TMI Blog2014 (10) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... account following the RBI guidelines HTM investments are valued at cost and in respect of AFS and HFT investments, the valuation is carried out basket-wise and within the prescribed basket any appreciation in security is adjusted against the depreciation of other any security - the change in the method of valuation has been partly accepted by the Revenue and for the reason that qua the investments classified as AFS and HFT there is no dispute and, the valuation of such closing stock at lower of cost or market value, has been accepted - Relying upon Commissioner Of Income-Tax Versus Corporation Bank Limited [1988 (8) TMI 90 - KARNATAKA High Court] - there are no statutory rules for the valuation of closing stock but the ordinarily accepted method of commercial accounting support the valuation of closing stock based on the lower of the cost or market value - the method of valuation of the closing stock adopted by the assessee i.e. cost or market value, whichever is lower is fair and proper and the income-tax authorities have erred in not accepting the same. The stand of the assessee is upheld to value the stock of its investments / securities at lower of cost or market value - B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a banking company - the amendment does not negate the ratio of the precedents, which hold the field so far as the present AY is concerned - assessee, being a banking company, does not fall within the purview of section 115JB of the Act – Decided in favour of assessee. Deduction on amortization of public issue expenses u/s 35D – Held that:- The alternative plea of the assessee deserves to be considered for the purposes of determining the quantum of amount disallowable with respect to the assessee's claim for amortization of expenditure u/s 35D of the Act – thus, the matter is remitted back to the AO to re-compute the net expenditure incurred on public issue carried out by the assessee, and the disallowance shall be limited to such 'net' expenditure – Decided in favour of assessee. Invocation of section 14A – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that following the decision The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] - since the interest-free funds available with the assessee were in excess of the investments which yielded the exempt income - therefore, no in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act, 1961 (in short the Act ). 3. In the appeal preferred by the assessee, the following Grounds have been raised in the Memo of Appeal :- 1. The CIT(A) erred in not allowing depreciation on valuation of securities (scrip-wise) of ₹ 375,89,72,351/- despite decision in UCO Bank - ITR (SC) and Corporation Bank - ITR (Kar) and other relevant case law. The addition is wrong in law based on relevant case law. 2. The CIT (Appeals) erred in not allowing depreciation of ₹ 1,52,07,500/- on items of Plant Machinery considering them as items of Furniture Fixtures. 3. The CIT (Appeals) erred in not considering the claim of ₹ 68,06,15,000/- u/s 36(1)(vii) regarding Non-Rural Bad Debits written off. 4. Apart therefrom the assessee has raised 3 Additional Grounds of Appeal vide an application dated 18.02.2011, which read as under :- 1. It may please be held that the correct amount of deduction u/s 36(1)(viia) of the I.T. Act, 1961 works out to ₹ 155,48,95,324/- (subject to change on account of total income as defined in the said section) as against the amount of ₹ 102,67,99,000/- erroneously claimed by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, bonds, etc. It has been treating all the investments as stock-in-trade and income from investments, such as interest, profit / loss on the sale of these investments, etc. were offered to tax as business income in the past years and the same are assessed as such. In the books of account, assessee bank classifies the investments into three categories following the Reserve Bank of India guidelines, viz., Held to Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT). In its books of account, following the RBI guidelines, assessee bank has all along been valuing the HTM investments at cost. In respect of AFS and HFT investments the same are divided into 7 baskets and the valuation was carried out basket-wise and within the basket, any appreciation in value of a security is adjusted against depreciation in the value of another security. If the resultant figure in a basket is net depreciation, the same is debited to Profit Loss Account. However, if the net figure is an appreciation, the same is ignored and is not adjusted against the depreciation in respect of other baskets. 8. For the purposes of income-tax, upto the previous year ending 31.03.2004 i.e. correspondin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as since deleted the said addition and therefore the relief now sought to be claimed by way of Ground of Appeal No.1 is to be taken as ₹ 359,24,58,508/- only. On this aspect, there was no dispute between both the parties and therefore the Ground of Appeal No.1 is to be read as referring to a sum of ₹ 359,24,58,508/- as against ₹ 375,89,72,351/- stated therein. 