as stock-in-trade, the amortisation accounted in the books of account is not added to the income in the return of income. The amount of loss on revaluation of securities/amortisation of premium' amounting to Rs. 115.88 crores. This amount is inclusive of premium/interest paid for the securities purchased in the earlier years. If the Assessing Officer is intending to consider the amount of interest component included at the time of purchase is Rs. 90,54,75,365. In the assessment any amount to be considered to be added, either one of the above amounts can only be considered." (emphasis added). Before me in appeal it was submitted that 'the premium paid does not include any broken period interest and no broken period interest is amortised'. It was also submitted that the quoted explanation given before the Assessing Officer was not cor....
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.... 04. The brief facts pertaining to this issue are that while framing the assessment under section 143(3) of the Income-tax Act, for the assessment year 2007-08, the Assessing Officer noticed that the assessee has claimed a sum of Rs. 26,40,237 under amortisation of premium on investments and the assessee had no explanation for the claim. Hence, he disallowed the same. While disallowing the same, the Assessing Officer followed the decision of the Madras High Court in the case of T. N. Power Finance and Infrastructure Development Corporation Ltd. v. Joint CIT [2006] 280 ITR 491 (Mad). Aggrieved, the assessee moved the matter in appeal before the first appellate authority. 05. The learned Commissioner of Income-tax (Appeals) after considering the submissions made before him and following the decision of the Madras High Court cited supra, came to the conclusion that the hon'ble Madras High Court has that merely because the RBI had directed the assessee to provide for non-performing assets, that direction cannot override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate for deduction not exceeding 5 per cent. of the total income....
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....ank Ltd. (I. T. A. No. 126/Coch/2004, dated September 19, 2005 followed." (ii) Khanapur Co-op Bank Ltd. v. ITO (I. T. A. No. 141/PNJ/2011, dated September 8, 2011) : The hon'ble Bench of the Panaji Tribunal had recorded its findings that '6. Likewise, the premium amortised at Rs. 1,78,098 is claimed to be in respect of securities held under the category "held to maturity". The Assessing Officer has taken them as long-term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the Central Board of Direct Taxes Instruction No. 17 of 2008 dated November 26, 2008 as reproduced hereinabove, the premium paid on such Government securities is required to be amortised over the period remaining to maturity. . .' (iii) In the case of Corporation Bank v. Asst. CIT (I. T. A. No. 112/ Bang/2008 (Bang)) for the assessment year 2004-05, the earlier Bench had also held a similar view. In the light of the above discussion and the case law discussed supra, taking into account the totality of the facts and materials, we are of the considered view that th....
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....ed the following incomes as exempt from Income-tax. (a) Interest on PSU bonds Rs. 7,93,68,502 (b) Dividend exempt under section 10(34) Rs. 37,90,97,485 Total Rs. 45,84,65,987 3.2 As per the provisions of section 14A of the Income-tax Act, no deduction is required to be allowed in respect of expenses incurred by the assessee in relation to the income which does not form part of the total income under the Income-tax Act. The assessee was requested to explain why the expenses should not be disallowed relating to the incomes claimed exempt. The assessee has replied by letter dated June 27, 2011 as under : 3.3 'The bank has claimed interest on PSU bonds (exempt under section 10(15)(iv)(h) amounting to Rs. 7.94 crores and dividend income (under section 10(34) and 10(35) amounting to Rs. 37.90 crores as exempt under section 10 and no specific expenditure was incurred for earning the income. The administrative expenditure is incurred to carry out various business activities, the income from, which is subjected to tax. There is no additional expenditure involved in earning the tax-free income. The exempted income is very small portion ....
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.... (b) Dividend income Rs. 37,90,97,485 Total Rs. 45,85,65,987 Proportion of the head office other expenditure to the exempted income Rs. 43,22,952. If the Assessing Officer is not agreeing with the method of calculation made by the assessee, in terms of the provisions of section 14A and rule 8D the expenditure that is required to be disallowed is the expenditure incurred by an assessee in relation to income which does not form part of the total income has to be worked. 3.6 On a perusal of the assessee's submission, it is seen that the assessee has not appreciated the provision of section 14A properly. Sub-section (2) of section 14A stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed. The mechanism of determination of the amount of expenditure relatable to exempt income is prescribed in rule 8D of the Income-tax Rules, 1962 which were inserted by the fifth amendment with effect from March 24, 2008. A perusal of rule 8D will indicate that there are three sub components of....
