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2015 (8) TMI 836 - ITAT HYDERABAD

2015 (8) TMI 836 - ITAT HYDERABAD - TMI - Disallowance u/s 14A - CIT(A) deleted the addition - Held that:- In assessee’s own case for preceding AY, the Tribunal has held that before introduction of Rule 8D, disallowance u/s 14A of the Act has to be made at a reasonable rate. In this context, Tribunal in assessee’s own case has held that expenditure incurred towards two months salary for officers and staff in investment division could be considered as disallowance to be made u/s 14A of the Act. A .....

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ally 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.

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 .....

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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). - Decided in favour of ass .....

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old 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 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 - When there is no distinction between the three categories of securities viz.,HTM, AFS and HFT. The assessee can provide for depreciation in all the securities on the .....

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ng due date for payment of interest upto the date of the sale. The assessee claimed the amount of interest paid for the broken period upto the date of purchase as deduction on the ground that the securities were held stock in trade - The broken period interest is an allowable deduction - Decided against Revenue.

Disallowance u/s 14A - CIT(A) deleted addition - Held that:- No disallowance u/s 14A can be made as assessee’s investments in shares is as per the business needs of assessee, .....

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e 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 2 .....

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/s 14A of the Act by AO. 3. Briefly the facts are, assessee is a banking company and subsidiary of SBI. For the AY under consideration, assessee had filed its return of income on 31/10/07 declaring total income of ₹ 495,28,37,146. Assessment in case of assessee was originally completed u/s 143(3) of the Act vide order dated 30/09/08 by disallowing expenditure of ₹ 5,83,68,430 u/s 14A of the Act. Against such assessment order assessee preferred appeal before ld. CIT(A). Ld. CIT(A), ho .....

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the Hon ble High Court vide order dated 07/08/2013 in ITTA No. 323 of 2013. 4. Thus, in terms with the direction of ITAT to reasonably estimate the disallowance of expenditure u/s 14A of the Act, AO passed impugned assessment order on 29/11/2013 quantifying the disallowance u/s 14A at ₹ 5,83,68,430. While doing so, AO observed that assessee has incurred operating expenditure of ₹ 808 crores and interest expenditure of ₹ 2134 crores for earning total income of ₹ 3946 crore .....

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assessee preferred appeal before ld. CIT(A). 5. In course of hearing of appeal before ld CIT(A), assessee relying upon the decisions of ITAT in its own case submitted, it has already made disallowance u/s 14A an amount equal to establishment charges in the form of salary to officers and staff 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 b .....

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e 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 disallowance u/s 14A, o .....

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preceding AYs has held that reasonable expenditure which could be disallowed u/s 14A would be an amount equal to expenditure incurred by assessee towards two months salary of officers and staff of investment division. In this context, ld. AR placed on record order passed by ITAT in assessee s own case for AYs 1996-97 to 1998-99 in ITA No. 661,662 & 663/Hyd/2003 dated 19/03/10 passed in ITA No. 584/Hyd/08 for AY 2005-06 and order dated 06/08/2010 passed in ITA No. 827/H/09 for AY 2006-07. 8. .....

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staff in investment division could be considered as disallowance to be made u/s 14A of the Act. As it appears, assessee in terms with the aforesaid direction of Tribunal has disallowed expenditure of ₹ 7,03,500 u/s 14A of the Act. In the aforesaid view of the matter, we do not find any infirmity in the order of ld. CIT(A) in deleting addition made by AO. Accordingly grounds raised are dismissed. 9. In the result, department s appeal is dismissed. ITA No. 450/Hyd/15 for AY 2012-13 by asses .....

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al 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 observe .....

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10.74 in its books of account. However, in the computation of total income, assessee has claimed deduction of ₹ 209.08 crore in stead of setting off against provision of ₹ 616.55 crores. He further noted that during the year, assessee has claimed deduction of ₹ 660,50,77,954 u/s 36(1)(viia), which is worked out as per the limit prescribed by the Act. However, as per the books of account, assessee has created provision for an amount of ₹ 616.55 for NPAs, which also include .....

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)(vii) held that since assessee has created provision for rural debts at ₹ 19.98 crores in the books of account for the year ending 31/03/2012, deduction u/s 36(1)(viia) has to be restricted to that amount only and the balance amount of ₹ 640,52,77,954 has to be disallowed. Accordingly, he added back the amount of ₹ 640,52,77,594. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT(A). 13. Before ld. CIT(A), assessee submitted that section 36(1)(viia) .....

