TMI Blog2014 (3) TMI 724X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee as stock in trade, the claim for amortization made by the assessee is valid - The CIT (A) however accepted the view of the assessing officer so far as the correctness of the computation of the claim made by the assessee is concerned by restricting the claim – thus, there was no infirmity in the order of the CIT(A) – Decided against Revenue. Disallowance of provision for staff frauds – Held that:- As decided in assessee’s case for the earlier assessment year, it has been held that, the CIT (A) was of the view that staff frauds are similar to embezzlement by an employee and therefore qualifies as an allowable expenditure u/s 37 of the Act - The decision in ITO vs. J & K Bank Ltd [2005 (3) TMI 384 - ITAT AMRITSAR] and the CBDT's Circular No.35 dated 24-11-1965 followed - the loss by embezzlement by employees should be treated as incidental to business and the same should be allowed as deduction in the year in which it is discovered - the loss to embezzlement by an employee is an allowable expenditure u/s 37 of the Act – thus, there is no infirmity in the order of the CIT (A) in allowing the expenditure claimed by the assessee on account of staff fraud – Decided against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act - Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year - This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2) - the issue needs reconsideration by the authorities below – thus, the matter is remitted back to the AO for reconsideration – Decided in favour of Assessee. - ITA No. 610/Hyd/2013, ITA No. 427/Hyd/2013 - - - Dated:- 13-3-2014 - Shri Chandra Poojari And Smt. P. Madhavi Devi,JJ. For the Petitioner : Shri P. Soma Sekhar Reddy For the Respondent : Shri T. Umakanth ORDER Per P. Madhavi Devi, J.M.: Both these appeals are cross appeals directed against the order of the CIT(A)-VI, Hyderabad, dated 31/01/2013 for the AY 2009-10. 2. Brief facts of the case are that the assessee is a cooperative society engaged in the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities are not investments but stock in trade of the assessee and as such no disallowance of the broken period interest can be made. The CIT (A) after considering the submissions of the assessee and relying upon the decision of Hon'ble Kerala High Court in case of CIT vs. Nedungadi Bank Ltd.(264 ITR 545) held that government securities acquired by the assessee in pursuance of provisions of banking regulation Act have to be treated as stock in trade of business of the bank. Hence, the broken period interest is an admissible deduction in the computation of total income of the bank under the head 'profits and gains of business'. On the aforesaid conclusion, the CIT (A) deleted the addition of Rs.83 lakhs. 5. We have considered rival submissions of the parties and perused the material on record. It is evident from the assessment order that the assessing officer has disallowed the broken period interest by holding the HTM category of securities as investment and not stock in trade of the assessee by relying upon Board's Circular No.665 dated 5-10-1993. The assessing officer has further relied upon the decision of Hon'ble Supreme Court in case of CIT vs. Vijaya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort) as per the advice of the RBI. The assessing officer did not accept the explanation of the assessee by observing that mere conformity with the accounting practice advised by the RBI would not qualify for any allowance under the provisions of IT Act. He was of the view that the claim of amortization of government securities was inadmissible as no specific provision warranting the allowability of such a claim was available in the Act. He further observed that the computation of amortization itself was incorrectly done by adopting the count of 365 days per year as against 360 days allowable. The CIT (A) after considering these submissions of the assessee and examining the materials on record came to hold that HTM category constitutes stock in trade of the assessee bank. He further held that the method adopted by the assessee for amortizing the premium is as per the established accounting standards. He further held that as the securities under HTM category is held by the assessee as stock in trade, the claim for amortization made by the assessee is valid. The CIT (A) however accepted the view of the assessing officer so far as the correctness of the computation of the claim made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sar Bench in case of ITO vs. J K Bank Ltd., (95 ITD 141) allowed the claim of the assessee. 10. We have considered rival submissions of the parties and perused the material on record. From the assessment order, it is clear that the assessing officer has not disputed the fact that there is loss to the bank on account of staff fraud but has assumed that the entire amount could not have been lost and part of the loss must have been recovered, the amount so recovered needs to be accounted for as income if the provisions created for such loss is to be allowed. However, no disallowance can be made on presumptions. The Income-tax Appellate Tribunal, Amritsar Bench in case of ITO vs. J K Bank Ltd (supra) after taking into consideration the decision of Hon'ble Supreme Court in case of Badri Das Daga V/s. CIT (34 ITR 10) and Associated Banking Corpn. Of India Ltd. V/s. CIT AIR 1965 (SC) 1188 and keeping in view the CBDT's Circular No.35 dated 24-11-1965 held that the loss by embezzlement by employees should be treated as incidental to business and the same should be allowed as deduction in the year in which it is discovered. The Income-tax Appellate Tribunal, Amritsar Bench fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of section 43B of the Act. 14. The revenue is in appeal against the relief given by the CIT(A). We find that this issue has also arisen in assessee's own case in earlier assessment year and the Tribunal at paras 18 to 23 of its order in ITA No. 967/Hyd/2011 has held as under: 18. The only dispute in this appeal of the assessee pertaining to the assessment year 2007-08 is with regard to disallowance of provision made for gratuity. 