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....e. The disallowance offered by the assessee is not accepted considering that there would be direct and indirect expenses for earning the exempt income which cannot be quantified by any other method than the application of rule 8D of the Income-tax Rules, 1962, in consonance with section 14A of the Income-tax Act, 1961. Therefore, I proceed to disallow the expenses under rule 8D of the Income-tax Rules. Here, it is further pointed out that the hon'ble Special Bench of the Income-tax Appellate Tribunal Mumbai has held in the case of ITO v. Daga Capital Management Pvt Ltd. [2009] 312 ITR (AT) 1 (Mumbai) that application of rule 8D read with section 14A with retrospective effect and also that the rule 8D applies wherever there is a claim of exempt income. 3.8 The disallowance under rule 8D is computed as under : (i) The amount of expenditure directly relating to income which does not form part of Rs. 91,69,320. (The assessee has stated in submission dated June 27, 2011 in paragraph 12 that 'we have not incurred any direct expenditure that can be disallowed, however, as offered in the return of income a sum of Rs. 0.92 crore can be attributed under thi....
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....er section 10(34) and (35) Rs. 57,47,34,029 Total Rs. 3,35,51,49,960 It is the contention of the assessee-bank that no expenditure was incurred for earning the above exempt income which does not form part of the total income. The provisions of section14A of the Act state that no deduction shall be allowed in respect of an expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Under the provisions of sub- section (2) of section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with methods prescribed i.e., rule 8D of the Income-tax Rules. Therefore, at the first instance, himself examine the claim of the assessee that no expenditure was incurred to earn exempt income and it is only thereafter, and only if the Assessing Officer is not satisfied on this account, and after making reference to accounts, he is entitled to adopt th....
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....hat exempt income is earned from securities which are held as a part of stock-in-trade. The hon'ble Bombay High Court in the case of CIT v. India Advantage Securities Ltd. [2016] 380 ITR 471 (Bom) held that the provisions of section 14A have no application in case assets are held as stock-in-trade. Therefore, the provisions of section 14A cannot be applied in the present case. Furthermore, in the assessee's own case, the hon'ble High Court of Karnataka held that no notional expenditure can be attributed to exempt income in the case cited supra. Accordingly, we hold that no disallowance can be made under section 14A of the Act. The ground of appeal of the Revenue is dismissed." 10.4 As extracted above, no disallowance under section 14A can be made in the absence of finding as to the correctness or otherwise of the computation made by the assessee. In the present year, the assessee-bank itself has offered to tax a sum of Rs. 91,69,320 which was upheld by the Commissioner of Income-tax (Appeals). Since the assessee is not in appeal, we uphold the disallowance. Accordingly, the finding of the Commissioner of Income-tax (Appeals) does not call for an interference. The gro....
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....missions of the appellant and I am unable to agree with the stand taken by the Assessing Officer. It is clear from the nature of entries included under 'miscellaneous items written off' that they are extremely diverse and cover a huge gamut from frauds, misappropriations, shortage of cash and stamps to various sundry amounts remaining unadjusted or unrecovered for long and the items cannot be related to advances as has been done by the Assessing Officer, I find that he has not identified any item of advances in the debited items which he could relate to the provision created for rural advances of the bank under section 36(1)(viia). On the contrary, they are clearly relatable to practices and systems arising out of the carrying on of the business of banking and are incidental to it. Hence, in terms of the judicial decisions cited above they are part of the accepted commercial practices in the line of banking. The disallowance is, therefore, directed to be deleted. These grounds, accordingly, succeed." 12.2 We heard the rival submissions and perused material on record. This issue has come up for consideration before the co-ordinate Bench in I. T. A. No. 318/2014 wherein it....
