TaxTMI 
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2022 (5) TMI 1537
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....lue was claimed as depreciation in their value amounting to Rs.436.81 crores as deduction. The AO noticed that the RBI, vide its Master Circular dated 02-09-2003, has classified the investments made by banks into three categories and also provided the methodology for valuing those investments. As per the above said circular, the Investments held to maturity should be valued at cost and no depreciation is to be provided in respect of this category. He also noticed that the Hon'ble Karnataka High Court, in the assessee's own case for AY 2004-05 and also in the case of ING Vysya Bank Ltd (ITA No.2886/2005), has held that the "investments held under HTM category" should be valued at Cost only. He further noticed that the assessee has valued the said investments "at cost" only in its books of accounts and the assessee has revalued the investments and the fall in the value of investment was claimed as depreciation for income tax purposes alone. In view of the above, the AO took the view that the assessee has followed two different methods of valuing "investments held to maturity", one for book purposes and another one for income tax purposes. The AO took the view that the above said dual....
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....ctional Karnataka High Court in the case of Vijaya Bank (ITA No.687/2008 dated 11.3.2013) and in the case of Karnataka Bank (ITA No.172/2009 dated 11.01.2013) was followed. Accordingly, the Ld CIT(A) deleted the addition in both the years. 21. We heard the parties on this issue and perused the record. We notice that the co-ordinate bench in AY 2009-10 (supra) has followed the decision rendered in the assessee's own case in ITA No.708/B/2010 dated 19-06-2013 relating to AY 2006-07 on an identical issue. The co-ordinate bench, in AY 2006-07, has noticed that the Hon'ble jurisdictional High Court has rendered its decision in the case of ING Vysya Bank Ltd (supra) without considering the decision rendered by Hon'ble Supreme Court in the case of UCO Bank (240 ITR 355)(SC). It was further noticed that the Hon'ble jurisdictional Karnataka High Court, in two subsequent decisions rendered in the cases of Vijaya Bank (supra) and Karnataka Bank (supra), has held that the depreciation claimed on investments 'held on maturity' by a bank has to be treated as 'stock in trade' in accordance with RBI guidelines and CBDT Circular. Accordingly, the co-ordinate bench followed later deci....
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....h consisted of interest disallowance of Rs.42.17 crores u/r 8D(2)(ii) and expenditure disallowance of Rs.2.98 crores u/r 8D(2)(iii). 5.1 The Ld CIT(A) took the view that the AO has not recorded dissatisfaction over the claim of the assessee with regard to the disallowance to be made u/s 14A of the Act. Accordingly, he directed the AO to delete the disallowance. The revenue is aggrieved. 5.2 We heard the parties on this issue and perused the record. We notice that an identical issue was restored to the file of AO in the assessee's own case in AY 2012-13 (supra) with the following observations:- "8. We have heard the parties on this issue and perused the record. We have noticed that the assessee has not disallowed any expenditure u/s 14A of the Act, even though it has earned exempt income. From the asst. order we noticed that the AO has made following observations with regard to the claim of the assessee. "It is a known fact that there are certain expenses for earning these exempted income. The actual income which qualifies for exemption can be ascertained only after considering the expenses related to it and such expenses are disallowable under the provisions of Sec.14A of th....
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.... in the instant year, we are of the view that the assessing officer has recorded dissatisfaction. Accordingly, the decision rendered by the co-ordinate bench for asst. year 2008-09 is distinguishable. 10. The Hon'ble Supreme Court has settled the issue relating to disallowance to be made u/s 14A of the Act in the case of Maxopp Investments Ltd., Vs. CIT (Civil Appeal No.104-109 of 2015 dated 12/2/2018). The following observations made by the Hon'ble Supreme Court in para 39 of the order are relevant here. "39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits there from. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax.This triggers the applicability of Section 14A of the Act which is based on the theory of....
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....ree funds available with it is more than the value of investments. Hence, as per the decision rendered by Hon'ble jurisdictional high court in the case of Micro Labs Ltd. (Supra), interest disallowance is not called for. However, this contention of the assessee requires verification at the end of the AO. Since the assessee has earned dividend income, the disallowance u/s 14A is, in any way, called for. In view of the foregoing discussions, we are of the view that this issue requires fresh examination at the end of AO. Accordingly, we set aside the order passed by ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh." 5.3 In the current year also, we notice that the assessing officer has expressed his dissatisfaction at paragraphs 4.2 and 4.4 of his order. In this year also, the AO has disallowed interest expenditure without considering interest free funds available with the assessee. Hence this issue requires to be set aside to the file of AO for examining it afresh. 5.4 Before us, the Ld A.R also placed his reliance on the latest decision rendered by Hon'ble Supreme Court in the case of South Indian Bank Ltd (2021)(438 ITR 1)(SC), wherein the H....
