TMI Blog2009 (5) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... ) comes to play, when the excess amount so charged to P L account u/s 36(1)(vii) is subsequently recovered from bad debts. In this given case, the assessee asserts that the actual amount is adjusted against the reserve created by virtue of section 36(1)(viia) and had not exceeded the reserve account. Therefore, the assessee claims no amount was charged to P L account by invoking section 36(1)(vii). Since the assessee has not claimed bad debts u/s 36(1)(vii), but purely adjusted the amount against the reserve created u/s 36(1)(viia), section 41(4) cannot be invoked. Therefore, we are in agreement with the contentions of the assessee. Accordingly, this issue goes in favour of the assessee-Bank. We remitted back on the file of AO to verify the other issues. - K.P.T. THANGAL AND A. MOHAN ALANKAMONY, JJ. Sarangan for the Appellant. Smt. Swathi S. Patil for the Respondent. ORDER A. Mohan Alankamony, Accountant Member. - These are two appeals - one filed by the assessee- Bank in ITA No. 647/BNG/2008 dated : 14-5-2008 against the order of the Ld. CIT(A)-III/Bangalore in ITA No. 87/C-12(3)/CIT(A)-III/BNG/06-07 dated 12-3-2008 for the assessment year (AY) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast years; and ( c )the CIT(A) ought to have observed that the recoveries from such bad debts written off do not constitute income under section 41 of the Act. 4. The revenue, in its grounds of appeal, has raised eight grounds, out of which, ground Nos. 1, 7 and 8 are being general, they do not survive for adjudication. The remaining grounds, for the sake of convenience and clarity, are formulated in a concise form, as under : The Ld. CIT(A) ( i )ought not to have deleted the addition of Rs. 29,52,23,240 on account of broken period interest; erred in directing the Assessing Officer not to assess the broken period interest loss of Rs. 28,31,75,841 on accrual basis and not to reduce from the taxable income declared by the assessee for assessment year 2005-06 on accrual basis; ( ii )ought to have appreciated the facts of the case as discussed in the assessment order and should not have restricted the disallowance of interest under section 14A to 2 per cent of the declared amount; ( iii )erred in deleting the addition on account of share income of Rs. 2,19,51,300 received from the sponsored rural banks as the provisions of section 86 provide for taxing such share inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e second effective ground is with regard to the provision made on transfer of securities form Available For Sale (AFS) category to Held To Maturity (HTM) category Rs. 127,21,17,913. 6.1 The Assessing Officer had disallowed the expenses which were claimed as diminution in value of AFS as on the date of their conversion to HTM. It was the contention of the assessee-Bank that such conversion was carried out in accordance with the RBI guidelines. However, the Assessing Officer was of the view that there was depreciation of value, over the average purchase cost, of all the units transferred from AFS to HTM. It was not clear as to how the said AFS carrying a fixed coupon rate of interest at 6 per cent to 8 per cent as on their maturity date could be valued less. It was noted by the Assessing Officer that values of all the AFS in question have only depreciated and none of them appreciated and, therefore, concluded that such revalue of the AFS in question was a deliberate attempt on the part of the assessee-Bank to reduce the tax. It was pointed out by the Assessing Officer that the assessee had neither furnished the so called RBI Guidelines nor any evidence on the market price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of the decisions relied on by the appellant were carefully perused. In all the said decision it has been held, in essence, that valuation of closing stock - including the securities - as per accepted method of accounting is admissible in computing the total income. In the case of hand, AFS are the securities held as stock-in-trade and therefore, can be valued, in accordance with settled method of valuation, at the end of the previous year, i.e., 31-3-2005. The diminution in value, if any, as on 31-3-2005 can be debited to the relevant Profit and Loss account and allowable as deduction in computing the total income. But, in the case on hand, the appellant had chosen to transfer AFS to HTM on 2-11-2004 and before so transferring the same valued as on 2-11-2004. The conversion from AFS to HTM was statedly carried out as per RBI guidelines. The issue that arises here is if the AFS are intended to be so converted to HTM on 2-11-2004, the same could have been done without valuing the AFS. It is an accepted principle of accounting that closing stock of any stock-in-trade is valued