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....case of banking companies itself as listed below : (i) Union Bank of India v. Asst. CIT (I. T. A. Nos. 4702 and 4706/ Mumbai/2010 dated June 30, 2011) (ii) Indian Bank v. Addl. CIT (I. T. A. No. 469/Mds/2010 dated August 3, 2011). In both these decisions, the respective Benches have followed the decision of the Mumbai Bench in the case of Krung Thai Bank PCL (supra) and held that section 115JB is not applicable to banking company. The decision relied on by the learned Departmental representative in the case of HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC) is not applicable. In that case, the assessee is not a banking company and hence, in our considered view that decision will not help the Revenue. Since there are more than one decision in favour of the assessee, following the same, we are inclined to hold that the provisions of section 115JB are not applicable to the assessee being a banking company. Hence, we are of the view that invoking of section 263 is not correct and accordingly quash the action under section 263 of the Act." 13.1 Respectfully following the decision of the co-ordinate Bench we hold that the assessee-bank is not li....
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....es and conjunctures. 2.10. The learned Commissioner of Income tax (Appeals) erred in relying on the facts of some other assessee. 2.11. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that on the same set of facts the jurisdictional Appellate Tribunal and the hon'ble High Court have allowed the deductions to various banks. 3. The learned Commissioner of Income tax (Appeals) erred in law in confirming the disallowance of the provision for bad debts claimed under section 36(1)(viia) amounting to Rs. 575,05,63,090. 3.1. The learned Commissioner of Income tax (Appeals) erred in law in holding that rule 6ABA prescribes only fresh/incremental advances are to be considered for arriving at the aggregate average advances. 3.2. The learned Commissioner of Income tax (Appeals) erred in interpreting that as per rule 6ABA 'advances made' to be read as 'made during the month'. 3.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that section 36(1)(viia) being an incentive provision should be interpreted liberally. 3.4. The learned Commissioner of Income....
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....n the decision in the case of Ing Vysya Bank Ltd. which is distinguishable on facts. 4.6. The learned Commissioner of Income tax (Appeals) erred in law in redirecting the matter to the Assessing Officer to re-examine the issue of allowing the depreciation on investments amounting to Rs. 55,01,13,332 in respect of securities held outside India, in overseas branches. 4.7. The learned Commissioner of Income tax (Appeals) erred in coming to the conclusion that the appellant-bank had offered all the income and expenditure of the overseas branches and only claimed relief for the taxes paid under section 90 of the Income-tax Act as per the Double Taxation Avoidance Agreement. 5. Without prejudice to ground No. 4 relating to depreciation on investments, the learned Commissioner of Income tax (Appeals) erred in not taxing the profit arising on sale of HTM investments under the head 'Capital gains', whereas the same is treated as business income. 5.1. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that once an asset is treated as capital asset, then the income from the transfer of the same has to be taxed only under ....
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.... of Income tax (Appeals) failed to appreciate the fact that on the same set of facts, in the earlier years, the advance amounts received by the appellant-bank was not taxed as income. 7.5. The learned Commissioner of Income tax (Appeals) failed to distinguish the facts of the judicial decision referred by the Assessing Officer to that of the appellants-bank case and drawing conclusions without verifying the facts of the case. 7.6. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years. 7.7. In the alternative, the learned Commissioner of Income tax (Appeals) failed to direct the Assessing Officer to exclude the above referred added amount from the income of the appellant-bank in the subsequent years since the same has been offered to tax. 8. The learned Commissioner of Income tax (Appeals) erred in law in sustaining the disallowance the unrealised gains on revaluation of forward contracts in foreign exchange amounting to Rs. 36,28,87,643. 8.1. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact ....
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....rage advances of rural branches Rs. 8260,78,60,834 The deduction amount at 10 per cent. works out to Rs. 826,07,86,083 Thus the total eligible amount of deduction is Rs. 1110,06,12,611 Provision made in the books Rs. 900,00,00,000 Eligible deduction claimed under section 36(1)(viia) Rs. 900,00,00,000 17.1 According to the Assessing Officer, the assessee-bank computed wrong computation of average aggregate advances (AAA) for the following reasons : "1. Population of many of the rural branches had already exceeded 10,000. 2. Further in several cases it was not rural branch and rather it was situated urban agglomeration. 3. Apart from this while the computing the average aggregate advances the assessee-bank has taken into account the running balance of the advances made in the previous year as the opening balance of the subsequent year and computed the outstanding balance at the end of last day of each month comprised in the previous year. While computing the average aggregate advances the assessee-bank should have considered the fresh amount of advances made by each rural branch as outstanding at the end of each month comprised....