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ision should relate to rural advances alone. Thus, it was submitted, assessee had made provision of ₹ 616.55 crores and claimed deduction of ₹ 660.50 crores. 14. Ld. CIT(A) after considering the submissions of assessee noted that as per the decisions of ITAT in 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 mad .....

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s 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 made assessee had written off ₹ .....

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). In other words, bad debts written off in the accounts of assessee representing urban advances is an allowable deduction. He, therefore, accepted assessee s claim of deduction u/s 36(1)(vii) for an amount of ₹ 209,07,50,831 as the same was less than the provision made in the books of account at ₹ 596.57 crores. Having held so, AO observed that if it is ultimately held that assessee is entitled to make provision for both urban and rural advances u/s 36(1)(viia), the, proviso u/s 36( .....

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off and its being part of the provision. The appellant admittedly had made a provision of only ₹ 19.98 crores in its books for rural bad debts. The balance Provision admittedly related to urban debts. The disallowance of ₹ 209,07,50,831 u/s 36(l)(vii) is, therefore, upheld. 16. Ld. AR submitted before us, assessee can claim deduction both u/s 36(1)(vii) and 36(1)(viia) subject to restrictions put under the proviso to section 36(1)(vii) of the Act, which only applies to rural debts. I .....

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e 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 N .....

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doubtful debts and as such account will relate to all types of advances including the advances made by rural branches, no differentiation can be made between rural advances and non-rural advances while applying the proviso to section 36(1)(vii). 18. In the rejoinder, ld. AR submitted, explanation 2 to section 36(1)(vii) was introduced into the statute by the Finance Act, 2013 with effect from 01/04/2014, hence, it will have prospective application and will not apply to the AY under consideration .....

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ssessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of prov .....

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assessee, though, has written off in the books of account an amount of ₹ 210.74 crore, but, in the computation of total income, the actual deduction claimed u/s 36(1)(vii) is ₹ 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to r .....

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ras 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 debt .....

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to invoke the same where there was no threat of double deduction. 27. As per this proviso to cl. (vii), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits .....

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onditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commerc .....

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) relating to allowance of the 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 .....

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ts 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 proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the posi .....

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ia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said 1 proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT .....

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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 (su .....

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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 .....

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HFT securities (being held in stock in trade) ₹ 257,12,34,622 ₹ 507,05,30,372 AO while completing assessment held that assessee is not eligible to claim depreciation on HTM securities as it cannot be treated as stockin-trade. He, therefore, disallowed the claim of depreciation for an amount of ₹ 249,92,95,750 on HTM securities. Similarly, AO observing that depreciation on HFT and AFS securities is to be allowed to the extent provided in the books of account, restricted deductio .....

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are held as stock-in-trade, claim of depreciation has to be allowed. Being aggrieved, department is before us. 25. We have heard the parties and perused the materials on record. At the outset, learned counsels of both the parties have agreed that the issue in dispute is squarely covered by the decisions of the coordinate benches in assessee s own case for different assessment years. On perusal of materials on record, we find that this particular issue has been subject matter of dispute from AY 2 .....

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or AY 2009-10 in ITA No. 666/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 lat .....

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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 identical issue of claim of depreciation on HTM securities came up before the Income-tax Appellate Tribunal in assessee s own case for the assessment year 2003-04 in ITA No.1232/Hyd/2006 dated 28-11-2008, the Incometax Appellate Tribunal following the ratio laid down by the jurisdi .....

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the department is dismissed . Since the issue in dispute is squarely covered by the decisions of the coordinate benches in assessee s own case for previous AYs, following the view expressed by the Tribunal, we uphold the order of ld. CIT(A) by dismissing the ground raised. 26. The next issue as raised in Ground No. 3 relates to decision of ld. CIT(A) in deleting the addition made by AO on account of broken period interest. 27. Briefly the facts are, AO observed that every bank is required to mai .....

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urities for consideration to other banks and consequently RBI pays interest to such holder on the date for payment of interest. While bank appearing in the RBI ledger is entitled to receive interest for the entire period, bank which buys securities in the intervening period has to make payment to the seller an amount which includes the traded value of the security and a portion of interest for the period covering between commencement of due date and upto the date of purchase. The proportionate i .....