11. Now, we may touch-upon the grievance in the cross-ground raised by the Revenue. In this context, it is to be noted that during the previous year relevant to the assessment year 2005-06, assessee bank shifted certain securities from AFS to HTM category following the RBI guidelines. As per the RBI guidelines, securities could be shifted from AFS to HTM category at lower of cost or market value on the date of shifting. The resultant depreciation on the date of shifting was debited to Profit Loss Account and the value of the securities appearing in the books of account was reduced to that extent, following the RBI guidelines. The depreciation arising on shifting of securities from AFS to HTM category was computed at ₹ 213,92,63,435/- which was claimed as a deduction in the return of income filed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion where a double deduction is allowed to the assessee in the context of the two cross-grounds raised before us, namely, Ground of Appeal No.1 of the assessee and the Ground of Appeal No.1 raised by the Revenue in its appeal. 14. Now, we may consider the claim of the assessee of loss on valuation of closing stock of securities at ₹ 359,24,58,508/- on account of the change in the method of valuation of securities undertaken for the first time during the year under consideration. The assessee has valued all the securities, including the HTM securities, as on the last day, i.e. 31.03.2005 at lower of cost or market value. So far as the valuation of AFS and HFT securities is concerned, the Revenue has accepted the stand of the assessee because according to the Revenue such securities represent stock-in-trade of the assessee bank and thus the valuation of such securities at the year end at the lower of cost or market value is acceptable. However, the Revenue has not accepted the changed method of valuation with respect to the HTM securities. The reason advanced for the same is that the HTM securities are in the nature of long term permanent investments since they are Held upt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has not referred to any resolution passed by the Board of Directors of the assessee-bank regarding the change in the method of valuation of the securities. 16. The learned counsel appearing for the assessee has assailed the stand of the Revenue by pointing out that the change in the method of valuation of the securities for the purposes of income-tax is bona-fide and the changed method has been consistently followed by the assessee hereinafter. The learned counsel submitted that in so far as the assessee bank is concerned, it was treating all investments as 'stock-in-trade' even in the past years inasmuch as the income from such investments such as interest, profit on sale of investments, etc. have always been offered to tax as 'business income' and the same was also assessed as such by the income-tax authorities. The only change is with regard to the method of valuation of closing stock of securities made from assessment year 2005-06 onwards, whereby assessee has valued the investments at the lower of cost or market value, which is a universally accepted method of valuation. The learned counsel pointed out that the classification of investments in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation of closing stock of securities adopted in the books of account following the RBI guidelines, was also adopted by the assessee for the purposes of income-tax. It is in the instant assessment year of 2005-06 and in subsequent years, that assessee has changed the method of valuation for the purposes of its income-tax computation whereby assessee has valued the closing stock of securities / investments at lower of cost or market value. The resultant effect of such change in the assessment year 2005-06 amounting to ₹ 359,24,58,508/- is not accepted by the Revenue, and hence the impugned addition of ₹ 359,24,58,508/-. 18. Factually speaking, the change in the method of valuation has been partly accepted by the Revenue and we say so for the reason that qua the investments classified as AFS and HFT there is no dispute and, the valuation of such closing stock at lower of cost or market value, has been accepted. The dispute is only with regard to the closing stock of HTM securities, which according to the Assessing Officer, should continue to be valued 'at cost' only for the purposes of income-tax computation. 19. In the present context, the judgement of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite appropriate, and in fact is line with a method approved by the Hon'ble Supreme Court in the case of Chainrup Sampatram (supra). In-fact, the only basis for the Revenue to challenge the bona-fides of the change is that the change has been effected only for the purpose of assessment of taxable income and is not incorporated in the account books. The aforesaid plea of the Revenue, in our view, is quite misplaced because it is well understood that assessee is a banking company and is statutorily mandated to maintain its books of account in terms of the RBI guidelines. On the other hand, the assessment of taxable income has to be based on the principle of law and cannot be guided merely by the treatment meted out to a particular transaction in the account books. In-fact, this aspect of the controversy has also been answered by the Hon'ble Karnataka High Court in the case of Corporation Bank Ltd. (supra) by relying on the judgement of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT, (1971) 