TMI Blog2015 (8) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... er of ld. CIT(A) on this issue and dismiss the ground raised. Disallowance of provision for NPAs claimed as deduction u/s 36(1)(vii) - Held that:- wWhen 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 [2014 (5) TMI 929]. 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 non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of ₹ 209.94 crore representing actual write off in the books of account of bad debts relating to non-rural/urban advances in terms with section 36(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. In the aforesaid view of the matter, shares/securities held by assessee cannot be treated as investment so as to attract provisions of section 14A. In the aforesaid view of the matter, we find no infirmity in the order of CIT(A) in deleting the addition made by AO. Accordingly, we uphold the same by dismissing ground raised by department.- Decided against Revenue. - ITA No. 450/Hyd/2015, ITA Nos. 498 and 499/Hyd/2015 - - - Dated:- 14-8-2015 - SHRI P.M. JAGTAP AND SHRI SAKTIJIT DEY, JJ. For The Assessee : Mrs. Lalitha Rameswaran For The Revenue : Shri J. Siri Kumar ORDER PER SAKTIJIT DEY, J.M.: Out of these three appeals, two by the department and one by assessee are against two separate orders of ld. CIT(A)-III, Hyderabad for the AYs 2007-08 and 2012-13. While appeal for AY 2007-08 being ITA No. 498/Hyd/2015 is by the department, there are cross appeals for the AY 2012-13. As the issues more or less are common and assessee is same in these appeals, they were clubbed and heard together, and therefore, we find it convenient to dispose of these appeals by way of a common order. ITA No. 498/Hyd/2015 for AY 2007-08 by revenue 2. Solitar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working in the investment division incurred for a period of two months. It was also submitted by assessee, since tax free investments are in the nature of stock-in-trade of assessee, exempt income earned by assessee on such investment, which are exempt from taxation should also be incidental to the assessee s business, hence, no disallowance u/s 14A could be made. In this context, assessee relied upon a decision of the Hon ble Karnataka high Court in case of CCI Vs. JCIT, 250 CTR 291. 6. Ld. CIT(A) after considering the submissions of assessee, deleted the addition made by AO by holding as under: 6. I have considered the facts on record and the submissions of the AR in this regard. In my appellate orders for AY 2010-11 and 2011-12 dated 18.2.2014, it was held on identical facts, relying on the decision in the case of CCI Ltd Vs. JCIT (Kar) 250 CTR 291 that since the tax free bonds and other investments had been held to be in the nature of stock in trade of the appellant, it would be logical to hold that the interest and dividend earned by the appellant, which are exempt from taxation, State Bank of Hyderabad were incidental to the appellant s business and that no disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, noticed that assessee has computed the provision for bad and doubtful debts allowable as under: a. Bad and doubtful debts @ 7.5% of total income 156,55,18,082 b. Rural branch advances @ 10% of the aggregate average rural advances based on census published in 2011 503,95,59,872 Total 660,50,77,954 He noticed that in the computation of taxable income assessee has claimed the total amount of ₹ 6,60,50,77,954 towards provision for bad and doubtful debts u/s 36(1)(viia). In addition, assessee has also claimed deduction of ₹ 209,07,50,831 as bad debts written off u/s 36(1)(vii) in respect of non rural advances. AO observed that as per the proviso to section 36(1)(vii), the amount of deduction relating to any 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. He observed that assessee bank had opening balance of provisions for NPAs at ₹ 475.83 crores an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s own case in the preceding AYs deduction u/s 36(1)(viia) is allowable to the extent of provision actually made. She, therefore, directed that deduction u/s 36(1)(viia) should be allowed to the extent of provision made in the books of account. Being aggrieved of the aforesaid decision of ld. CIT(A), assessee preferred appeal before us. 15. We have considered the submissions of the parties and perused the material on record. At the outset, ld. AR fairly conceded that the decision of ld. CIT(A) to restrict the deduction claimed u/s 36(1)(viia) to the extent of provision actually made in the books of account is fair and reasonable. Considering such submissions of ld. AR, we uphold the order of ld. CIT(A) on this issue and dismiss the ground raised. 