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....uage to have been used in the rule would be 'amount of advance of each rural branch outstanding' the use of the word 'made by' implies an activity to be correlated to a time/period that may be overtly mentioned or passively understood as in the present context. This interpretation is closer to the Assessing Officer's understanding that the reference is to advances made during the month and which are outstanding at the end of each month. I have also noted with concern the fact that the assessee-bank failed to furnish the details of fresh advances made by each such rural branch in every month comprised in the previous year to compute the average aggregate advances, in spite of numerous opportunities provided by the Assessing Officer. 9.7 The Assessing Officer has noted that by claiming 10 per cent. of average aggregate advances year after year on the running advance instead of advances made by each rural branch during the year which was outstanding at the end of the month the assessee had claimed benefit beyond the scope of section 36(1)(viia) over the years. This would explain why the provision of non-performing asset as per the annual report (Rs, 788.60....
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.... Finance Act, 1979 inserted a new clause (viia) in sub-section (1) of section 36 to provide for deduction in computation of taxable profits of scheduled bank in respect of provision made for bad and doubtful debts relating to advances made by the rural branches computed in the manner prescribed under the Income-tax Rules, 1962. For this purpose, "rural branches" has been defined to mean "branch of scheduled bank situated at place with a population not exceeding 10,000 according to the last census". Rule 6BA of the Income-tax Rules provides the procedure for computing average aggregate advances for the purpose of the provisions of section 36(1)(viia) which reads as under : "6ABA. Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36.-For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely :- (a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately ; (b....
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....g into the issue, it is necessary to look into the relevant statutory provisions. Section 36(1)(vii) provides for deduction on account of bad debts actually written off in the books of account. However, the proviso to section 36(1)(vii) makes an exception by providing that in case of an assessee to which clause (viia) applies the claim of bad debt shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made under clause (viia). Clause (viia) permits a co-operative bank to claim deduction of provision made for bad and doubtful debts as per the prescribed conditions. As has been correctly observed by the learned Commissioner of Income-tax (Appeals), the only dispute between the assessee and the Department is in respect of working out 10 per cent. of the aggregate average rural advances. While the assessee has made such working by considering the entire outstanding advances at the end of each month, the Assessing Officer has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances. However, a perusal of the provision contained under section 36(1)(viia) and ru....
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...., we remit this issue back to the file of the Assessing Officer to identify the rural branches less than 10,000 population as per the last census and the average aggregate advances of such rural branches alone should be considered for the purpose of this deduction. Thus, these grounds of appeal are allowed for statistical purposes. 19. Ground of Appeal No. 4 challenges the disallowance on account of depreciation in the value of investments of Rs. 1008,20,09,971. The factual background leading to the above addition as set out by the Assessing Officer is as under : "3 Disallowance of depreciation claimed on HTM category securities In the computation of income the assessee-bank has been claiming depreciation of investments on the HTM category securities in all the assessment year. The HTM category securities are not eligible for any depreciation as per the RBI guidelines. The RBI has permitted the banks to claim depreciation on remaining two categories of securities namely, held for trade (HFT) and available for sale (AFS) whereas the banks are not entitled to claim depreciation on the HTM category securities, the profit and loss account by the company has been pr....
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....d onwards in respect of our claim of depreciation on the HTM category. Pending the decision of our claim before the Income-tax Appel late Tribunal in respect of depreciation on HTM we have not offered the appreciation on HTM in the assessment year 2009-10 as the depreciation in the earlier year was rot allowed. However, we have disclosed the same in our notes to the return undertakes to offer the same for tax in the event of our claim on depreciation is allowed in all the earlier years regarding the HTM securities. For the current assessment year 2010-11, the depreciation on the available for sale, held for trading and held to maturity categories is reckoned for the purpose of computation of taxable income after adjusting the previous year appreciation on the HTM securities. Accordingly, we have prepared an investment trading account and claimed depreciation and offered appreciation and profit on sale of investments. As in the part assessments, as required, we are furnishing the details which are subject during the course of the assessment we will resubmit any changes that will happen'. It is noticed from the above reply that the assessee-bank has bee....