19. Briefly the facts relating to the issue in dispute are, during the assessment proceedings, the Assessing Officer noted that the assessee has claimed provision for gratuity of an amount Rs.2,74,49,761/-. The Assessing Officer when asked the assessee to explain why the said amount should not be disallowed u/s 40A (7) of the Act, the assessee in its reply submitted that the provision has been made on the basis of actuarial valuation. It was further stated that the actual payment was also made on 22-5-2007 i.e., before the due date of furnishing the return of income, by way of contribution to group gratuity Scheme of SBI Life Insurance Co. Ltd. The Assessing Officer however did not accept the explanation of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Group Gratuity of SBI Life Insurance is an approved gratuity fund and had it not been an approved gratuity fund the amount could not have been collected from the assessee. He further submitted a certificate of renewal of registration with IRDA and receipt in support of payment made to gratuity fund of SBI Life Insurance Company and submitted that the contribution having been made before the due date of filing of return of income, it is an allowable deduction u/s 43B of the Act. The learned AR further submitted that for the subsequent assessment year i.e., assessment year 2008-09 basing on the certificate issue by IRDA stating that the group insurance fund managed by SBI life Insurance Company Limited is approved gratuity fund the assessing officer has allowed the provision for gratuity. It was further submitted that for the assessment year 2009-10 the CIT(A) allowed the ground relating to disallowance of payment to group gratuity fund managed by the SBI Life Insurance Co. Ltd, approved by IRDA and authorized to manage group gratuity scheme. A copy of the order dated 31-1-2013 passed by the CIT(A) in appeal No.320/CIT(A)/Tr/Vja/10-11 relating to assessment year 2009-10 was also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is partly allowed. 16. Coming to the cross appeal of the assessee, only ground raised herein is against the confirmation of disallowance of provision for SME Advances. 17. The facts relating to this issue are that the AO observed that the assessee had made a provision in the P L A/c under the head 'provisions and contingencies' and break-up of the same was given as under: i) towards Mutual fund of Rs. 10,93,55,000/- ii) provision for SME advances Rs. 89,65,055/- 17.1 The AO observed that SME advance is a SME standard advance but as per the Income-tax Act, no provision should be allowed. He accordingly disallowed the total amount of Rs. 11,83,20,000/-. The assessee preferred an appeal before the CIT(A) contending that when there is no specific provision under the IT Act, 1961, the tax liability of certain sums have to be decided in accordance with the accounting practice. It was also submitted that the provision for depreciation on Mutual funds is towards depreciation on non-SLR investments under the category of available for sale and should be debited to the P L A/c and any appreciation should be taken to unrealized appreciation account as per the RBI guide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained. This fact is evinced by the entries in the profit and loss account, balance sheet and break up details. We need not deliberate this aspect with reference to records at any greater length as this is not a matter in issue before us. It was contended on behalf of the Revenue that the Revenue is only concerned with the assessee as a single unit and not with how many separate accounts are being maintained by the assessee and under what items. The Department, therefore, would assess an assessee with reference to a single account maintained in the head office of the concerned bank. This, according to the learned counsel appearing for the Department, would further substantiate the argument of the Department that the interpretation given by the Full Bench of the High Court is the correct interpretation of Section 36(1)(vii). This argument has to be rejected, being without merit. 32. In the normal course of its business, an assessee bank is to maintain different accounts for the rural debts for non- rural/urban debts. It is obvious that the branches in the rural areas would primarily be dealing with rural debts while the urban branches would deal with commercial debts. Maintenanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, then there would be a mismatch between the rural branch accounts and the head office accounts. Therefore, in order to prevent such mismatch and to be in conformity with the accounting practice, the banks should maintain separate accounts. Of course, all accounts would ultimately get merged into the account of the head office, which will ultimately reflect one account (balance sheet), though containing different items. 37. Another example that would support this view is that, a bank can write off a loan against the account of `A' alone where it has advanced the loan to party `A'. It cannot write off such loan against the account of `B'. Similarly, a loan advanced under the rural schemes cannot be written off against an urban or a commercial loan by the bank in the normal course of its business. 38. The Full Bench of the Kerala High Court expressed the view that the Legislature did not make any distinction between provisions created in respect of advances by rural branches and advances by other branches of the bank. It also returned a finding while placing emphasis on the proviso to Section 36(1)(vii), read with clause (v) of Section 36(2) of the Act that the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2). 42. Consequently, while answering the question in favour of the assessee, we allow the appeals of the assessees and dismiss the appeals preferred by the Revenue. Further, we direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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