TMI Blog2013 (1) TMI 785X X X X Extracts X X X X X X X X Extracts X X X X ..... matter was remitted back to AO to verify and examine the deduction, which has been transferred to the special reserves subject to the prescribed percentage of profits derived from providing long-term finance for the approved purposes mentioned in section 36(1)(viii). Matter restored back. Deduction on Notional gain on Derivatives - Assessee submitted that trading derivatives held by the bank constitute its stock in trade and according to the accepted basis, valuation of closing stock it should be valued at cost or market price, whichever is lower. Therefore, while the loss arising on account of revaluation of trading derivatives must be allowable as deduction. CIT rejected the contention as assessee didn't follow RBI guidelines for recognizing profit and loss. HELD THAT:- Assessee is entitled to claim loss on revaluation of trading derivatives. The notional unrealized gain cannot be charged to tax. It is settled principle of law as laid down by Hon'ble Apex Court in the case of CHAINRUP SAMPATRAM VERSUS COMMISSIONER OF INCOME-TAX, WEST BENGAL [ 1953 (10) TMI 2 - SUPREME COURT] , that while anticipated loss is taken into account in valuing closing stock, the anti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for bad and doubtful debts are made by the scheduled bank having rural Branches, the assessee is entitled to a deduction, which is quantified not with reference to the amount provided for in the account but with respect to certain percentage of the total income and also certain percentage of aggregated advances. Decision in favour of Assessee. - I.T.A. No. 6631/Mum/2010, I.T.A. No. 6349/Mum/2010 - - - Dated:- 18-1-2013 - Rajendra Singh (Accountant Member) And Amit Shukla (Judicial Member) For the Petitioner : C. N. Naresh For the Respondent : A. P. Singh ORDER These are cross appeals filed by the assessee as well as revenue against the order dated 30.6.2010 passed by the CIT(A)-24, Mumbai for the quantum of assessment passed u/s. 143(3) for A.Y. 2007-08. 2. First ground in assessee s appeal (ITA No. 6631/Mum/2010) relates to disallowance of expenditure u/s. 14A read with Rule 8D. 3. The Assessing Officer noted that the assessee has claimed income aggregating to ₹ 83,05,02,921/- as exempt in the return of income. He, therefore, required the assessee to explain as to why proportionate expenditure to earn exempt income should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully considered the rival submissions, and perused the findings of the authorities below. The Assessing Officer as well as the CIT(A) has made the disallowance u/s. 14A as per working given in Rule 8D, which cannot held to be applicable in A.Y. 2007-08 in view of Hon'ble Bombay High Court decision in the case of Godrej Boyce Manufacturing Co.Ltd.(supra). Thus, the matter is restored back to the file of the Assessing Officer to work out some reasonable basis after calling for the relevant details and availability of interest free funds for making investments from the assessee. The Assessing Officer will provide reasonable opportunity to the assessee and assessee will also provide necessary information for adjudication of this issue. Accordingly, ground raised by the assessee is treated as allowed for statistical purposes. 8. In ground No. 2 the assessee has challenged the disallowance of claim u/s. 36(1)(viii) for a sum amounting to ₹ 150 crores. 9. The assessee has claimed deduction u/s. 36(1)(viii) in respect of special reserves created in the balance-sheet, as it is a financial corporation which is engaged in providing long-term finance for industrial, agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , co-operative bank , primary agricultural credit society . 10. Further the restructuring done to define the financial corporation is only clarificatory as we can see from the notes on clauses which read as follows: The proposed amendment further seeks to define certain terms including specified entities and eligible business for the purposes of deduction. 11. Since the definition is only clarificatory in nature, it can be presumed that the entity such as the assessee were covered in the definition from the inception of the section. 12. Even otherwise the assessee is a Govt. company since the Central Govt. holds more than 51% of the share capital of the bank and as defined in Sec. 617 of the Companies Act the assessee is a Govt. company. Hence the deduction u/s. 36(1)(viii) has to be allowed to the assessee as it is engaged in the business of providing long term finance for industrial, agriculture and infrastructure development in India and is a Govt. company. The assessee is a financial corporation within the meaning of Sec. 36(1)(viii) since it is Govt. company. However the deduction available under this section will be restricted to the amount transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and the various submissions made by the appellant. I am of the considered opinion that as stated by the Assessing Officer that the RBI Guidelines RBI/2006-2007/333 DBOD. No. BP.BC.86/21.04.157/2006-07 dated 20.4.2007, para 8.6 clearly says that the risk measurement process starts with marking to market of risk positions and this is necessary to establish current value of risk positions to recognize profit and losses in the books of account and also as observed by Hon'ble ITAT in Deutsche Bank A.G. Vs. DCIT in Appeal No. 1401 and 1726 (Bom) of 1993 dated 17.6.2002 the valuation of the derivatives is to be reflected at its fair value (without deduction of transaction costs from the market prices as per IAS 39; FAS 133 being silent on this aspect) with the result that any increase in the value of a derivative will lead to increase in the profit of the current year and thus this ground of appeal is dismissed. 