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....y a banking institution for complying with the RBI guidelines/regulations can be in current investment, the fact that the bank had treated all its investments in securities as stock-in-trade and further fact that the RBI had accorded permission to the bank to value such investment should be taken as a relevant and clinching circumstance to accept the stand of the asses see that the securities were stock-in-trade, we are unable to accept this submission, only for the reason that any and every asset held by an assessee does not necessarily become stock-in-trade, it is only such merchandise of a businessman which is ready for sale, and is held for sale, that acquires the characteristic of stock-in-trade. A merchandise or goods or in the present situation, security does not get the character of stock-in-trade merely because it is so designated but a security can acquire the character of stock-in-trade if it is so held as part of trading stock and the assessee acts as such. In respect of securities which are held by way of permanent investment in securities by the assessee-bank as part of the requirement of the law, then such securities is not and cannot be either be construed ....
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....n and rejection of the claim. The assessee-bank has made a request vide their letter dated October 19, 2012 that if the Assessing Officer decides to follow the previous order and wants to disallow the depreciation on the HTM category the profit to be considered as capital gains and to be taxed at Rs. 119,14,63,845 and the profit of Rs. 169,88,51,800 needs to be deleted from the computation of business income. The claim of the assessee-bank cannot be considered on the fact that income has to be computed under five different heads prescribed in the Income-tax Act. In order to compute the capital gain there must be a transfer of capital asset. In the present case neither there was existence of a capital asset nor transfer of the capital asset within the meaning of section 2(47) of the Income-tax Act. The assessee-bank has invested some funds in the securities that are held to mature (HTM) and redeemed those securities at the date of maturity. As per the break-up of profit on sale of investment in schedule 14 was Rs. 872,42,65,224. It includes the profit on sale of investment of held to maturity, available for sale and held for trading category securities. The business of the ....
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....ned Commissioner of Income-tax Departmental representative placed reliance on the orders of the lower authorities. 21.2 We heard the rival submissions and perused the material on record. This issue was decided by the co-ordinate Bench in the case of the assessee to which both of us are parties wherein after referring to Circular Nos. 18 of 2015 dated November 2, 2015* and the decision of the hon'ble jurisdictional High Court in the case of Karnataka Bank Ltd. v. CIT [2013] 356 ITR 549 (Karn) and the decision of the hon'ble apex court in the case of Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577 (SC) and UCO Bank v. CIT [1999] 237 ITR 889 (SC) it has been held as under : "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 the RBI can be allowed as a deduction while computing business income of a banking company. Notwithstanding the treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of the RBI governing SLR requirement. Even otherwise, the hon&....
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....shall be chargeable to Income-tax under the head "Income from other sources", if, the income is not chargeable to Income-tax under the head "Profits and gains of business and profession". 3. The matter has been examined in the light of the judicial decisions on this issue. In the case of CIT v. Nawanshahar Central Co- operative Bank Ltd. [2007] 289 ITR 6 (SC) ; [2007] 160 Taxman 48 (SC), the apex court held that the investments made by a banking concern are part of the business of banking. 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 the 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 the appeals already....
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....be doubted. Now, it is well settled that the assessee is entitled to change the regular method of accounting irrespective of the fact, it results in loss to the Revenue. Therefore, having regard to the spirit of the circular cited supra and the fact that investments are shown as stock-in-trade in the books of account, loss/depreciation on account of fall in value of securities held by the assessee-bank should be allowed as deduction. Therefore, income arising therefrom should also be treated as business income. The provisions of section 45(2) cannot be applied to the facts of the present case, as in the earlier years, for the purpose of Income-tax proceedings, the investments were treated as stock-in- trade. Thus, grounds of Appeal Nos. 4, 5 and 6 are disposed of." The reliance placed by the Assessing Officer on the decision of the hon'ble jurisdictional High Court in the case of CIT v. Ing Vysya Bank Ltd. [2013] 356 ITR 532 (Karn) ; [2012] 208 Taxman 511 is misplaced for the reason that hon'ble jurisdictional High Court in the case of Karnataka Bank (supra) held that the decision in Ing Vysya Bank (supra) runs counter to law lay down by the hon'ble apex court in the....