14. The next issue as raised in ground No. 3 is in relation to disallowance of an amount of ₹ 209,07,50,831 claimed as deduction u/s 36(1)(vii) of the Act. 15. Briefly the facts are, as already stated in the preceding paragraphs, assessee during the year had opening balance of provision for NPAs at ₹ 428.83 crore and made fresh provision of ₹ 580.46 crore during the year. Against the aforesaid provision m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable only in respect of rural advances and not non-rural advances. Therefore, the debts relating non-rural advances actually written off in the books of account cannot be disallowed by applying proviso to section 36(1)(vii). In this context, he specifically referred to the observations made in para 2 of the judgment delivered by Hon ble Supreme Court. Ld. AR submitted, as far as the provision for bad and doubtful debt to be made u/s 36(1)(viia) is concerned, it will include both rural advances and non rural advances. In this context, he referred to the decision of the ITAT Bangalore Bench in case of DCIT Vs. Ing Vysya Bank Ltd., ITA No. 53 54/Bang./13, dated 25/10/2013. Thus, ld. AR submitted, assessee having actually written off bad debts relating to non-rural advances, no disallowance can be made by applying proviso to section 36(1)(vii). 17. Ld. DR, on the other hand, referring to explanation 2 to section 36(1)(vii)submitted before us, as per the said explanation, it has been clarified that for the purpose of proviso to section 36(1)(vii) assessee has to maintain only one account in respect of provision for bad and doubtful debts and as such account will relate to all ty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon ble Apex Court in this regard in paras 26 27 of the judgment is extracted hereunder for convenience. 26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of ₹ 209.94 crore representing actual write off in the books of account of bad debts relating to non-rural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A). 20. In the result, assessee s appeal is partly allowed. ITA No. 499/Hyd/2015 for 2012-13 by revenue 21. In this appeal, the department has raised six grounds. Ground Nos. 1 6 being general in nature, do not require any specific adjudication. 22. The first issue as raised in Ground No. 2 relates to disallowance of depreciation relating to Held to Maturity (HTM) investments. 23. Briefly the facts are, while verifying the computation of income for the AY under consideration, AO noticed that assessee has claimed deduction for an amount of ₹ 507,05,30,372 on account of depreciation on investment in HTM securities and in Held for Trading (HFT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/Hyd/2013 dated 29/11/13 held as under: 5. Having considered the submissions of the parties and perused the materials on record, we are of the view that the issue is squarely covered in favour of the assessee not only by virtue of decision of the jurisdictional High Court in assessee s own case reported in 151 ITR 703 but by atleast three separate orders of the ITAT, Hyderabad Bench in assessee s own case for different assessment years. The Coordinate Bench in its latest order passed in ITA.No.847/Hyd/2012 and 1002/Hyd/2012 dated 28.03.2013 relating to assessment year 2008-2009 while deciding the issue held as under : 28. We have considered the rival submissions and perused the material on record. The Hon ble jurisdictional High Court in assessee s own case (151 ITR 703 ) held that main business of the banking company being to accept deposits to advance loans to appropriate persons, money constitutes its stock in trade. The amount required 4 ITA.No.584 666/Hyd/2013 State Bank of Hyderabad, Hyd. to kept in India as per section 24 of the Banking Regulation Act, 1949 in the form of cash, gold and unencumbered securities is part of stock in trade of the assessee. While identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatements of assessee for the year under consideration, AO noticed that assessee has paid broken period interest on purchase of securities amounting to ₹ 263,58,94,093 during the relevant PY which has been claimed as deduction. AO, however, disallowed the expenditure claimed by observing that the nature of expenditure being capital is not allowable. Being aggrieved of such disallowance made by AO, assessee challenged the same before ld. CIT(A). 28. Ld. CIT(A) having found that ITAT in assessee s own case for AY 2007-08 has allowed the expenditure claimed on account of broken period interest , followed the same and deleted the addition made by AO. Aggrieved, department is before us. 29. We have considered the submissions of the parties and perused the materials on record. Ld. counsels for both the parties agreed that the issue is covered by the decision of ITAT in assessee s own case. On perusal of the orders of coordinate bench, it is seen that this issue relating to deduction claimed on account of broken period interest has permeated through preceding AYs in assessee s own case. In the latest order passed for the AY 2009-10 by the coordinate bench in ITA No. 666/Hyd/13 da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai High Court in the case of American Express International Banking Corporation Vs. CIT 258 ITR 601, we find that Kerala High Court., CIT Vs. Nedungadi Bank 264 ITR 545 has held that the broken period interest is an allowable deduction. Respectfully following the above decisions, we uphold the order of CIT(A) and reject the Revenue s appeal on this ground. 