TaxTMI 
TaxTMI 
2022 (6) TMI 1346
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....t of disallowance under section 36(1)(viia) and disallowance of diminution of Government securities, therefore, with the consent of parties all the appeals were clubbed, heard together and are decided by consolidated order to avoid the conflicting decisions. For appreciation of facts, the facts in assessment year 2009-10 are treated as lead case and the decision on the facts of this year would apply for all other years under appeal before us. The assessee in its appeal in ITA No.1542/AHD/2021 (AY2009-10) has raised the following grounds of appeal:- "1. The CIT(Appeals) erred in not allowing deduction of Rs.1,06,73,0092/- u/s 36(1)(viia) of the Income Tax Act, 1961 in respect of the provision made for bad and doubtful debts in accordance with the provision of the Gujarat Cooperative Societies Act,1961 read with the consequential provision in the bye-laws of the assessee." 2. The revenue in its cross appeal for AY 2009-10 in ITA No. 1542/Ahd/2016 has raised following grounds of appeal; "1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in deleting the disallowance of Rs.5,86,30,000/- made on account of diminution of valu....
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....urities and deduction of Rs. 8.567 Crore under section 36(1)(viia). During the scrutiny the assessee was asked to furnish justification on deduction under section 36(1)(viia). The assessing officer recorded that the assessee furnished following details:- "6.1 In the computation of income the assessee has claimed deduction of Rs.8,56,73,002/- U/s 36(1)(viia). The ae was asked to furnish the justification and working for the above claim. In response the assessee has submitted the calculation as under Gross Total income before claiming deduction U/s36(1)(viia) 10,20,63,748 7.5% 76,54,781 Avg. Aggregate Rural Advances 20,05,106,000 10% of above 20,05,10,600 Total deduction allowable 20,81,65,381 1) NPA provision debited to P&L a/c 75,000,000 2) Statutory bad debts provision made @15% of net profit 10,673,003 TOTAL 85,673,003 Deduction u/s 36(1)(viia) claimed was restricted to 85,673,003 4. The Assessing Officer after ref....
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....ssee claimed deduction of Rs.5.863 crores on account of diminution of Government Securities. The assessee in the note attached with the computation of income, claimed such deduction on the basis of decision of Hon'ble Apex Court in the case of United Commercial Bank (UCO Bank) vs. CIT 240 ITR 355 (SC). The assessee was issued show cause notice to justify such deduction. The assessee filed its reply to the said show cause notice. In the reply, it was submitted that such deduction is claimed for the first time on the basis of judgment of Hon'ble Apex Court in UCO Bank (supra). It was further claimed that assessee-co-operative bank has shifted its investment in Government Securities held in "Held to Maturity" (for short to as "HTM") category into current category for the first time vide Resolution dated 18.10.2008. The assessee also stated that as per Master Circular on Investment by Primary (Urban) Co-operative Banks, the banks may shift investment to / from "Held to Maturity" category with the approval of Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. The contention of assessee was not accepted by Assessing Off....
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.... Court was that the assessee was consistently following system of accounting from last past 30 years, which has been accepted by department. The assessing officer held that the assessee has claimed such deduction for the first time though such decision of Hon'ble Apex Court in UCO Bank (supra) was delivered much before purchased of securities, thus, case law relied by assessee is not applicable in the facts of the present case. On the aforesaid reasoning, the Assessing Officer disallowed the diminution of value of Govt. securities of Rs.5.865 crores. 6. Aggrieved by the disallowance of diminution as well as on deduction under section 36(1)(viia), the assessee filed appeal before the Ld. CIT(A). On the disallowance of diminution of valueon investment of Rs.5.863 crores, the assessee made similar submission as submitted before the Assessing Officer. In addition to assessee furnished the details of securities; consisting date of purchase, fixed value, book value, market value and difference in the following manner:- Particulars Date purchase of Face value Book value Market value Difference SLR-Current Category 6.17% GOI 2023 21.10.2003 2000.00 2....
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.... AFS category in fact assessee was followed method classification as per RBI's Master Circular dated 01.07.2008. The securities was held under the available for sale category has been consistently valued at market value/rate and only the incremental profit/loss has been offered/claimed in the return of income. 8. On the submission of assessee, Ld. CIT(A) required remand report from the Assessing Officer. The Assessing Officer furnished remand report with letter dated 21.05.2015, wherein he has written that before deciding the matter, the decision of Ahmedabad Tribunal in the case of DCIT, Mehsana Circle Vs Co-operative Bank of Mehsana Ltd. (22 taxmann.com 71) (Ahmedabad-Trib) may be considered. 9. The remand report of Assessing Officer was forwarded to assessee for its comment. The assessee filed its comment / rejoinder vide submission dated 23.10.2016. In rejoinder / reply, the assessee reiterated that as per RBI's Master Circular dated 01.07.2008 a bank is required to classify its entire investment portfolio into 3 categories i.e. HTM, AFS and HFT. A bank is allowed to shift investment to / from HTM category with the approval of Board of Directors once in a year. Accordingl....