15. Learned counsel submitted that the similar issue has been decided in favour of the assessee by the Tribunal in A.Y. 1997-98 in ITA No. 2590/Mum/2001 vide order dated 8.9.2006. He further submitted that Hon'ble Supreme Court in the case of UCO Bank Vs. CIT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Supreme Court after applying the principle laid down in the case of Chainrup Sampatram (supra) and various other decisions, have come to the following conclusion :- (1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower ; (2) In the balance-sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price. (3) A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. (4) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognised limits. (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (6) Under section 145 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as bad in law, and we quash the same . 22. The decision of the Ld. CIT(A) is reversed and we hold that provisions of Sec. 115JB cannot be made applicable to the assessee. This ground of the assessee is dismissed. 22. Thus, respectfully following the earlier years precedence, we hold that the provisions of section 115JB are not applicable in the case of the assessee and accordingly ground taken by the assessee is allowed. 23. Ground No. 5 as admitted by learned counsel will become academic if ground No. 4 is allowed. Thus ground No. 5 is treated as infructuous in view of the findings given in Ground No. 4. Accordingly, assessee s appeal is treated as partly allowed for statistical purposes. 24. We now take up the revenue s appeal being ITA No. 6349/Mum/2010. 25. In ground No. 1 the department has challenged allowing of prior period expenses of ₹ 1,98,189/- by the CIT(A). 26. During the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed an amount of ₹ 22,00,282/- as prior year expenses, details of which were given in Annexure 11A of Form 3CD of the Tax Audit Report. In response to the show-cause notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not claimed deduction for write off of rural debts on the ground that provision for rural debts exceeded the amount of write off. The Assessing Officer held that the provision created u/s. 36(1)(viia) @ 5% of total income and 10% of the aggregate rural advances exceeds bad debts written off and, therefore, in view of the proviso to section 36(1)(vii), the appellant was not entitled to deduction of bad debts as claimed by the assessee. In coming to this conclusion, the Assessing Officer has relied upon the Board circular No. 464 dated 18.7.1986 and held that decision of Kerala High Court in the case of Catholic Syrian Bank reported in 262 ITR 579, and Special Bench decision of the ITAT cannot be appreciated as department has not accepted this order and SLP has been filed. 32. The CIT(A) held that the similar issue has been decided by the CIT(A) in the earlier years and also by the ITAT in assessee s own case in A.Y. 1991-92 and, accordingly, he allowed the assessee s claim for deduction of write off of non-rural debts. 33. Learned CIT-DR strongly relied upon the findings of the Assessing Officer as well as Board Circular relied upon by the Assessing Officer. On the other han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order. 36. Before the CIT(A), assessee submitted that the assessee had been consistently treating all its securities as stock-in-trade for income tax purpose and valuing them at cost or market price which is lower. Moreover, classifications made in the books as Held to Maturity is purely temporary since banks have a right to reclassify the investments into other categories once in a year with the permission of the Board of Directors. It was further submitted that the Assessing Officer having taxed the profit arising out of sale of its entire securities as business income should not have disallowed the claim of loss on revaluation of securities. Reliance was placed on the decision of Hon'ble Supreme Court in the case of UCO Bank Vs. CIT, 240 ITR 355 and Hon'ble Bombay High Court in the case of CIT Vs. Bank of Baroda, 262 ITR 334. The CIT(A) relying upon the earlier year ITAT order in assessee s own case and also the decision of Hon'ble Supreme Court in the case of UCO Bank. 37. Learned CIT-DR relied heavily upon the findings given by the Assessing Officer. On the other hand learned counsel relied upon the earlier year order of the Tribunal. 38. After care ..... X X X X Extracts X X X X X X X X Extracts X X X X
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