82 ITR 363 (SC). Therefore, we do not find any merits in the above objection of the Revenue. Moreover, the plea of the learned CIT-DR that nature of HTM se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee submitted that because of the change in the valuation method of the investments, assessee had re-worked the entire income relating to the investments/securities by preparing an 'Investment Trading Account'. The learned counsel explained that the assessee was also undertaking sale and purchase of securities and therefore the profit / loss thereon was also liable to be adjusted having regard to the change in valuation of the securities/investments. In this context, a statement showing the 'Investments Trading Account' and the effect of the change in the method of valuation of investments was furnished by way of tabulation in the course of hearing. 23. The learned counsel for the assessee pointed out that an Investment Trading Account for the period ending on 31.03.2005 was submitted to the CIT(A) as a measure to enable the computation of real income of the assessee on account of valuation of investments, sale of investments as per books, depreciation in value of investments as per books, amortization of securities, etc.. The plea of the assessee in this regard has been put by way of a Note, which reads as under :- 1.11.1. As submitted during the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the earlier paragraphs. The Assessing Officer shall allow the assessee an appropriate opportunity of being heard and thereafter re-work the computation of income as per law and keeping in mind the aforesaid directions. Thus, on Ground of Appeal No.1 assessee succeeds. 25. The Ground of Appeal No.2 raised by the assessee is with regard to the depreciation of ₹ 1,52,07,500/- on items of Plant Machinery, which according to the assessee have been wrongly considered as items of Furniture Fixtures. 26. At the time of hearing, it was a common ground between the parties that similar dispute has been adjudicated by the Tribunal in the assessee's own case for assessment year 2004-05 vide ITA No.967/PN/2008 dated 30.05.2014, wherein the operating portion of the order reads as under :- 43. In our considered opinion, the action of the Assessing Officer is quite suspect having regard to the parity of reasoning laid down by the Hon'ble Bombay High Court in the case of Central Bank of India (supra) as well as Hon'ble Delhi High Court in the case Punjab Sind Bank Ltd. (supra). In both the judgements, it clearly emerges that in the case of a banking c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be canvassed that the said claim is covered by the judgement of the Hon'ble High Court in the case of Catholic Syrian Bank Ltd. vs. CIT, (2012) 343 ITR 270 (SC) and in the case of assessee for assessment years 2002-03, 2003-04 and 2004-05 the Tribunal vide its order dated 30.05.2014 (supra) admitted such an Additional Ground but remitted the same back to the file of the Assessing Officer for adjudication in the light of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra). The aforesaid factual matrix has not been disputed by the learned CIT-DR appearing for the Revenue. As a result, following the precedent in the assessee's own case, we deem it fit and proper to direct the Assessing Officer to consider the said claim of the assessee in the light of the judgement of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra). Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity to put-forth its claim and only thereafter he shall proceed to adjudicate the claim of the assessee as per law. Thus, on this Ground assessee succeeds for statistical purposes. 29. In so far as the Addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful debts made by - (a) a scheduled bank [not being [* * *] a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and onehalf per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding [ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner : 10. A bare perusal of aforesaid section clearly brings out that the deduction specified therein is in respect of any provision for bad and doubtful debts made by .. an eligible assessee. The presence of the aforesaid expression in the section supports the plea of the Revenue, which is to the effect that the deduction allowable under Section 36(1)(viia) of the Act is in respect of the provision made by the assessee. In our considered opinion, the judgement of the Hon'ble Punjab Haryana High Court in the case of State Bank of Patiala (supra) clearly covers the controversy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for claiming such deduction. In view of the aforesaid judgement of the Hon'ble Punjab Haryana High Court, in our view, the position sought to be canvassed by the assessee deserves to be repelled. We reproduce hereinafter the relevant portion of the order of the Hon'ble High Court, which reads as under :- 5. Sec.36(1)(viia) of the Act as applicable to the asst. yr. 1985- 86, reads as under : in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of cl.(viiia) or a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) or an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such bank, computed in the prescribed manner, whichever is higher. 