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allowance 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 ass .....

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dinate Bench of this Tribunal while considering this issue in assessee s own case for the A.Y. 2008-09 in ITA. No. 847 & 1002/Hyd/2012 dated 28.03.2012 held as under : 30. We have considered the submissions of the parties. On perusal of the orders of the revenue authorities and materials on record we find that the issue is squarely covered in favour of the assessee by the orders of co-ordinate bench passed in assessee s own for the assessment years 1999- 2000 and 2007-08. The Tribunal in the .....

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urchase. The bank had also received interest of ₹ 36.84 Crores in respect of securities sold by them for the broken period from the preceding due date for payment of interest upto the date of the sale. The assessee claimed the amount of interest paid for the broken period upto the date of purchase as deduction on the ground that the securities were held stock in trade. The AO however rejected the appellant s claim holding that the appellant s contention that the securities constituted stoc .....

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na Bank 139 TTJ 81 (Mum). They had followed the decision of Special Bench in the Mumbai in JCIT Bank of Beharain, 132 TTJ 505 and the 7 ITA.No.584 & 666/Hyd/2013 State Bank of Hyderabad, Hyd. decision of Mumbai 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 upho .....

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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 raised by the department. 30. The next issue as raised in Ground No. 4 relates to addition made .....

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for AY 2000-01, assessee has quantified the expenditure relating to exempt income by taking into consideration two months salary of treasury/investment department. Alternatively, it was submitted by assessee that provisions of section 14A are not applicable to the dividend earned out of the shares held as stock-intrade. For this proposition, assessee relied upon a decision of the Hon ble Karnataka High Court in case of M/s CCI Ltd. Vs. JCIT, 250 CTR 291. AO, however, was not convinced with the e .....

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ing the rate of 77.26% to the exempt income earned by assessee of ₹ 5,10,91,194 quantified the expenditure at ₹ 3,94,73,056. Being aggrieved of such disallowance assessee challenged the same before ld. CIT(A). 32. Ld. CIT(A) after considering the submissions of assessee in the light of decision in case of CCI Vs. JCIT (supra) held that as the tax free bonds and other investments are in the nature of security of assessee, it will be logical to hold that interest and dividend earned by .....

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wn 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. Furth .....

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sessee s business. As stated earlier, security held as HTM//AFS/HFT are in the nature of stock-in-trade of assessee. Moreover, holding of such securities is ancillary and incidental to assessee s 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 s .....

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f total income and 10% of the aggregate average rural advances. However, actual provision made for bad and doubtful debts in the books of account was to the tune of ₹ 616.55 crores. During the assessment proceeding, AO noticed that out of the aforesaid provision for bad and doubtful debts made in the books of account an amount of ₹ 19.98 crores represents provision towards bad and doubtful debts of rural advances whereas the balance provision of ₹ 596.57 represents urban bad de .....

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gible for deduction u/s 36(1)(viia) for the provision made towards rural advances as well as non-rural advances, but, she held that deduction has to be restricted to actual provision made in the books of account. In other words, she allowed deduction u/s 36(1)(viia) to the extent of ₹ 616.55 crores being the provision actually made in the books of account. Being aggrieved of such decision of the ld. CIT(A), revenue is before us. 37. Ld. DR supporting the reasoning of AO submitted before us .....

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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 .....

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ondly the maximum deduction allowable is to the extent of 7.5% of the total income and 10% of the aggregate average advances made by rural branches of such bank. On a reading of the provisions of section 36(1)(viia), as it stands now, it is very much clear that there is no restriction imposed under the said provision to indicate that assessee cannot make a provision for non-rural/urban advances. That being the case, department s argument that deduction u/s 36(1)(viia) has to be restricted only t .....

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of the ITAT Bangalore Bench in extenso, which are as under: 34. It can be seen from the history of Sec.36(1)(viia) of the Act that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBDD had to be linked to the advances made by Bank s rural branches. At stage-II of Sec.36(1)(viia), the deduction while computing the taxable profits was allowed of an amount n .....

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elation 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 Prof .....

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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. Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of .....

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ranches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) Schedule or non-scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary. 37. Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) of the Act, PBDD has to be created by debiting the profi .....

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gregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s.36(1)(viia) of the Act will not be available to the bank. The second part of the deduction u/s.36(1)(viia) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s.36(1)(viia) of the Act. The actual provision made in t .....

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