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Joint Commissioner of Income-tax, LTU, Bangalore Versus M/s. Vijaya Bank And M/s. Vijaya Bank Versus Addl. Commissioner of Income-tax, LTU, Bangalore

2016 (8) TMI 74 - ITAT BANGALORE

Disallowance u/s 36(1)(viia) - Held that:- Deduction u/s 36(1)(viia) should be restricted to the extent of the amount of provision created in the books of account during the previous year relevant to assessment year under consideration. There is no provision in the Act enabling the assessee-bank to make good short-fall of earlier years in the subsequent years. Therefore, the contention advanced on behalf of the assessee-bank that in the subsequent year, the short-fall in previous year was made g .....

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e interests 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 u .....

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ents 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 .....

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s ground of appeal is also dismissed - ITA No.318/Bang/2014, ITA No.331/Bang/2014 - Dated:- 22-7-2016 - Shri Vijay Pal Rao, Judicial Member And Shri Inturi Rama Rao, Accountant Member Revenue by : Shri P.Chandrashekar, CIT(DR) Assessee by : Shri S.Ananthan, CA and Smt.Lalitha Ramaswamy, CA ORDER Per Inturi Rama Rao, AM : These are cross appeals filed by the assessee-bank as well as the revenue directed against the order of the CIT(A), LTU, Bangalore, dated 28/11/2013 for the assessment year 2009 .....

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09/-. While doing so, the AO made the following disallowances: The AO computed tax liability u/s 115JB of the Act. While doing so, the AO had not allowed set off of carried forward of loss of ₹ 172,79,57,339/- as according to the AO, there was no computed loss allowed to be carried forward for assessment year 2008-09. 3. The AO had not allowed deduction in respect of provision for doubtful debts in respect of rural branches as provided in sec.36(1)(viia) of the Act on the ground that the a .....

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i) 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 .....

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CIT(A) had relied on the decision of the Hon ble Punjab & Haryana High Court in the case of State Bank of Patiala vs. CIT (272 ITR 54). In respect of disallowance of bad debts claimed u/s 36(1)(vii), the CIT(A) confirmed the addition on the ground that the amounts were not actually written off in the books of account and also relied on the decision of the Hon ble Supreme Court in the case of Southern Technologies Ltd. (320 ITR 577). So far as the disallowance u/s 14A is concerned, the CIT(A .....

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appeal: 1. The order of the learned Commissioner (Appeals) is bad in law and against the facts of the case. 2. The learned Commissioner of Income Tax ( Appeals) erred in confirming the disallowance of ₹ 171,14,39,327 /- u/s 36(1)(viia). 2.1. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the appellant bank is entitled to deduction u/s 36(1)(viia) to the extent of amount calculated under the section and not with reference to the provision made in the boo .....

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(Appeals) erred in holding that the decisions relied on by the appellant bank are not applicable to the facts of this case. 3. 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 Inco .....

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ax (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 in following the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd [2010] 320 ITR 577 the facts of which are totally different. 4. The learned Commissioner of Income .....

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ellant bank was not correct. 4.3. The learned Commissioner of Income Tax (Appeals) erred in holding that the provisions of section 14A r.w. Rule 8D are applicable to the appellant banks case. For all these and other grounds which may be urged at the time of the hearing of this appeal, the appellant prays that its appeal be allowed. 6. The revenue, being aggrieved by the relief granted to the assessee-bank in respect of loss on HTM investments and mark to market loss on derivatives and sundry ass .....

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(Appeals) erred in allowing the assessee's claim of mark to market loss on derivatives of ₹ 111,89,71,243/-, as this expenditure was not considered as revenue expenditure while finalizing accounts and was claimed only in the computation income. 4. The Commissioner (Appeals) erred in allowing the assessee's claim of sundry assets written off of ₹ 16,04,125/-For these and such other grounds that may be urged at the time of hearing. 7. Now, we shall take up the assessee-bank s .....

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reated 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 .....

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sified by the Reserve Bank of India as doubtful assets or loss assets in accord the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets - in the books of account of the bank on the last day of the year: Provided further that for the relevant assessment year commencing on or after the 1st day of April, 2003 and ending the 1st day of April, 2005, the provisions of the first prov. have effect as if for the words "five per cent", t .....

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eturn of income under the head "Profits and gains of business or profession. Explanation.-For the purposes of this sub-clause, "re' assessment years" means the five consecutive assessment commencing on or after the 1st day of April, 2000 and before the 1st day of April, 2005 From a bare reading of the above provision, it is crystal clear that provision should be created in the books of account so as to enable the assessee to claim deduction in respect of advances of rural bran .....

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provision created for bad and doubtful debts in respect of rural branches. The same position was again reiterated by the Hon ble Punjab & Haryana High Court in the case of Haryana State Industrial Development Corporation vs. CIT (344 ITR 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. Th .....

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ebt 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 various provisions which also required creation of reserve aft .....

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heet. The provision has been made in the books of account of the subsequent year. Thus, having regard to the plain provisions of section 36(1)(viia) as well as the decision of the Hon ble Punjab & Haryana High Court in the cases cited supra, we hold that the deduction u/s 36(1)(viia) should be restricted to the extent of the amount of provision created in the books of account during the previous year relevant to assessment year under consideration. There is no provision in the Act enabling t .....