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....f diminution of value on Government securities on the basis of judgment of Hon'ble Apex Court in the case of United Commercial Bank (supra). On the observation of assessing officer that such deduction is claimed for the first time on the basis of judgment, the ld CIT(A) noted that the assessee's claim that shifting of securities was done for the first time during the year and there was no such shifting in earlier years and thus there was no consequential effect and that similar method was followed in subsequent assessment years and loss of Rs.1.18 crores was claimed in assessment year 2011-12 and was allowed. The Ld. CIT(A) held that there is no bar to change the classification in the middle of the year, the classification can be changed only on approval of Board of Directors' approved such classification, as has been done in the middle of the year, then claim of loss on account of diminution of value in Govt. securities has no connection availability of deduction. Even if change would have been done in the beginning of the year it could change on 31.03.2009 and the amount of claim would still remain same. On the objection of Assessing Officer that for allowance of claim ....
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.....01 Bond maturing in 2028 49,000,000 40,655,000 8,345,000 Total (Rs) 504,960,000 446,330,000 58,630,000 Allowable claim for change in category of investments i.e. from HTM to AFS Sr. No. Govt. Security Type Purchase price Premium (discount) on acquisition Net value (excluding premium) Market value as on 31.03.2009 Diminution in value of investment 1 6.17% Bond maturing in 2023 202,560,000 2,560,000 2000,000,000 173,700,000 26,300,000 2 6.05% Bond maturing in 2019 253,400,000 3,400,000 250,000,000 231,975,000 18,025,000 3 6.01% Bond maturing in 2028 49,00,000 -1,,000,000 50,000,000 40,655,000 9,345,000 Total (Rs) 504,960,000 4,960,000 500,000,000 446,330,000 53,670,000 11. On perusal of the aforesaid details, the Ld. CIT(A) was of the view that premium amount of Rs.49.65 lacs as shown in the column No.4 is not eligible for deduction as the assessee is not claiming premium amount sepa....
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....T (2012) (136 ITD 102) held that under Banking Regulation Act, 1949, "The banking company" also includes "Cooperative Bank" and further held that as per definition of "Non-schedule Bank" given in the explanation under Section 37(1)(viia) a "banking company" as defined in Section (c) of Banking Regulation Act, which is not a scheduled bank is classified as Non-scheduled bank and it was held by Tribunal that consequently a cooperative bank would be classified as non-scheduled bank for the purpose of Section 36(1)(viia), thus, cooperative bank will get deduction of 10% only of rural branch advance which are defined under that Act. The decision of Tribunal was confirmed by the Hon'bleKerala High Court in its decision dated 3rd April, 2014 reported viz (365 ITR 343 Ker). The Hon'ble High Court held that there is no necessity to find out generic meaning of either urban or rural for the simple reason that explanation under Section 36(1)(viia) is self-defines what could be considered as a rural branch for the purpose of this Section. As per the High Court decision, the cooperative banks also falls under the category of non-scheduled bank for the purpose of this Section and held that author....
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....ee claimed deduction of diminution in the value of these securities from its book value to its market price as on 31/03/2009. There is no dispute with regard to valuation and the amount of diminution. The only issue is (i) whether change in valuation as a result of reclassification/shifting is allowable and/or (ii) whether only change in market price during the current year is allowable or entire difference between book value and market price as on 31/03/2009 is allowable. The ld. AR of the assessee submits that as per RBI master circular, banks are required to classify their investments into three categories and can reclassify or shift classifications with the approval of the board of directors. The provisions of circular, although, recommended such reclassification or shifting at the beginning of year, however, it does not prohibit in the middle of the year. The ld AR for the assessee submits that on careful reading of entire provision makes the intention clear that such recommendation is given to avoid further reclassification/ shifting i.e. more than once in a year to maintain stability but does not prohibit it to be done in the middle of the year. Such intention is clear from ....
