TMI Blog2013 (4) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... this order (supra), HTM category of securities being stock in trade, the assessee is entitled to claim amortization. Hence, the order passed by the CIT (A) is upheld and the ground raised by the revenue is dismissed. Addition being provision for staff frauds - Held that:- Circular No.35 dated 24-11-1965 of CBDT also clarifies that the loss to embezzlement by an employee is an allowable expenditure u/s 37 of the Act. In aforesaid view of the matter, we do not find any infirmity in the order of the CIT (A) in allowing the expenditure claimed by the assessee on account of staff fraud. Hence, this ground raised by the Revenue is dismissed. Accrued interest on non performing assets (NPAs) - Held that:- Assessing Officer has not denied the fact that the amount represents unrealized interest on NPA. Admittedly, so far as interest on NPA is concerned the assessee was recognizing it as per the prudential norms for income recognition issued by the RBI for recognition and asset classification and accordingly has not included the interest on NPA as its income. In our view, such recognition of income by the assessee is in accordance with law and as per accepted accounting norms. When the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We uphold the order of the CIT on this issue and dismiss the appeal. - ITA Nos. 502/H/11, 967/Hyd/11 And ITA No. 1387/Hyd/11, ITA Nos. 1121/Hyd/11 & 1459/Hyd/11 - - - Dated:- 29-4-2013 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For the Petitioner : Sri T. Umakant For the Respondent : Sri M. Ravinder Sai ORDER PER SAKTIJIT DEY, JUDICIAL MEMBER: These are set of five appeals. While ITA No. 1121/Hyd/11 and ITA Nos. 967/Hyd/11 are cross appeals against the order of the CIT (A), Vijayawada pertaining to the assessment year 2007-08, ITA Nos. 1387/Hyd/11 and ITA No. 1459/Hyd/11 are cross appeals against the order of the CIT (A)-VI, Hyderabad pertaining to the assessment year 2008-09. ITA Nos. 502/Hyd/11 is against the order passed by the CIT u/s 263 of the IT Act for the assessment year 2007-08. Since the assessee is common and issues involved in all these appeals are also identical, these are clubbed together and disposed of by this combined order for the sake of convenience. ITA Nos.1121 and 1459/Hyd/11 (departmental appeals):- 2. Since facts excepting the figures are similar for both the years in these tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 ₹ 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 Bank (187 ITR 541). However, we find that the issue is covered in favour of the assessee by the decisions of Mumbai High Court in case of American Express International Banking Corporation V/s. CIT (258 ITR 601) and decision of Hon ble Kerala High Court in case of CIT V/s. Nedungadi Bank Ltd.,(264 ITR 545) wherein it has been held that the broken period interest is an allowable deduction. The co-ordinate Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 by the assessee is concerned by restricting the claim to ₹ 18,88,58,186/-. 7. We have considered rival submissions of the parties and perused the material on record. After perusing the order of the CIT (A), we do not find any infirmity in his view. As has been held by us in the earlier part of this order (supra), HTM category of securities being stock in trade, the assessee is entitled to claim amortization. Hence, the order passed by the CIT (A) is upheld and the ground raised by the revenue is dismissed. 8. Ground No.4 relates to deletion of an addition of ₹ 46,45,087/- being provision for staff frauds. During the assessment proceedings, the assessing officer noted that the assessee had made a provision of ₹ 44,44,087/- towards staff fraud. In response to the query made by the assessing officer, the assessee submitted that all the advances which have become bad on account of fraud by the staff are treated as loss and accordingly provision has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. J K Bank Ltd (supra) that the issue is squarely covered by the aforesaid decision of the Tribunal. That besides Circular No.35 dated 24-11-1965 of CBDT also clarifies that the loss to embezzlement by an employee is an allowable expenditure u/s 37 of the Act. In aforesaid view of the matter, we do not find any infirmity in the order of the CIT (A) in allowing the expenditure claimed by the assessee on account of staff fraud. Hence, this ground raised by the Revenue is dismissed. 12. The additional ground raised by the department in ITA No.1121/Hyd/2011 which corresponds to ground No.5 of ITA No.1459/Hyd/11 is with regard to deletion of addition made by the assessing officer on account of accrued interest on non performing assets (NPAs). 13. During the assessment proceedings, the assessing officer noted from the audit report in Form No.3CD, it was reported that income and expenditure were accounted on accrual basis except the interest on NPAs which was stated to have been recognised on realisation basis. When the assessing officer asked the assessee to explain as to why the interests on NPAs have not been recognised on accrual basis, the assessee submitted that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessee of the kind specified who have o account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. 