6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debts equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, in our view, the lower authorities were justified in restricting the deduction to ₹ 50,00,000/-, being the amount of Provision actually made in the books of account. 12. The learned counsel for the assessee has cited certain decision in support of his proposition that the claim of deduction under Section 36(1)(viia) of the Act is not linked to making of a Provision in the account books. At the outset, we may observe that the decisions relied upon by the assessee are of various Benches of the Tribunal and not of any High Court. Therefore, the judgement of the Hon'ble High Court in the case of State Bank of Patiala (supra), which is contrary to the decisions of the Tribunal relied upon by the assessee; and being solitary judgement of a High Court, is required to be applied, having regard to the established norms of judicial discipline. For the said reason, we refrain from discussing each of the decisions of the Tribunal relied by the assessee before us. 13. The other plea of the assessee was that the contents of the CBDT Circular dated 26.11.2008 (supra) is contrary to the provisions of Section 36(1)(viia) of the Act and therefore the same should be disrega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of provision made in the books of account for bad and doubtful debts. 31. In so far as the Additional Ground of Appeal No.2 is concerned, the same is with respect to the exemption u/s 10(23G) of the Act in relation to interest income earned by the assessee on infrastructural advances. On this aspect the plea of the assessee is that a similar claim has been admitted by the Tribunal in its order dated 30.05.2014 (supra) but the matter was remitted back to the file of the Assessing Officer to decide on merits, having regard to the facts and circumstances of the case. Following the aforesaid precedent in the present year also we restore the matter back to the file of the Assessing Officer for adjudication on its merits, having regarding to the facts and circumstances of the case. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity to put-forth its claim and the Assessing Officer shall thereafter adjudicate the claim of the assessee as per law. Thus, on this Additional Ground of Appeal No.2 assessee succeeds for statistical purposes. 32. The Additional Ground of Appeal No.3 relates to the claim of the assessee that the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.08.2011). Similar is the decision of the Hyderabad Bench of the Tribunal in the case of State Bank of Hyderabad (supra). In so far as the objection of the learned CIT-Departmental Representative, based on the amendment made to section 115JB of the Act by the Finance Act, 2012 is concerned, the same is misconceived because the said amendment is applicable from assessment year 2013-14 onwards. Therefore, the aforesaid amendment does not negate the ratio of the aforesaid precedents, which hold the field so far as the assessment year before us is concerned. Therefore, following the aforesaid precedents and in the absence of any contrary decision, we hereby hold that assessee, being a banking company, does not fall within the purview of section 115JB of the Act. The Assessing Officer is hereby directed to consider the aforesaid legal position as and when he is to finally determine the total income. Thus, on this Additional Ground of Appeal No.3 assessee succeeds. 36. In the result, so far as the assessment year 2005-06 is concerned the appeal of the assessee in ITA No.1618/PN/2008 is partly allowed whereas the cross-appeal of the Revenue in ITA No.1505/PN/2008 is dismissed. 37. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure after deducting the income earned on the application money be disallowed. 8. In the facts and circumstances of the case and in law, the disallowance of ₹ 139,27,20,607/- made by the learned CIT (A) u/s 36(1)(vii) of the I.T. Act 1961, being bad in law, arbitrary, perverse and legally unsustainable. The said claim may please be allowed to the appellant. The learned CIT (A) erred in holding that the appellant had not written off the debts, which is against the facts. 10. In the facts and circumstances of the case and in law, the appellant submits that the full amount considered as donation is contribution to the society for the promotion of the business and reputation. Hence full amount may please be allowed as deduction u/s 37. 11. In the facts and circumstances of the case and in law, the learned CIT (A) has erred in restricting the claim made by the appellant u/s 36[1][viia] of the I.T. Act 1961 to ₹ 83,00,00,000/- as against the claim of ₹ 172,49,54,970/-. It may please be held that the correct amount of deduction u/s 36(1)(viia) is ₹ 172,49,54,970/- [subject to change on account of total income as defined in the said sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the provision made by it, u/s.36(1)(viia), pertained to the rural advances whereas the facts emerging from the financial accounts prove to the contrary; and, the learned Commissioner of Income-tax (Appeals) has also erred in not giving opportunity to the Assessing Officer to examine and rebut the above claim of the assessee as was required under Rule 46A of the Income-tax Rules, 1962. 