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.... dated 01/07/2008 shifting of investment from HTM category to AFS category normally be allowed at the beginning of the year while the assessee has shifted in the middle of year. The assessee has not given an extraordinary circumstances for such shifting. Further the categorisation of investment is not separately shown in the balance sheet. The ld. CIT(A) allowed the relied to the assessee by taking a view that the assessee claimed deduction of Rs. 5.863 crore on account of diminution of valuation on government securities on the basis of judgment of Hon'ble Apex Court in the case of United Commercial Bank (supra). It was explained before Assessing Officer that such deduction is claimed for the first time on the basis of judgment. As per Assessing Officer, the depreciation on investment during the year was only Rs.51.17 lakhs on the basis of his observation that depreciation reserved has increased to Rs.5.90 crores as on 31.03.2009 from Rs.5.39 crores as on 31.03.2008. Thus, as per Assessing Officer, the maximum claim during the year could have been Rs.51.17 lacs only. The Assessing Officer held that if the assessee really got such approval of board of director from to HTM catego....
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....on appreciation of facts find that in subsequent year, the securities held under the AFS category have been consistently valued at market rate and only the incremental profit/loss has been offered/claimed in the return of income and which has been accepted by Assessing Officer. The loss as has been allowed in subsequent year on the objection of Assessing Officer that in the balance-sheet there is no separate classification for HTM and ASF. The Ld. CIT(A) held that there is no requirement of separate disclosure of HTM category and ASF category and as per the RBI's Master Circular, the investment should continue to be classified in Govt. Securities, shares & Bond of PSU and others. The categorization in the case of assessee has been done separately as per RBI's requirement and held that assessee is eligible for claim of deduction under diminution in the value investment shifted from HTM category to ASF category. The Ld. CIT(A) also relied upon the decision of ITAT Mumbai Benches in the case of Yes Bank Ltd. Mumbai vs. DCIT in ITA No.5910/Mum/2012 for assessment year 2006-07. 21. We find that in State Bank of Mysore Vs DCIT (supra), the coordinate bench of tribunal on similar groun....
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....trade. During the course of proceedings before us, the learned AR has filed the assessment order in the case of the assessee for the asst. years 2000-01 to 2002-03. The depreciation claimed in all these asst. years has not been disallowed .Thus, the revenue is consistently accepting that depreciation is allowable. This Bench in the following cases has allowed such depreciation on the valuation of the securities held by the Bank: (1) Karnataka Bank Ltd. v. Jt. CIT ITA No. 50/BANG/97 dated 27th July, 2003. (2) ING Vysya Bank Ltd. v. Dy. CIT [2006] 6 SOT 606 (Bang.). 17. Considering the above discussion, it is held that the assessee is entitled to value all the investment at cost prices or market value whichever is lower by treating such investment as stock-in-trade. . . ." 7.3 The Hon'ble Tribunal in IT Appeal No. 112/Bang./2008, dated 3-12-2008 in the case of Corporation Bank v. Asstt. CIT (2009-TIOL-75-ITAT-BANG), by following the decision of the Hon'ble Tribunal in the case of Asstt. CIT v.Vijaya Bank (supra), has held that- "16. Considering the facts and circumstances of the case before us and respectfully following the decisio....
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....oes not cover cooperative banks. The legislature has placed cooperative bank as a different category than non-scheduled bank. Accordingly, deduction of provision for bad and doubtful debts with respect to advance of rural branch is not allowable to the assessee-bank. The ld CIT(A) allowed relief to the assessee to the extent of Rs. 7.500 Crore by following the order of Tribunal in Kannur District Co-operative bank (supra) and held assessee is eligible for deduction of 10% of aggregate average advances also as advanced by its rural branch. The ld AR submits that assessee has claimed total deduction of Rs. 8.567crores which also includes deduction of Rs. 1.067 crore being 15% statutory transferred to bad debts reserve. The ld. CIT(A) was of the view that amount of Rs. 1.067 crore would not qualify for deduction in view of decision of Ahmedabad Tribunal in assessee's own case for A.Y. 2008-09. Thus, granted partial relief to the assessee to the extent of Rs.7.500 crores and upheld the disallowance to the extent of Rs. 1.067 crore. The disallowance of Rs. 1.067 Crore is the subject matter of assessee's appeal. The ld AR for the assessee further submits that it is settled law now that a....
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....er). The Hon'ble High Court held that there is no necessity to find out generic meaning of either urban or rural for the simple reason that explanation under Section 36(1)(viia) is self-defines what could be considered as a rural branch for the purpose of this Section. As per the High Court decision, the cooperative banks also falls under the category of non-scheduled bank for the purpose of this Section and held that authorities below were justified in opining that the benefit of 10% of aggregate of average advances is applicable to cooperative bank also, provided rural branches have advanced such amounts and such rural branches means a branch as explained under explanation (ia) as held by the High Court in Lord Krishna Bank 339 ITR 606. The ld. CIT(A) by following the decision of Tribunal held that assessee is eligible for deduction of 10% of aggregate average advances also as advanced by its rural branch. 27. Before us, the ld. AR of the assessee also vehemently submitted that it is a settled position in the law that explanation to Section 36(1)(viia) includes 'rural branch' of 'cooperative banks' as per the decision of Hon'ble Kerala High Court High. We find merit in the sub....