16. The assessee relied upon a decision of Hyderabad Bench in case of TCI Finance Ltd. V/s. ACIT (91 ITD 573) wherein the Tribunal after going through the guidelines issued by RBI and the accounting standards notified by the Central Government u/s 145 of the Act observed that non recognition of income on the ground that the income had not really accrued as the realizability of the principles outstanding itself was doubtful, is legally correct under the mercantile system of accounting. The assessee further relied upon a decision of the Hon ble Madras High Court in the case of CIT V/s. Annamalai Finance Ltd. (275 ITR 451) wherein it was held that when the principal amount is doubtful for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem of accounting. The Hon ble Delhi High Court observed that when the principal amount has itself become doubtful to recover, it would be legitimate to infer that interest income thereupon has not accrued. The Income-tax Appellate Tribunal, Vizag Bench in case of DCIT V/s. Durga Co-operative Urban Bank Ltd. in ITA No.511/Vizag/2010 dated 10-3-2011 following the aforesaid decision of Hon ble Delhi High Court decided the issue in favour of the assessee by holding that interest income relatable on NPA advances did not accrue to the assessee. The other decisions cited by the learned counsel for the assessee before us also supports this view. In such view of the matter, we do not find any infirmity in the order of the CIT (A) which we accordingly uphold. The ground raised by the department is dismissed. ITA No.967/Hyd/2011 (assessee s appeal):- 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in the case of Goetz India Limited V/s. CIT (284 ITR 23). The CIT (A) held that the revised plea made in the appeal proceedings is not entertainable and accordingly rejected the claim of the assessee. 21. The learned AR reiterating his stand taken before the first appellate authority submitted that the CIT(A) was not justified in rejecting the evidence submitted before him by observing that no cognizance can be taken of the same as no petition in terms of Rule 46A was filed for admitting additional evidence. The learned AR submitted that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as allowed. ITA No.1387/Hyd/11 (Assessee s appeal): 25 This appeal of the assessee relates to the assessment year 2008- 09. 26. The issue in dispute in this appeal relates to disallowance of an amount of ₹ 10,46,19,487/- claimed as deduction u/s 36(1)(viia) of the Act. 27. Briefly the facts relating to the issue are, during the assessment proceedings, the assessee on 6-10-2008 submitted a letter before the assessing officer requesting to allow revised computation enclosed to the letter. It was submitted by the assessee that in the original return of income filed for the impugned assessment year, the assessee had not claimed deduction of an amount not exceeding 7.5% of the total income (computed before making any deduction under this clause and Chapter VI-A) as laid down u/s 36(1)(viia) of the Act. It was submitted that the revised computation filed as per section 139(5) to be considered. The assessing officer however rejected the claim of the assessee by observing that the revised computation has not been filed within the time prescribed u/s 139(5) of the Act. The assessee being aggrieved of the aforesaid decision of the assessing officer preferred an appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard assets for an amount of ₹ 15,23,19,231/- b) Though the provision towards staff leave encashment of ₹ 21,14,35,000/- by an amount of ₹ 13,72,08,180/- was made on 22-5-2007 within the prescribed time limit for assessment year 2007-08.However, the assessing officer failed to disallow the differential amount of ₹ 7,42,26,820/- u/s 43B of the Act. 33. The CIT issued a notice u/s 263 of the Act directing the assessee to show cause. The assessee in its reply submitted that the order of the Income-tax Appellate Tribunal on the basis of which the CIT formed his opinion was not available to the assessing officer during the assessment proceedings. Hence, there is no scope u/s 263 of the Act to revise the assessment order on the basis of subsequent events. In support of his contention, the learned AR relied upon the decision of Calcutta High Court in case of Jaikumar Kankaria vs. CIT (251 ITR 707). The CIT however did not accept the contention of the assessee by observing that since the assessing officer completed the assessment much after the decision was rendered by the Income-tax Appellate Tribunal, Hyderabad Bench in case of Andhra Bank vs. DCIT (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the material on record. We have also applied our mind to the decisions cited before us. Section 36 of the Act allows certain deductions while computing the income under the head business and profession . Sub-clause (vii) of section 36(1) provides for writing off bad debts as irrecoverable in the accounts of the assessee for the previous year. Sub-clause(viia) of section 36 allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank of an amount not exceeding 7.5% of total income and the amount not exceeding 10% of the aggregate average advances made by the rural branches of such banks computed in the prescribed manner. Therefore, a reading sub-clause (viia) would make it clear that deduction is allowable in respect of any provision for bad and doubtful debts made by the bank. As per RBI guidelines, the NPAs have been classified to the following three categories. a) Sub-standard assets b) Doubtful assets c) Loss assets. The sub-standard asset is one which has remained NPA for a period of least 12 months. In such cases, the current net worth of the borrower or the current market value of the security is not enough to ens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against these, standard assets are performing assets. In other words, they are neither bad nor doubtful of recovery. Non-performing assets have well defined creditworthiness that jeopardize the liquidation of the debt and there is distinct possibility that the bank will sustain loss if deficiencies are not corrected. On the other hand, performing assets are such which have not ceased to generate income for the bank. Nonetheless, as a matter of prudence, the RBI has directed the banks to make a general provision of a minimum of 0.25% on standard assets w.e.f. the year ending 31-3-2000. This is only, in our opinion, a safety measure or an over-cautious approach to take care of a standard asset becoming non-standard in future. But certainly, the provision for standard asset cannot be equated with a provision for a bad and doubtful debt. That is why, it is prescribed by the RBI that the provision for standard assets need not be netted out from gross advances but should be shown separately as contingent Provisions against Standard Assets . The head itself is indicative of the fact that this provision is contingent in nature whereas the provision for non performing assets is to guard ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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