6. The learned Commissioner of Income-tax (Appeals) has erred in deciding on the issue of provision u/s.36(1)(viia) without taking cognizance of the specific request made by the Assessing Officer in his remand report dated 05.02.2013 to exclude the non-rural advances for the purpose of computing deduction u/s.36(1)(viia) of the Act. 7. The learned Commissioner of Income-tax (Appeals) has erred in holding that the assessee is entitled to deduction of ₹ 1,00,00,000/- u/s.37 of the Income-tax Act, 1961 in respect of the donations of ₹ 75,00,000/- and ₹ 25,00,000/- paid by it to the Maha Bank Agriculture Research and Development and to the Gramin Mahila Va Bal Vikas Mandal respectively. 8. The learned Commissioner of Income-tax (Appeals) has erred in failing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. The factual matrix of the claim, as noted by the CIT(A) in para 8.1 of his order shows that the assessee had written back a provision of ₹ 6,79,45,780/- by way of credit to Profit Loss Account and thus offered it for taxation. The said amount represented excess provision made in the past on account of fall in value of investments. The assessee had offered such write back of excess provision, on the strength that in the past years the provision made was claimed as a deduction out of taxable income. However, it was during the impugned assessment proceedings, assessee found that in the past year of 2001-02 deduction was not allowed in respect of such provision. Out of such disallowed provision a sum of ₹ 4,30,01,225/- was recovered, which formed a part of the excess provision of ₹ 6,79,45,780/- offered for tax in this year. Because such amount was not allowed in the past as a deduction, assessee claimed that the sum of ₹ 4,30,01,225/- be not considered as an amount exigible to income tax in this year. In our view, the aforesaid claim could not have been foreseen by the assessee at the time of filing of the return of income as it has emerge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f denial of assessee's claim for amortization of expenditure u/s 35D of the Act. The learned counsel has relied upon the judgement of the Hon'ble Rajasthan High Court in the case of CIT vs. Neha Proteins Ltd. (2008) 306 ITR 102 (Raj) = only for the purpose of supporting his proposition that the amount of interest accrued on the share application monies lying in deposit with the bank has a nexus with the expenditure incurred on raising of the public issue and therefore it is only the net expenditure which should be considered for denying the benefit of amortization u/s 35D of the Act. The learned CIT-DR has opposed the plea of the assessee but the factual aspect of the matter has not been assailed. 45. In our considered opinion, the alternative plea of the assessee deserves to be considered for the purposes of determining the quantum of amount disallowable with respect to the assessee's claim for amortization of expenditure u/s 35D of the Act. Accordingly, we restore the matter back to the file of the Assessing Officer to re-compute the net expenditure incurred on public issue carried out by the assessee, and the disallowance shall be limited to such 'net' exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,49,54,970/-, which was restricted by the CIT(A) to ₹ 83,00,00,000/- representing the amount of Provision for bad and doubtful debts actually made in the account books. This aspect of the controversy has already been adjudicated by us in assessee's appeal for assessment year 2005-06, wherein it has been held that the deduction u/s 36(1)(viia) of the Act is admissible only to the extent of Provision for bad and doubtful debts actually made in the books of account. The CIT(A) has already allowed ₹ 83,00,00,000/- following the aforesaid proposition which is hereby affirmed, and the balance of assessee's claim is inadmissible as the corresponding Provision has not been made in the books of account. Thus, assessee's Ground of Appeal No.11 and Ground of Appeal Nos.2 to 6 of the Revenue are dismissed. 50. The Ground of Appeal No.12 relates to the claim of the assessee that the provisions of section 115JB of the Act are not applicable to it, being a banking company, which stands on similar footing as additional Ground of Appeal No.3 considered in assessee's own case for assessment year 2005-06 in the earlier paragraphs. Our decision in the said appeal with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year is to be allowed in full. The other donation which qualifies for business expenditure u/s 37 is the contribution made by the appellant for ₹ 25 lakhs towards the corpus of GMBVM (Gramin Mahila Va Bal Vikas Mandal) which is a trust sponsored by the appellant since the year 1989 for empowerment of rural women. The appellant has in respect of the other amounts, already been allowed the benefit of deduction u/s 80G. The claim of the appellant in respect of these other donations u/s 37 is not fully established to be solely and exclusively for the purposes of business. While allowing the amounts referred to above, the Assessing Officer would only allow the balance amount (taking into account the deduction already allowed u/s 80G). Additional ground no.2 is treated as partly allowed. 57. We find no reasons to interfere with the aforesaid conclusion of the CIT(A) as no infirmity has been demonstrated by the Department and accordingly the same is affirmed. Accordingly the Revenue fails on this Ground. 