2022 (5) TMI 1537 - AT - Income Tax

Disallowance of depreciation claimed on Investments held to Maturity (HTM) - HELD THAT - We notice that the Ld CIT(A) has followed the subsequent decision rendered by the jurisdictional Hon ble Karnataka High Court in the assessee s own case 2013 (7) TMI 656 - KARNATAKA HIGH COURT and also the decision rendered by Tribunal in the case of Corporation Bank 2015 (3) TMI 1360 - ITAT BANGALORE in deciding this issue in favour of the assessee. Since the assessee has claimed depreciation only for income tax purposes both the assessee and the assessing officer shall ensure that the profit/loss arising on sale of these investments should be ascertained by considering the value of investments as per income tax records and not as per books of account. Disallowance made u/s 14A - AO noticed that the assessee did not make any disallowance u/s 14A of the Act even though it has earned tax free income during the year under consideration - 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 - HELD THAT - Hon ble Supreme Court in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - 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. 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 2021 (9) TMI 566 - SUPREME COURT . The assessee is free to make all contentions on this issue before the AO. Disallowance made u/s 36(1)(viia) - deduction towards Provision for bad and doubtful debts (PBDD) - 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? - HELD THAT - In the instant case the assessee has claimed deduction towards PBDD under clause (a) to sec. 36(1)(viia) of the Act meaning thereby the clause (a) is applicable to rural advances only as per the decision given by Hon ble Supreme Court in the case of Catholic Syrian Bank 2012 (2) TMI 262 - SUPREME COURT - Hence the bad debts relating to non-rural branches are not required to be adjusted against PBDD allowed under clause (a) of sec. 36(1)(viia) of the Act in terms of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. We are unable to agree with the view expressed by Ld CIT(A) on this issue. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the bad debts relating to non-rural branches u/s 36(1)(vii) of the Act without adjusting the same against the PBDD a/c since the said PBDD a/c relates to rural advances only.

Issues Involved:

1. Disallowance of depreciation claimed on investments (HTM).
2. Disallowance made u/s 14A of the Act.
3. Disallowance made u/s 36(1)(viia) of the Act.
4. Disallowance of bad debts claimed u/s 36(1)(vii) of the Act.
5. Claim for deduction of Education cess.

Detailed Analysis:

1. Disallowance of Depreciation Claimed on Investments (HTM):

The first issue concerns the disallowance of depreciation claimed on investments held to maturity (HTM). The Assessing Officer (AO) noted that the assessee revalued HTM investments at year-end, claiming a depreciation deduction of Rs. 436.81 crores based on the fall in value. The AO referenced an RBI Master Circular and the Karnataka High Court's decision, which mandated that HTM investments should be valued at cost without depreciation. The AO disallowed the depreciation claim, citing dual valuation methods for book and tax purposes, which contradicted the CBDT's Circular No. 665 and RBI guidelines.

The CIT(A) decided in favor of the assessee, referencing previous favorable decisions from the Hon'ble Karnataka High Court and ITAT Bangalore B Bench, which allowed banks to value investments at cost or market price, treating them as stock in trade. The Tribunal upheld the CIT(A)'s decision, noting that the same issue was decided in favor of the assessee in earlier years, emphasizing that the profit/loss on sale of these investments should be based on income tax records, not book values.

2. Disallowance Made u/s 14A of the Act:

The second issue pertains to the disallowance made under Section 14A of the Income Tax Act. The AO noted that the assessee did not make any disallowance under Section 14A despite earning tax-free income. The AO, dissatisfied with the assessee's explanation, applied Rule 8D, resulting in a disallowance of Rs. 51.44 crores.

The CIT(A) directed the AO to delete the disallowance, stating that the AO did not record dissatisfaction with the assessee's claim. The Tribunal, however, found that the AO had recorded dissatisfaction in the assessment order and noted that the issue required fresh examination. The Tribunal set aside the CIT(A)'s order and restored the issue to the AO for re-examination, considering the Hon'ble Supreme Court's decision in the case of South Indian Bank Ltd., which clarified that Section 14A would not be attracted when income from shares and securities held as stock in trade is assessed as business income.

3. Disallowance Made u/s 36(1)(viia) of the Act:

The third issue involves the disallowance made under Section 36(1)(viia) concerning the deduction for Provision for Bad and Doubtful Debts (PBDD). The AO computed the deduction based on incremental advances rather than the aggregate average advances, resulting in a lower deduction.

The CIT(A) accepted the assessee's computation, supported by the Tribunal's decision in the case of Canara Bank. The Tribunal upheld the CIT(A)'s decision, noting that the methodology adopted by the AO was against the plain provisions of the rules and previous judicial decisions. The Tribunal affirmed that the computation should be based on the entire outstanding advances, not just incremental advances.

4. Disallowance of Bad Debts Claimed u/s 36(1)(vii) of the Act:

The fourth issue concerns the disallowance of bad debts claimed under Section 36(1)(vii). The AO disallowed the claim, stating that the bad debts were not debited to the Profit and Loss account and were mere prudential write-offs, not actual write-offs. The AO also contended that it would result in double deduction.

The CIT(A) initially allowed the claim, referencing the Hon'ble Supreme Court's decision in the case of Vijaya Bank but later disallowed it, stating that the bad debts should be adjusted against the PBDD account. The Tribunal reversed the CIT(A)'s decision, following its earlier decision in the assessee's case, which held that the proviso to Section 36(1)(vii) applies only to rural advances. The Tribunal directed the AO to allow the bad debts relating to non-rural branches without adjusting them against the PBDD account.

5. Claim for Deduction of Education Cess:

The final issue involves the claim for deduction of Education cess. The Tribunal dismissed this ground, referencing the amendment brought by the Finance Act, 2022, which clarified that education cess is not allowable as a deduction.

Conclusion:

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, providing detailed rationale and directives for each issue based on legal precedents and statutory interpretations. The Tribunal emphasized adherence to judicial decisions and statutory provisions in resolving the contested issues.

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