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apping of the amount claimed u/s 36(1)(viia). During the course of appellate proceedings before the CIT(A), the assessee-bank relied upon the decision of the Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. (343 ITR 270) in support of its claim that the claims u/s 36(1)(vii) and 36(1)(viia) are independent of each other. Obviously, the CIT(A) accepted this view but however considering the evidence filed by the AO before him, held that bad debts were not actually written off as ther .....

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ection, 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 additio .....

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harya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra) was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1-4-1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from 1-4-1989, a mere debit of the impugned amount of bad debt to the .....

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, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, bes .....

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he judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee(s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans an .....

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oth 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 .....

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er because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction under section 36(1)(vii) of1961 Act, twice over. [See Order of CIT (A) at pages 66, 67 and 72 of the Paper Book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under section 36(1)(vii), twice over. The Order of the Assessing .....

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assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the Bank statement and contend that no amount is due and payable in which event the suit would be dismissed. The assessee-bank had not produced any evidence .....

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of ₹ 5,20,530/- out 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 in .....

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ed 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(23G) .. ₹ 2,56,23,50,763/- Dividend union exempt u/s 10(34) & (35) ₹ 57,47,34,029/- Total .. ₹ 3,35,51,49,960/- It is the contention of the assessee-bank that no expenditure was incurred for earning above exempt income which does not form part of the total income. T .....

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enditure which should be disallowed in accordance with methods prescribed i.e. rule 8D of the IT Rules. Therefore, at the first instance, himself examine the claim of the assessee that no expenditure was incurred to earn exempt income and it is only thereafter, and only if the AO is not satisfied on this account, and after making reference to accounts, he is entitled to adopt the method prescribed under rule 8D of the IT Rules. Rule 8D of the IT Rules read as under: METHOD FOR DETERMINING AMOUNT .....

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on to such income in accordance with the provisions of sub- rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed .....

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me 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 pro .....

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own case, the Hon ble High Court of Karnataka held that no notional expenditure can be attributed to exempt income in the case cited supra. Accordingly, we hold that no disallowance can be made u/s 14A of the Act. The ground of appeal of revenue is dismissed. Similarly, we hold that no disallowance is called for under the provisions of sec.14A of the Act. 11. Now, shall take up the revenue s appeal bearing ITA No.318/Bang/2014. Ground Nos.1 and 5 are general in nature and do not require any adju .....

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s arising thereon should be recognized as revenue loss and same should be allowed. 12.1 Learned Departmental Representative placed reliance on the order of the AO and prayed that same may be disallowed the loss incurred is capital in nature. 12.2 On the other hand, learned AR of the assessee placed reliance on the decision of the co-ordinate bench in assessee s own case in ITA No.578/Bang/2012 dated 27/2/2015 for assessment year 2008-09. 12.3 We heard rival submissions and perused the material o .....

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y. Notwithstanding treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of RBI 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 chang .....

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e 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. But here the question is, in the earlier years though investments are shown as investments in the books of account, for income-tax purposes, the same was shown as .....

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of 2015, dated November 02, 2015. Subject : Interest from Non-SLR securities of Banks- reg. It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, expenses relatable to investment in non-SLR securities need to be disallowed under section 57(i) of the Act as interest on non-SLR securities is income from other sources . 2. Clause (id) of sub-section (1) of section 56 of the Act provides that income by way of interest on securities shall be .....

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stments is attributable to the business of banking falling under the head Profits and gains of business and profession . 3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 4. In the light of the Supreme Court s decision in the matter, the issue is well settled. Accordingly, the Board .....

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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-tr .....

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tional High Court further upheld the claim of the assessee-bank following the principle of consistency. Even the Hon ble Apex Court in the case of UCO Bank (supra) only laid down principle that where the investments are forming part of stock-in- trade, loss arising on account of fall in value of the securities should be recognized and allowed as a deduction. But the above case cited supra does not come to the rescue of the assessee-bank for the reason that the assessee-bank, even in the books of .....

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thod of accounting irrespective of the fact, it results in loss to revenue. Therefore, having regard to the spirit of the circular cited supra and the fact that investments are shown as stock-in-trade in the books of account, loss/depreciation on account of fall in value of securities held by the assessee-bank should be allowed as deduction. Therefore, income arising there-from should also be treated as business income. The provisions of section 45(2) cannot be applied to the facts of the presen .....

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ount of mark to market loss of ₹ 111,89,71,243/-. The AO disallowed the same holding that the securities were held as investments in books of account and loss arising, if any, is only capital in nature. The CIT(A) adopted the same reasoning applied in respect of HTM 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 .....

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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 are held as stock-in-trade then wha .....

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ed at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy". This is what the Supreme Court held in the case of Chainrup Sampatram v. CIT (1953) 24 ITR 481, speaking through Hon'ble Justice Patanjali Sastri, the then Chief Justice of India (pages 485 - 486 of the Report). At page 486 the Supreme Court further observed that "loss due to a fall in price below cost is allowed even if such loss has n .....

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eir market value. This decision of the Supreme Court governs the facts of the present case. It is to the assessee's strength that the Institute of Chartered Accountants of India in its guidelines have also approved of the rule of prudence which really means that while anticipated losses can be taken note of while valuing the closing stock, anticipated profits cannot be recognized. The anticipated loss, in the light of the judgment of the Supreme Court cited above, cannot be treated as a cont .....

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