31. Though it is a fact that in case of CIT V/s. Bank of Rajasthan Ltd (316 ITR 391), relied upon by the learned Departmental Representative, the Hon ble Rajasthan High Court has taken a contrary view by holding that the payment towards broken period interest is a capital expenditure. However, as the coordinate bench has decided the issue after following the view expressed by the Hon ble Bombay High Court in case of American Express International Banking Corporation (supra) and Hon ble Kerala High Court in case of CIT V/s. Nedungadi Bank (supra), we respectfully follow the same and uphold the order of the CIT (A). The ground raised by the department is dismissed. Facts being materially same, respectfully following the decision of the coordinate bench on the issue, we uphold the order of ld. CIT(A) by dismissing the ground ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions of the parties and perused the materials on record. There is no dispute to the fact that assessee itself has shown to have earned exempt income amounting to ₹ 5.10 crores and has also on its own disallowed expenditure relating to such income quantified at ₹ 11,91,090. Though for the year under consideration, disallowance u/s 14A, if any, should have been made as per Rule 8D of the IT Rules, but, AO for some strange reasons has made disallowance of expenditure worked out at 77.26% of the exempt income. In our view, such adhoc disallowance made by AO is not permissible in law. In our view disallowance u/s 14A, if any, should be strictly in compliance to rule 8D of IT rules. Further, if assessee has not incurred any interest expenditure for earning exempt income, no disallowance under rule 8D(2)(ii) of the Act, can be made. The only disallowance which could be made by AO is under rule 8D(2)(iii) i. E. 0.5% of the aggregate average value of investment. Further, we find merit in the contention of assessee that no disallowance u/s 14A can be made as assessee s investments in shares is as per the business needs of assessee, hence, earning of exempt income is incidental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch decision of the ld. CIT(A), revenue is before us. 37. Ld. DR supporting the reasoning of AO submitted before us, as the deduction allowable u/s 36(1)(viia) is relatable to advances of rural branches, assessee cannot claim deduction towards provision made on account of doubtful debts relating to non-rural/urban advances. 38. Ld. AR, on the other hand, submitted before us, there is no restriction in the provisions of section 36(1)(viia) to infer that the provision made has to be confined to advances made by rural branches only. In this context, he reffered to a decision of the ITAT, Bangalore Bench in case of DCIT Vs. Ing Vysya Bank Ltd., in ITA No. 53 54/Bang./13, dated 25/10/2013. 39. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. On careful analysis of section u/s 36(1)(viia) of the Act, it is very much clear that assessee being a schedule bank can claim deduction in respect of provision for bad and doubtful debts made in its books of account, which does not exceed the aggregate of amount not exceeding 7.5% of the total income computed before making any deduction u/s 36(1)(viia) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvances but can be in relation to any advances both rural and non-rural advances. The two percent AAA made by rural branches of such banks had to be computed and the PBDD made in books has to be in relation to rural advances. The other eligible sum which can be considered for deduction u/s.36(1)(viia) of the Act viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances. Nevertheless the debit of PBDD to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1)(viia) of the Act. If the concerned bank does not have rural branches then they could not claim the deduction. Therefore the deduction was confined only to banks that had rural branches. 35. At Stage-III of the provisions of Sec.36(1)(viia) of the Act, the deduction allowed earlier was enhanced. The enhancement of the deduction was consequent to representation to the Government that the existing ceiling in this regard i. E. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether it is rural or nonrural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the Assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration. As can be seen from the aforesaid observation of the Bangalore Bench, it has been held in clear terms that actual provision made by assessee on account of provision for bad and doubtful debt irrespective of the fact whether it is rural or non-rural, has to be seen while examining assessee s claim of deduction u/s 36(1)(viia). If the bank does not have rural branch, it will not get deduction relating to 10% of aggregate average advances made by rural branches. However, it will be eligible to claim deduction of 7.5% of total income. The Bench further held that bifurcating the provision for bad and doubtful debt as one relating to rural advances and other advances (non-rural) does not arise for consideration. Considered in the aforesaid perspective, reasoning of the AO in confining the deduction claimed u/s 36(1)(viia) only to the provision made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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