on the last date of an accounting year; whereas, the AFS in question was transferred to the HTM on 2- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the assessing authority, the Bank has furnished a copy of the RBI Master Circular dated 12-7-2005 along with other details mentioned therein. It is further submitted that the guidelines issued in this Master Circular are in pari materia with that of 2004 Circulars. It is submitted that filing of this document would not only in any alter the arguments already addressed and the grounds taken before this Hon ble Tribunal. Therefore, the appellant seeks liberty of this Hon ble Tribunal to furnish a copy of the letter dated 25-5-2007 addressed to the Assessing Officer for kind consideration in the interest of justice and equity. A copy of this Memo along with the enclosure is being served upon the Departmental Representative Smt. Swathi Patil." After considering the contents of abovesaid Memo, it was ordered to place on record. 7.1 On the other hand, the Ld. D.R. had vehemently argued that the CIT(A) had decided the issue in a judicious manner which requires no interference at this stage. 7.2 We have considered the rival submissions. We have also perused the RBI Master Circular and other case laws on which the Sr. Counsel has placed strong reliance. The Hon ble ITAT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision of the Hon ble Supreme Court in the case of United Commercial Bank v. CIT referred supra, it is held that the assessee bank is entitled to value all the investment at cost prices or market value whichever is lower by treating such stock-in-trade........." 7.4 In RBI s Master Circular, under the caption 2 Classification, it has been men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue the appeal before the ITAT only regarding recovery of the principal portion of bad debts. 8.2 Let us now confine ourselves to consider only the grievance of the assessee-Bank that the CIT(A) erred in upholding the adjustment made by the Assessing Officer with respect to adding back of Rs. 39,38,25,324 being recoveries from bad debts written off. 8.3 The assessee had declared an amount of Rs. 39,38,25,324 being the amount of bad debts written off in the earlier years, recovered. However, the same was not offered for tax for the year under dispute on the plea that the assessee had not been claiming deduction of bad debts written off under section 36(1)( vii ), but, only provision for bad and doubtful debts allowable under section 36(1)( viia ) of the Act. It was, therefore, contended that the amount of bad debts so recovered is not assessable as income as per section 41(4) of the Act, and, accordingly, was not includible in the taxable income returned for the assessment year under appeal. 8.4 However, the Assessing Officer had rejected the assessee s argument, pointing out that the claims of provisions for the bad and doubtful debts were made while also claiming substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he earlier years. Accordingly, the CIT(A) ought to have appreciated the fact that the recoveries from such bad debts written off do not constitute income under section 41 of the Act. 9.1 The ld. DR was of the firm view that the lower authorities have judiciously decided the issue which does not require any interference. 9.2 We have carefully considered the rival submissions. We have also perused the relevant documents. Let us see what sections 36(1)( vii ), 36(1)( viia ) and 41(4) say "( 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 made under that clause. Explanation. For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully. The ld. Assessing Officer has brought these amounts to tax by invoking the provisions of section 41(4) of the Act as the assessee-bank has made provision for bad and doubtful debts under section 36(1)( viia ) of the Act by writing off in the P L account and the said amounts are recovered subsequently. On analyzing the provisions of the Act reproduced supra, we observe that by virtue of section 36(1)( viia ) certain assessees like the appellant-bank are allowed to provide in a particular manner provision for bad and doubtful debts as a charge to P L account, irrespective of the actual bad debts. Further proviso to section 36(1)( vii ) of the Act stipulates that an assessee to which clause ( viia ) applies, the amount of the reduction relating to any such debts 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 made under that clause. This makes it clear that when the assessee identifies the actual bad debt, it should be first adjusted against the reserve created by virtue of section 36(1)( viia ) and excess, if any, will be allowed to be written off in the P L a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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