58. In the result, for assessment year 2006-07, appeal of the assessee vide ITA No.1135/PN/2013 is partly allowed that of the Revenue vide ITA No.1219/PN/2013 is dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it may please be held that no disallowance u/s 14A of I. T. Act, 1961 is warranted in the case. 7. The appellant submits that the amortization of public issue expenses is allowable expense u/s 35D and same may please be allowed to the appellant. 8. Without prejudice to the above ground, the appellant submits that only the net expenditure after deducting the income earned on the application money be disallowed. 9. In the facts and circumstances of the case and in law, the learned CIT (A) has erred in restricting the claim made by the appellant u/s 36[1][viia] of the I.T. Act 1961 to ₹ 138,47,60,000/- as against the claim of ₹ 252,47,36,951/-. It may please be held that the correct amount of deduction u/s 36(1)(viia) is ₹ 252,47,36,951/- [subject to change on account of total income as defined in the said section]. The Learned CIT (A) has failed to appreciate that the deduction should not be restricted to the provision made in the books accounts. 10. An amount of ₹ 16,51,995/- being the actual loss sustained by the appellant bank on account of frauds in the accounts of customers, the same may please be allowed as deduction as busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Commissioner of Incometax (Appeals) has erred in routinely accepting the assessee's claim that the provision made by it, u/s.36(1)(viia), pertained to the rural advances whereas the facts emerging from the financial accounts prove to the contrary; and, the learned Commissioner of Income-tax (Appeals) has also erred in not giving opportunity to the Assessing Officer to examine and rebut the above claim of the assessee as was required under Rule 46A of the Income-tax Rules, 1962. 6. The learned Commissioner of Income-tax (Appeals) has erred in deciding on the issue of provision u/s.36(1)(viia) without taking cognizance of the specific request made by the Assessing Officer in his remand report dated 05.02.2013 to exclude the non-rural advances for the purpose of computing deduction u/s.36(1)(viia) of the Act. 7. The learned Commissioner of Income-tax (Appeals) has erred in holding that the assessee is entitled to deduction of ₹ 8,76,000/- u/s.37 of the Income-tax Act, 1961 in respect of the donations of ₹ 5,76,000/- and ₹ 3,00,000/- paid by it to the National Institute of Bank Management (NIBM) and to the Rajiv Gandhi Foundation respectively. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of ₹ 2,63,45,285/- worked out by the assessee. Instead, the Assessing Officer computed the disallowance u/s 14A of the Act by application of Rule 8D of the Rules at ₹ 3,56,69,000/-. A disallowance of ₹ 3,21,99,000/- was worked out by applying clause (ii) of sub-rule (2) of Rule 8D of the Rules and an amount of ₹ 34,70,000/- was worked out by applying sub-clause (iii) of sub-rule (2) of Rule 8D of the Rules, thereby totalling to ₹ 3,56,69,000/-. Since, assessee had already suo-motu disallowed a sum of ₹ 2,63,45,285/- in its computation of income, the balance of ₹ 93,23,715/- was disallowed and added back to the total income. 64. The assessee carried the matter in appeal before the CIT(A). In appeal before the CIT(A), assessee not only challenged the disallowance made by the Assessing Officer of ₹ 93,23,715/- but also canvassed that the disallowance of ₹ 2,63,45,285/- suo-motu made in the return of income was also not justified. It was asserted by the assessee that the suo-motu disallowance made in the return of income was due to the mis-apprehension and confusion about the legal provisions and lack of proper advice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re capital, reserves and current account balances and such interest free funds far exceed the value of investments which have yielded taxfree incomes. Secondly, it is contended that the tax-free income portfolio is handled by the Treasury department at Mumbai and impugned interest income is directly credited to assessee-bank's account by the payees, thus there is no expenditure incurred to collect such incomes. It is pointed out that the Treasury department carries out other activities and therefore, no expenditure was incurred to earn the tax-free incomes. Therefore, the plea of the assessee is that the disallowance made by invoking section 14A(2) of the Act with respect to expenditure by way of interest as also other expenses is wrong. Addressing the finding of the lower authorities that the funds are kept in a common pool, according to learned Counsel it is clear that the interestfree funds available with the assessee exceed the value of investments which have yielded the exempt incomes. Therefore, having regard to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd. (2009) 178 taxmann.com 135 (Bom), it has to be concluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free securities, which is exempt from tax. The cost of such securities is stated to be ₹ 78.50 crores. The plea of the assessee is that no interest expenditure is relatable to the acquisition of such securities because in the years of their acquisition, assessee had enough noninterest bearing funds in the shape of cash profits and other