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....ted June 20, 2012). On the other hand, the learned Commissioner of Income-tax (Departmental representative) placed reliance on the orders of the lower authorities. 25. We heard the rival submissions and perused the material on record. The only issue raised in this appeal relates to the assessability of income from commission on letter of credit and locker rent. The assessee-bank is following the accounting income on account of these two heads on receipt basis whereas in computation of total income, income from this was spread over the period to which commission related and locker related, which means income was offered to tax proportionate to the period covered under the accounting year under consideration. It is not the case of the Assessing Officer that income escaped assessment forever. The income is only spread over. It is settled principle of law that the treatment given in the books of account of a particular item of income or expenditure has no relevance to decide taxability or otherwise of it under the provisions of the Act. Therefore, though the amount was shown as receipt and credited to the profit and loss account, the assessee was entitled to offer income by follo....
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....ere will be profit/loss on valuation of such contracts. The profit/loss accounted in the books is only on estimation basis. As this is merely an estimated anticipated income, the same is reversed on the next day in the books and hence the profit arising on valuation of unsettled forward exchange contracts is offered to tax on maturity of such contracts. This is supported by the decision of the Madras High Court in the case of Indian Overseas Bank v. CIT [1990] 183 ITR 200 (Mad). Under the Income-tax Act 1961, income chargeable to tax is the income received or due to be received in India in the previous year, or income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. No doubt the Income-tax Act, 1961 takes into account two points of time at which the liability to tax is attracted viz., the accrual of income or its receipt ; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made about hypothetical income which does not materi....
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....y. In the light of these facts, the issue is whether this income is liable to tax as accrued income within the meaning of section 5 of the Act. It is salutary principle that Income-tax is not leviable on hypothetical income. No income can be taxed unless otherwise accrued and realised. Reliance in this regard can be placed on the decision of the hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) and Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC). This issue was settled by the hon'ble Madras High Court in the case of Indian Overseas Bank v. CIT [1990] 183 ITR 200 (Mad). In the light of these judgments, we hold that no income can be taxed on notional basis unless and otherwise income accrued to the assessee. 29. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. 30. The Revenue raised the following grounds of appeal for the assessment year 2010-11 : The order of the learned Commissioner of Income-tax (Appeals) is opposed to law and fact of the case. "1. The Commissioner of Income-tax (Appeals) has erred in allowing the depreciation claimed on the leased assets i.e....
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....nk. This issue was also decided by us against the Revenue in the appeal for the assessment year 2009-10 in I. T. A. No. 1035/ Bang/2013. For the same reasoning, this ground of appeal is also dismissed. The assessee's appeal viz., I. T. A. No. 931/Bang/2016 for the assessment year 2011-12 34. The assessee-bank raised the following grounds of appeal : "1. The order of the learned Commissioner of Income-tax (Appeals)-14, LTU Bangalore dated March 11, 2016 is against law and facts of the case. 2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in confirming the disallowance of the bad debts claim under section 36(1)(vii) amounting to Rs. 372,70,00,000. 2.1. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the appellant-bank did not write off the debts of Rs. 372,70,00,000. 2.2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the amount of Rs. 372,70,00,000 is a mere provision and not a write off. 2.3. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the debts are to be written off at the branch level where advances are m....
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....x (Appeals)-14, LTU erred in confirming the addition on surmises and conjunctures. 3.5. The confirmation made by the learned Commissioner of Income-tax (Appeals) of the computation made by the Assessing Officer is based on prejudices and against the facts and the records of the case. 4. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law and on facts in confirming the disallowance of depreciation amounting to Rs. 1154,59,00,000 on investments which are stock-in-trade of the bank. 4.1. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in confirming that the assessee had not made a provision for depreciation on investments and hence disallowed Rs. 1154.59 crores out of Rs. 1197.21 crores (allowed Rs. 42.61 crores being the amount debited to the profit and loss account). 4.2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in relying on the decision in the case of Ing Vysya Bank Ltd., which is distinguishable on facts. The learned Commissioner thus ignored the decisions of the jurisdictional High Court decisions. 4.3. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appr....
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....the alternative, the learned Commissioner of Income-tax (Appeals)-14, LTU failed to direct the Assessing Officer to exclude the above referred added amount from the income of the appellant-bank in the subsequent years since the same has been offered to tax voluntarily. 6. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in sustaining the disallowance the unrealised gains on revaluation of forward contracts in foreign exchange amounting to Rs. 107,20,87,678. 6.1 The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the unrealised gains cannot be taxed and only real income can be taxed. 6.2. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the unrealised gains did not accrue to the appellant-bank. 6.3. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the entries in the books alone cannot be the basis for taxing a receipt. 6.4. The learned Commissioner of Income-tax (Appeals)-14, LTU ignored the consistent method adopted by the appellant-bank in offering the unrealised gains to tax over the years. ....
