TMI Blog2016 (8) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... sts of justice, we remit this issue back to the file of the AO to allow the same as deduction after satisfying himself that provision for bad debts is debited to P&L account and reduced the same from sundry debtor’s account in the balance sheet. Addition u/s 14A - Held that:- As provisions of sec.14A have no application in case assets are held as stock-in-trade. Therefore, provisions of sec.14A cannot be applied in the present case. Thus we hold that no disallowance is called for under the provisions of sec.14A of the Act. Loss on account of depreciation in the value of HTM securities - Held that:- Loss arising on valuation of HTM category of securities should be allowed as revenue loss. This ground of appeal is dismissed. See Canara Bank Versus Joint CIT, LTU, Bangalore [2016 (4) TMI 429 - ITAT BANGALORE] Loss on account of mark to market loss - Held that:- As the facts emerge from the assessment order, it is clear that though derivatives are shown as investments in the books of account. However, for income-tax purposes, the same were claimed as stock-in-trade and this practice was continuously followed by the assessee-bank. Thus, for income-tax purposes, derivatives form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(viia) of the Act and made addition of ₹ 171,14,39,327/-. The AO also disallowed the claim for bad debts u/s 36(1)(vii) of ₹ 55,62,08,835/- on the ground that the credit balance available in the provision for bad and doubtful debts created under the provisions of sec.36(1)(viia) is much higher than the amount actually written off us 36(1)(vii). Accordingly, the AO held that deduction is not allowable u/s 36(1)(vii) and disallowed a sum of ₹ 55,62,08,835/-. The AO also disallowed an amount of ₹ 2,54,00,000/- u/s 14A of the Act. The AO held that the assessee was not entitled to depreciation in the value of securities held under the category of Held to Maturity [HTM] by holding that it is not a capital loss and accordingly brought to tax a sum of ₹ 151,48,15,234/-. The AO also disallowed deduction of ₹ 111,89,71,243/- as loss on Mark to Market loss on Derivatives holding that it is artificial loss. Sundry assets written off of ₹ 16,04,126/- was also added to the total income. 4. Being aggrieved by the assessment order, an appeal was preferred before the CIT(A), LTU, Bangalore, who vide order dated 28/11/2013, partly allowed the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of ₹ 55,62,08,835/- u/s 36(1)(vii). 3.1. The Learned Commissioner of Income Tax (Appeals) erred in holding that the bad debts were not written off by the appellant bank on the basis of the alternate submission of the learned Assessing Officer. 3.2. The Learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that in the original assessment proceedings, the learned Assessing Officer had accepted the fact that the bad debts were written off. 3.3. The order of the Learned Commissioner of Income Tax (Appeals) is based on surmises conjunctures. 3.4. The learned Commissioner of Income Tax (Appeals) erred in holding that the bad debts were not written off since there was no debit to the Profit Loss Account. 3.5. The Learned Commissioner of Income Tax (Appeals) erred in not admitting the evidences placed by the appellant bank. 3.6. The learned Commissioner of Income Tax (Appeals) erred in not following the decision of the Hon'ble Supreme Court in the appellant bank's own case. 3.7. The learned Commissioner of Income Tax (Appeals) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of a sum of ₹ 171,14,39,327 /- u/s 36(1)(viia) of the Act. Learned AR of the assessee-bank submitted that the amount was disallowed u/s 36(1)(viia) by the AO and confirmed by the CIT(A) on the ground that no requisite provision was created in the books of account. The deduction was limited to the extent of actual amount of provision created in the books of account. It is not dispute that the assessee-bank is eligible for deduction u/s 36(1)(viia). The only ground on which the AO has restricted the deduction is on account of short-fall in creation of provision. The relevant provisions of section 36(1)(viia) read as under: 36(1)(viia) in respect of any provision for bad and doubtful debts made by (a) a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or a non- scheduled bank, an amount (not exceeding seven and one-half per cent] of the total income (computed before making deduction under this clause and Chapter VIA) and an amount exceeding 34[ten] per cent of the aggregate average ad made by the rural branches of such bank computed in prescribed manner: Provided that a scheduled bank or a non-scheduled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 460). The Hon ble Punjab Haryana High Court in the case of State Bank of Patiala vs. CIT (272 ITR 54) held as follows: 6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to clause (vii) of section 36(1) of the Act, which reads as under : Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such 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. 7. This also clearly shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under section 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein deductions had been allowed under var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n u/s 36(1)(vii) it is enough if the debts are written off in the books of account and it is not necessary to establish that debts have become really bad. In this connection, he relied on the decision of the Hon ble Supreme Court in the case of T.R.F. Ltd. vs. CIT (323 ITR 397). As regards write off of debt, he submitted that debit in P L account and reducing the provision for bad debts from sundry debtors in the balance sheet amounts to write off as held by the Hon ble Supreme Court in the case of Vijaya Bank vs. CIT (323 ITR 166). 9.2 We heard rival submissions and perused the material on record. The only ground on which the CIT(A) confirmed the addition made on account of bad debts is that debts have not been written off in the books of account. Similar issue had come up before the Hon ble Supreme Court in the case of Vijaya Bank (supra) wherein the Hon ble Supreme Court held that debiting P L Account by provision for bad debts and reducing the same from the sundry debtors in the balance sheet amounts to write off. The relevant part of the judgment is extracted below: 7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in its books, as indicated above. 8. Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of 1961 Act applies both to Banking and Non-Banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of administrative expenses of treasury department. The AO, without rendering any finding as to how this claim is incorrect, made arbitrary disallowance of ₹ 2,54,00,000/- . The CIT(A) also confirmed the same without assigning any reasons. 10.1 On the other hand, learned Departmental Representative relied on the orders of the lower authorities. 10.2 We heard rival submissions and perused the material on record. It is undisputed fact that the assessee-bank earned interest from tax-free bonds of ₹ 2,29,20,547/- and dividend exempt u/s 10(34) of ₹ 4,83,12,766/-. It is also undisputed that the securities are held as part and parcel of banking business and stock-in-trade for income-tax purposes. Similar issue had come up for consideration before us in the case of Canara Bank in ITA Nos.479 530/Bang/2009, 530 601/Bang/2010, 793 813/Bang/2011 dated 30/03/2016, wherein we held as follows: 14.5 We heard the rival submissions and perused material on record. It is undisputed fact that the assessee earned tax-exempt income from the following sources: Interest on PSU bonds exempt u/s 10(15)(iv)(a) .. ₹ 21,80,65,168/- Interest exempt u/s 10(23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ............... 14.6 Sub-rule (1) of rule 8D extracted above states that, the AO having regard to accounts of the assessee and not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income can go on to determine disallowance under sub-rule (2) to rule 8D of the IT Rules. Sub-rule (2) does not come into operation until and unless specific condition in sub-rule (1) is satisfied. This position is reiterated by the Hon ble High Court of Karnataka in the case of Maxopp Investment Ltd. vs. CIT (347 ITR 272), and Bombay High Court in Godrej Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81). The AO had not given any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn exempt income was incorrect. In the absence of such finding, resort cannot be had to the provisions of sub-rule(2) of rule 8D as held by the Hon ble High Court in the cases cited supra. Furthermore, it is undisputed fact that exempt income is earned from securities which are held as a part of stock-in-trade. The Hon ble Bombay High Court in the case of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... governing SLR requirement. Even otherwise, the Hon'ble jurisdictional High Court in the case of Karnataka Bank vs. CIT (356 ITR 539) held that circular issued by the RBI for treatment in the books of account is not relevant for classifying the investments whether stock-in-trade or not. In the present case, undisputedly, assessee-bank has changed its method of accounting by classifying the investments from investments to stock-in-trade. In such a situation, provisions of sec.45(2) of the Act are attracted. The said provisions of the Act read as under: 45(2)Notwithstanding anything contained in sub- section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock- in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed upon. This may be brought to the notice of all concerned. (Sd.) . . . . . . . D. S. Chaudhry, CIT (A J), CBDT, New Delhi. From the reading of the above circular, it is clear that investments held by the banking concern are treated as a part of business of the banking company and therefore, the income arising from such investments is treated as part of business income falling under the head profits and gains of business . Though the circular was issued in the provisions of sec.80P of the Act, the said principle was equally made applicable to other banks and commercial banks to which Banking Regulation Act, 1949 applies. Therefore, by virtue of the above said circular, investments made by the banking company should be treated as a business asset of the banking company or stock-in-trade. It is well settled in law that CBDT circulars are binding upon the officers who are entrusted with the responsibility of executing the provisions of the Act. 9.6 The jurisdictional High Court, in the case of Karnataka Bank (supra), after referring to the judgment of the Apex Court in the case of Southern Technology (320 ITR 577) and UCO Bank (237 ITR 889) held that the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... category of securities and held that derivatives are held as stock-in-trade under banking company and therefore, loss arising thereon on the valuation as at the end of the accounting year following the principle cost or market price whichever is lower, should be allowed as deduction. 13.1 We heard rival submissions and perused the material on record. As the facts emerge from the assessment order, it is clear that though derivatives are shown as investments in the books of account. However, for income-tax purposes, the same were claimed as stock-in-trade and this practice was continuously followed by the assessee-bank. Thus, for income-tax purposes, derivatives form part of the stock-in-trade. When derivatives are held as stock-in-trade, then the salutary principle for valuation of stock in trade that stock has to be valued at cost or market price whichever is lower should be followed. Loss, if any, arising as a result of such valuation should be allowed as a loss. The same reasoning was followed by the co-ordinate bench of Mumbai in the case of Edelweiss Capital Ltd. vs. ITO [2010] 8 taxmann.com 157(Mum) wherein the co-ordinate bench held as under: ....When the derivatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same treating it as bad debt written off. 14.1 Learned Departmental Representative relied on the order of the AO. On the other hand, learned AR of the assessee submitted that sundry debts written off represent penalties imposed in respect of accounts which are inoperative for not maintaining of minimum required balance etc. The system automatically debits the customer s account with such charges wherever required. However, in some cases such charges were not recovered at all as the customers chose not to revive their accounts. Such outstanding balances/sundry assets were written off. It is submitted that whenever there was recovery the same were offered to tax. Sundry assets do not mean bad debts as bad debts pre-suppose existence of a debtor. There was no debtor and creditor relationship in these cases, as no money was lent to them. It is nothing but non-recovery of services charges. 14.2 We heard rival submissions and perused the material on record. In the present case, amounts written off represent services charges. It is undisputed fact that in the year of recovery the same were offered to tax. Therefore, we do not find any fault with the reasoning adopted by the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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