free Reserves. In our considered opinion, the proposition sought to be advanced by the assessee is quite apt and deserves to be examined in the light of the facts of the present case. In-fact, the Hon'ble Gujarat High Court in the case of UTI Bank Ltd. (supra) was considering a disallowance made by the Assessing Officer out of interest expenditure, being relatable to earning of tax-free income in the context of section 14A of the Act. The Hon'ble Gujarat High Court following the judgement of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) held that since the interest-free funds available with the assessee were in excess of the investments which yielded the exempt income; therefore, no interest could be disallowed by invoking section 14A of the Act. The Hon'ble Bombay High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) according to which the amount of operating expenses allocable to the exempt income was determined as 3,76,53,360/-. In our considered opinion, the stand of the assessee that no expenditure was allocable towards the earning of exempt income is a bald assertion; and, therefore the CIT(A) made no mistake in rejecting it and considering a portion of operating expenses as having been incurred towards earning of exempt income. The quantification of such expenditure done by the assessee is ₹ 3,76,53,360/-, which is the amount disallowed by the CIT(A) u/s 14A of the Act. We find no reason to discard the working which the assessee itself furnished and accordingly in so far as the disallowance of ₹ 3,76,53,360/- u/s 14A of the Act made by the CIT(A) is concerned, the same is hereby affirmed. Thus, assessee partly succeeds on Grounds of Appeal relating to the disallowance u/s 14A of the Act, as manifested by Ground of Appeal No.1 and Additional Ground of Appeal No.2. 16. The Additional Ground of Appeal No.1 relates to assessee's claim of exemption u/s 10(23G) of the Act with respect to the interest income earned by the assessee from infrastructure advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h does not form part of the total income under the Act is available for assessment years prior to 2008-09 also. So, however, the Assessing Officer is expected to adopt a reasonable basis or a method consistent with all the relevant facts and circumstances in order to determine such expenditure. The main plea of the assessee is that no expenditure on account of interest is liable to be considered for disallowance because the investments which have yielded the exempt incomes are out of interest-free funds available with the assessee. The aforesaid presumption is based on the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities Power Ltd. (supra). As per the Hon'ble Bombay High Court, if there are funds available, both interest-free and interest bearing, then a presumption would arise that the investments are made out of interest-free funds generated or available with the assessee, provided such interest-free funds are sufficient to cover the investments. In fact, as has been noted by the Tribunal in its order dated 30.05.2014 (supra), the aforesaid presumption laid down by the Hon'ble Bombay High Court has also been found applicable by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any interference which is hereby affirmed. 71. In this manner, the assessee partly succeeds in relation to the Ground of Appeal No.6 relating to disallowance u/s 14A of the Act for assessment year 2007-08. 72. Before parting, we may observe that in other assessment years 2008- 09 and 2009-10 also, assessee is in appeal challenging the disallowance computed u/s 14A of the Act. The manner of computing the disallowance by income tax authorities in the said two assessment years is para-materia to the manner in which it was computed for the assessment year 2007-08, which we have dealt with in earlier paras. The issue being similar, our decision in assessment year 2007-08 ought to apply mutatis-mutandis in other two assessment years also. However, the learned CIT-DR pointed out that so far as the assessment years 2008-09 and 2009-10 are concerned, the provisions of Rule 8D of the Rules become applicable as per the ratio of the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra). In our considered opinion, the recourse to Rule 8D of the Rules for the purposes of computing the disallowance u/s 14A of the Act would arise only if the sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, having regard to the accounts of the assessee. In other words, section 14A(2) of the Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra) :- 70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he validity of the exercise of the power is predicated . (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). [underlined for emphasis by us] 9. The aforesaid observations of the Hon'ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parate accounts with regard to the earnings of tax-free incomes, the satisfaction contemplated u/s 14A(2) of the Act is to be understood as having been impliedly recorded. The Tribunal in the case of Kalyani Steels Ltd. (supra), noted that the said objection of the Revenue was contrary to how the implications of sub-section (2) of section 14A of the Act has been understood and explained by the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra) and also by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. ors. vs. CIT (2012) 247 CTR 162 (Delhi).Therefore, the objection of the learned CIT-DR is hereby rejected. 