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....sment year 2010-11. This ground of appeal is partly allowed for statistical purposes. 37. Ground of Appeal No. 4 challenges the confirmation of disallowance on account of fall in the value of investments which are held as stock-in-trade. For the detailed reasons stated in paragraph 21.2, in the assessee's appeal viz. I. T. A. No. 1493/Bang/2014, for the assessment year 2010-11, we hold that the same should be allowed as revenue loss. This ground of appeal is allowed. 38. Ground of Appeal No. 5 challenges the confirmation of the addition of commission and locker rent received in advance of Rs. 110,26,13,670. In the assessee's appeal viz., I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11 in paragraph 25, we held that advance commission received on account of letters of credit and bank guarantee and locker rent has not become due or accrued to the assessee in terms of contract entered into by the bank with its customers. Accordingly, we hold that this amount cannot be brought to tax. Respectfully following the ratio laid down in the assessment year 2010-11, we allow this ground of appeal. 39. Ground of Appeal No. 6 challenges the confirmation of addition ma....
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....lete the addition made on account of payment to gratuity and pension fund even though the said expenditures were not debited to the profit and loss account. 3. The Commissioner of Income-tax (Appeals) has erred in holding that the provisions of section 115JB are not applicable to banking companies. 4. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the addition made towards expenses attributable to exempted income under section 14A. 5. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the addition made on account of depreciation on the leased assets." 42. Ground of Appeal No. 1 is general I nature and do not require any adjudication. 43. Ground of Appeal No. 2 challenges the deletion of the addition made on account of payment of gratuity and pension fund. Brief facts surrounding this addition are as under : 43.1 The assessee-bank is required to contribute towards gratuity fund of the employees of the bank every year on the basis of actuarial valuation as per Accounting Standard 15 issued by the Institute of Chartered Accountants of India. During the fina....
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....s pertinent to mention here that one-fifth of the gratuity fund of Rs. 679,52,53,142 is worked out into Rs. 135,90,50,628 whereas the assessee-bank has debited Rs. 137,52,84,090. They were not able to explain the difference. Similarly, Rs. 2369.19 crores of pension fund includes Rs. 1853.60 crores for the existing employees and Rs. 515.59 crores for retired employees. Out of Rs. 1853.60 crores one-fifth of the expenditure is computed into Rs. 370.72 crores and hence the total amount of Rs. 886.31 crores alone (Rs. 515.59 + Rs. 370.72 crores) is allowable. However, the assessee-bank has debited a sum of Rs. 890.26 crores for which no explanation was given. Every assessment year is a self-contained unit and the profits and gains of an assessee have to be computed in accordance with law discussed above. Hence, the following amounts are disallowed : (a) Payment made to gratuity fund Rs. 679,52,53,142-Rs. 135,90,50,630 Rs. 543,62,02,512 (b) Payment made to pension fund Rs. 2369,18,89,449-Rs. 886,31,00,000 Rs. 1482,87,89,450 Excess amount to be disallowed Rs. 2020,49,91,960 As per the detailed discussion made above a sum of Rs....
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....e assessee has not debited to the profit and loss account, the entire amount of the additional liability. Now, it is settled law that the absence of entries in the books of account or treatment in the books of account has no bearing on the allowability of actual expenditure, once it is established that the liability had crystallised and which is in the revenue in nature. Reliance in this regard can be placed on the decision of the hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). This proposition of law has been reiterated in a plethora of decisions subsequently by various High Courts as well as the hon'ble apex court. Therefore, the reasoning of the Assessing Officer does not hold water. Even otherwise, these payments were subject to the provisions of section 43B. Section 43B permits deduction only in the year of payment. Therefore, we do not find any fallacy in the reasoning of the Commissioner of Income-tax (Appeals). 43.7 This ground of appeal is dismissed. 44. Ground of Appeal No. 3 of the appeal relates to the applicability of the provisions of section 115JB to a banking company. This issue is covered in favour of t....