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.... Hon'ble Supreme Court has expressed the view that the provisions of sec.14A would not be attracted when the income received on shares and securities held as stock in trade is assessed as business income. 5.5 As held in AY 2012-13, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining this issue afresh. In the set aside proceedings, the AO should also consider the effect of the decision rendered by Hon'ble Supreme Court in the case of South Indian Bank (referred supra). The assessee is free to make all contentions on this issue before the AO. 6. The next issue urged by the revenue relates to the relief granted by Ld CIT(A) in respect of disallowance made u/s 36(1)(viia) of the Act. During the year under consideration, the assessee had claimed deduction towards Provision for bad and doubtful debts (PBDD) u/s 36(1)(viia) of the Act as detailed below:- (i) 7.5% of the total income 10.18 crores (ii) 10% of aggregate average advances of rural branches 102.00 crores 112.18 crores The aggregate average advances of rural branches had been computed by the assessee at Rs.1020.08 crores. The assessee had aggregated month ....
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....disregarded, both the contentions of the assessee and the judicial pronouncements cited and upheld the Assessing Officer's view that it is only the incremental advances that has to be considered for the purpose of computing AAA. 7.2 Before us, the learned Authorised Representative for the assessee reiterated the submission that the language of Rule 6ABA is very clear and does not mandate that only incremental advances has to be considered and nothing can be read into it as has been done by the authorities below. It was submitted that this issue has been considered and decided in favour of the assessee by the co-ordinate bench of this Tribunal in the case of Canara Bank Vs. JCIT (2017) 60 ITR (Trib) 1 [ITAT (Bang)]. 7.3 Per contra, the learned Departmental Representative for revenue placed reliance on the orders of the authorities below. 7.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the issue before us; i.e. in respect of the computation of deduction under Section 36(1)(viia) of the Act; has been considered and decided by a co-ordinate bench of this Tribunal i....
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....assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36." From a bare reading of the above rule it is crystal clear that the said rules prescribe three steps for computing AAA in the following manner: Step One - In respect of each rural branch, note down the amounts of advances outstanding at the end of the last day of each month comprised in the previous year and aggregate the amounts so noted. Step Two- Divide the aggregate amount arrived at in Step One by the number of months for which the outstanding amounts have been taken into account for the purpose of Step One. Step Three- Aggregate the amounts arrived at under Step Two in respect of all the rural branches. Thus, it is clear that the said Rules do not provide for only fresh advances made by each rural branch during each month alone is to be considered. It only prescribes that the amount of advances made by rural branch and is outstanding at the end of the last day of each month shall be aggregated. Having regard to the plain provisions of the IT Rules, it cannot be construed that only fresh loans made by rural branches outstanding at the end of each month should be considered for....
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....nds of appeal are allowed for statistical purposes." 7.4.2 We find that the issue is settled in favour of the assessee by the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Canara Bank (supra) and in view thereof we hold that the computation of the AAA made by the Assessing Officer is incorrect. " 7.4.2 We find that this issue is covered in favour of the assessee by the aforesaid decisions of the co-ordinate benches of this Tribunal in the assessee's own case (supra) and that of Vijaya Bank (supra), and respectfully following the same, we hold that the computation of the AAA made by the Assessing Officer while working out the deduction under Section 36(1)(viia) of the Act is incorrect and therefore delete the disallowance made there under. Consequently, ground NO.3 of the assessee's appeal is allowed. 6.2 We notice that the co-ordinate bench has rejected the view taken by the AO that the 10% of aggregate average advances of rural branches shall be available only on incremental advances. The co-ordinate bench has held that the workings given by the assessee are in accordance with Rule 6ABA and hence the 10% of aggregate average advances o....
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....w that the Prudential write off is not eligible for deduction u/s 36(1)(vii) of the Act, since it is not actual write off. He then relied upon the decision rendered by Hon'ble Supreme Court in the case of Southern Technologies vs. ACIT (352 ITR 577)(SC), wherein it was held that the mere making of provision for NPA cannot be considered as write off u/s 36(1)(vii) of the Act. He also relied upon the decision rendered by Hon'ble Kerala High Court in the case of CIT vs. Hotel Ambassador (2002)(253 ITR 430)(Ker), wherein it was held that the deduction u/s 36(1)(vii) of the Act only if the assessee debits the same into the accounts as irrecoverable. Accordingly, the AO took the view that the amount of bad debts claimed by the assessee was mere provision and not actual write off. Before the AO, the assessee had placed reliance on the decision rendered by Hon'ble Supreme Court in the case of Vijaya Bank vs. CIT (2010)(320 ITR 166 (SC)) to reiterate that it is entitled for deduction u/s 36(1)(vii) of the Act. The AO expressed the view that the issue considered by Hon'ble Supreme Court in the case of Vijaya Bank (supra) related to category of "Loss Assets", which is required to be provided ....