74. In view of the aforesaid discussion, we therefore, deem it fit and proper to direct the Assessing Officer to consider the plea of the assessee to the effect it has enough interest-free funds to cover the investments which have yielded impugned exempt incomes in assessment years 2008-09 and 2009-10 also. If the Assessing Officer is satisfied with the assertions of the assessee, having regard to the material and submissions put forth before him, no disallowance on account of interest expenditure would be required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which is contrary to the facts. 5. In the facts and circumstances of the case and in law, the learned CIT (A) has erred in restricting the claim made by the appellant u/s 36[1][viia] of the I.T. Act 1961 to ₹ 84,31,27,000/- as against the claim of ₹ 306,43,96,695/- and enhancing the income of the appellant to the extent of ₹ 222,12,69,695/-. It may please be held that the deduction allowed by the Assessing Officer u/s 36 (1)(viia) amount to ₹ 306,43,96,695/- is correct. The Learned CIT (A) has failed to appreciate that the deduction should not be restricted to the provision made in the books accounts. It may please be held that the enhancement of income made by the learned CIT (A) is unwarranted. 6. The appellant craves the permission to add, amend, modify, alter, revise, substitute, delete any or all grounds of appeal, if deemed necessary at the time of hearing of the appeal. 79. In so far as the cross-appeal of the Revenue for assessment year 2008- 09 vide ITA No.1221/PN/2013 the following Grounds of Appeal have been raised :- 1. The order of the learned Commissioner of Income-tax (Appeals) on the issues mentioned herein below ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961 in respect of the donations of ₹ 20,00,000/- and ₹ 7,00,000/- paid by it to the Gokhale Education Society, Nashik and to the Rajiv Gandhi Foundation respectively. 8. The learned Commissioner of Income-tax (Appeals) has erred in failing to appreciate that the Assessing Officer had correctly allowed deduction u/s.80G on the above donations and, moreover, in view of the fact that both the recipients are approved institutions for the purpose of section 80G and the assessee also did not have any business nexus with them, the provisions of section 37 are not at all attracted. 9. For these and such other grounds as may be urged at the time of the hearing, the order of the learned Commissioner of Income-tax(Appeals) may be vacated and that of the Assessing Officer be restored. 10. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the Hon'ble Tribunal. 80. At the time of hearing, it was a common ground between the parties that issues involved in all the Grounds raised in the Cross-appeals for assessment year 2008-09 have been decided in the Cross-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT (A) is unwarranted. 5. In the facts and circumstances of the case and in law, the learned CIT (A) has erred in not allowing the deduction of ₹ 9,19,09,647 /- for Loss as per Trading Account prepared for the securities held by the bank. 6. Without prejudice to Ground of appeal No. 6 above the appellant submits that it is well settled law, that learned CIT (A) can either adjudicate the issue or set aside the assessment and direct the Assessing Officer to decide the issue afresh. Since the CIT (A) has held that the HTM securities are capital assets and loss on valuation on HTM category is not allowable revenue deduction and in respect of other securities viz. AFS / HFT learned CIT (A) has given directions to Assessing Officer to verify the allowable deduction, the impugned order passed by the learned CIT (A) is bad in law, null and void and please may be vacated / quashed. 7. It may please be held that the securities held by the appellant bank under HTM category constitute its stock in trade and not Capital assets as held by the learned CIT (A). 83. In so far as the cross-appeal of the Revenue for assessment year 2009-10 vide ITA No.1222/P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The learned Commissioner of Income-tax (Appeals) has erred in holding that the assessee is entitled to deduction of ₹ 1,60,00,000/- u/s.37 of the Income-tax Act, 1961 in respect of the donations of ₹ 1,50,00,000/- and ₹ 10,00,000/- paid by it to the Mahabank Agricultural Research Rural Development Foundation (MARDEF) and to the National Institute of Rural Development (NIRD), Hyderabad respectively. 8. The learned Commissioner of Income-tax (Appeals) has erred in failing to appreciate that the Assessing Officer had correctly allowed deduction u/s.80G on the above donations and, moreover, in view of the fact that both the recipients are approved institutions for the purpose of section 80G and the assessee also did not have any business nexus with them, the provisions of section 37 are not at all attracted. 9. For these and such other grounds as may be urged at the time of the hearing, the order of the learned Commissioner of Income-tax(Appeals) may be vacated and that of the Assessing Officer be restored. 10. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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