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....eation of the reserve is by way of appropriation of net profit. The Assessing Officer disallowed and ld. CIT(A) confirmed. The ld. CIT(A) also held that the issues decided against the assessee by Ahmedabad Tribunal in A.Y. 2008-09, reported viz [36 taxmann.com 517 (Ahd.-Trib)]. The ld. AR of the assessee submits that transfer to statutory bad debts reserve appears in the annual report as a proposed appropriation subject to approval in general body meeting of the members and as such disclosure and treatment is as per norms and practice followed by all cooperative banks as governed by the State Cooperative Act. Thus, such provision being an actual appropriation of profit shall be allowed as deduction. The ld. AR for the assessee submits that nomenclature or treatment in the books of account is not decisive or conclusive for a particular deduction otherwise allowable under the law, especially when the amount is in fact reduced from profits, even though as appropriation in the books of account as held by the Hon'ble Supreme Court in Kedarnath Jute Manufacturing Company (1971) 82 ITR 363 (SC). The ld. AR for the assessee further submits that similar deduction was allowed by the Assessin....
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.... claimed in the Profit and loss account but it is claimed in the computation of income and further similar issue was decided against the assessee in earlier assessment year i.e. 2008-09. 33. Before us, the ld AR for the assessee made two fold submissions, firstly, the assessee claimed deduction of statutory bad debts reserve created during the year at the rate of 15% of the net profit as per Gujarat State Co-operative Act as provision for bad and doubtful debts and this creation of the reserve is by way of appropriation of net profit. Secondly, the ld. CIT(A) also held that the issues decided against the assessee by Ahmedabad Tribunal in A.Y. 2008-09, which is factually wrong as per the contention of ld AR for the assessee. We shall take second contention first. For appreciation second contention of ld AR of the assessee, we perused the copy of assessment order dated 31.12.2010 passed under section 143(3), order of ld CIT(A) and order or Tribunal for AY 200809, and find that issue of appropriation of 15% of statutory debts was not the subject matter in appeal before Tribunal, rather it was allowed by the assessing officer while passing the assessment order itself, though, the as....
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....he result, the ground of appeal raised by the assessee is allowed. 36. In the result, the appeal of the assessee is allowed. ITA No.1543/Ahd/2016 for AY 2010-11 by assessee. 37. The assessee has raised following grounds of appeal. "1. The C.I.T.(Appeals) erred in not allowing deduction of Rs. 1,93,84,396/- u/s. 36(1)(viia) of the Income Tax Act, 1961in respect of the provision made for bad and doubtful debts in accordance with the provision of the Gujarat Cooperative Societies Act, 1961 read with the consequential provision in the bye-laws of the assessee." 38. We find that the assessee has raised similar grounds of appeal as raised in appeal for AY 2009-10, which we have allowed, therefore following the principle pf consistency the grounds of appeal of assessee for AY 2010-11 is also allowed with similar observation. 39. In the result, the appeal of the assessee for AY 2010-11 is allowed. ITA No.1530/Ahd/2016 for AY 2010-11 by revenue. 40. The revenue has raised following grounds of appeal. "1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in directing the AO to allow deduction claimed by the assess....
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....(Appeals) erred in directing the AO to allow deduction claimed by the assessee of Rs.7,25,00,000/- @ 10% of average advances made by rural branches of the assessee bank u/s 36(1)(viia) of the Act, holding that the assessee co-operative bank falls under the category of non-scheduled bank and eligible for above deduction without appreciating the Explanation (ia) below section 36(1)(viia) of the Act. 2. The Ld. CIT(A) failed in interpreting the statute in the entirety, section 36(1)(viia) enshrines the three categories of banks namely Schedule Bank, Non-Schedule Bank and Co-operative Bank for deduction of bad and doubtful debts @ 7.5% of the total income computing before making any deduction under this clause and chapter VIA, whereas for the provisions for deduction @10% of average advances made by the rural branches, the Explanation (ia) clearly defines rural branches of Schedule and Non-Schedule Banks. The assessee being a Cooperative Bank did not find its place in the Explanation (ia) below section 36(1)(viia) of the Act, rendering the findings of Ld. CIT(A) erroneous and misleading. 3. The appellant craves to add to, amend or alter the above grounds as may be dee....