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....he "provision for bad and doubtful debts" (PBDD) allowed u/s 36(1)(viia) of the Act is related to rural debts only and hence, in terms of the proviso to sec. 36(1)(vii), only rural debts written off as bad should be adjusted against the PBDD allowed u/s 36(1)(viia) of the Act. However, the Ld CIT(A) expressed the view that the PBDD allowed u/s 36(1)(viia) of Act is applicable to both Rural and non-Rural debts. Accordingly, he held that the entire amount of bad debts written off (both rural and non-rural) should be first adjusted against the PBDD a/c allowed u/s 36(1)(viia) of the Act and only the excess should be allowed as deduction. He expressed the view that the decision rendered by Hon'ble Supreme Court in the case of Catholic Syrian Bank (2012)(343 ITR 270)(SC) was rendered under the assumption that the banks would maintain separate PBDD a/c in respect of rural branches and non-rural branches and therefore it is possible to distinguish PBDD as one in respect of rural branches and non-rural branches. The Ld CIT(A) expressed the view that the claim of the bank that the provisions of sec. 36(1)(viia) are distinct and independent of sec. 36(1)(vii) is based on the old circular no.....
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....lause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds the provision made u/s 36(1)(viia). If we examine the facts of the present case in the context of aforesaid statutory provision, it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the actual deduction claimed u/s 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created u/s 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syr....
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....ural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(11(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks 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 CBDT ....
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.... urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii)." Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to non-rural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT (supra). Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to nonrural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to non-rur....
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....d independently u/s 36(1)(vii) of the Act without first adjusting the same against PBDD allowed under clause (a) of sec. 36(1)(viia) of the Act. 7.7 We heard the Ld D.R and perused the record. Now the core question that arises is whether the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and then the excess amount over and above the balance available in PBDD alone could be allowed as bad debts u/s 36(1)(vii) of the Act. 7.8 The provisions of sec. 36(1)(vii) allows deduction as under:- "36(1)(vii) 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 for 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 for bad and doubtful debts account under that clause. ........... Explanation 2 - For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section a....
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....ral branches for which separate accounts are maintained...." Referring to the above said observations, the revenue has taken the view that the Hon'ble Supreme Court has rendered its decision on the assumption that the banks would be maintaining two separate PBDD a/c, viz., one for rural branches and another one for non-rural branches. 7.10 It is possible that all banks may not be maintaining two separate accounts, as observed by the Hon'ble Supreme Court. Hence there was an apprehension in the minds of revenue with regard to the effect of the decision rendered by Hon'ble Supreme Court. For instance, if a particular bank is maintaining only a single PBDD a/c for the provision created u/s 36(1)(viia) of the Act and even if that bank is not having any rural branches, then it may try to avail the benefit of decision rendered by Hon'ble Supreme Court and may possibly contend that (i) the provision allowed u/s 36(1)(viia) shall apply only to rural branches. (ii) since it does not maintain two separate PBDD a/c for rural and non-rural advances, the bad debts relating non-rural branches need not be reduced from the PBDD a/c allowed u/s 36(1)(viia) in terms of sec. 36(2)(v) and the ....
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....1)(viia) of the Act under clauses (b) to (d). In view of the decision rendered in the case of Catholic Syrian bank, it is possible that the assessees covered by clause (b) to (d) may contend that the bad debts written off by them need not be adjusted against PBDD allowed u/s 36(1)(viia) of the Act, since the bad debts relate to "non-rural debts". Accordingly, we are of the view that the Explanation 2 has been inserted in order to bring the assesses covered by clauses (b) to (d) within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. Hence, in our view, advances given by rural and non-rural branches mentioned in Explanation 2 shall apply to the assesses covered by clause (b) to (d) of sec. 36(1)(viia) of the Act. 7.12 At this juncture, we may gainfully refer to the "MEMORANDUM EXPLAINING FINANCE BILL 2013", which brings out the intention of the Parliament in inserting Explanation-2 in sec. 36(1)(vii) of the Act. It is extracted below:- "Clarification for amount to be eligible for deduction as bad debts in case of banks:- Under the existing provisions of section 36(1)(viia) of the Income-tax Act, in computing the business income of certain banks and fin....
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....o not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances. It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of section 36(1). In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and sub-section (2), it is proposed to insert an Explanation in clause (vii) of section 36(1) stating that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account as referred to therein is made in respect of provision for bad and doubtful debts under section 36(1)(viia) and such account relates to all types o....
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....tion given by Hon'ble Supreme Court. 7.14 In the Memorandum explaining the purpose of introducing Explanation -2 in Sec. 36(1)(vii), it has been acknowledged that only the clause (a) refers to "rural branches". It has also been stated that the foreign banks do not have rural branches. The assesses covered by clause (b) to (d) may not be having rural branches. Hence, the memorandum explains as under with regard to the decision rendered by Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra):- "However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances." Because of the interpretation so given by Hon'ble Supreme Court, as discussed earlier, there arose a necessity for the Parliament to clarify that the PBDD allowed u/s 36(1)(viia) shall apply to all types of advances including advances made by rural branches. However, as stated earlier, the clause (a) to sec.36(1)(viia) has been held to be applicable to rural advances only and this interpretation has not been overridde....