TMI Blog2014 (10) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... t portfolio by treating the investments held by the bank as stock-in-trade - Held that:- AO in the order giving effect to the order of the CIT(A) has factually found that the bad debts claimed as deduction u/s.36(1)(vii) of the Act has actually been written off in the books of accounts of the Assessee. There is, therefore, no basis for the revenue to raise the aforesaid additional grounds before the Tribunal. The additional ground sought to be raised is therefore not admitted for adjudication. In this regard, we are also of the view that decision rendered by the Tribunal in assessee’s own case for the A.Y. 2010-11 on an identical additional ground, will also be applicable in the present case. The additional ground sought to be raised are therefore dismissed as not admitted for adjudication. Addition u/s 14A - Held that:- Perusal of the financial statements of the Assessee for the relevant financial year shows that Investments of the assessee in tax free securities as on 31.3.2007 was ₹ 592.48 Crores and the same as on 31.3.2008 was ₹ 850.23 crores. Own interest free funds available with the Assessee 31.3.2007 was ₹ 10,542.77 Crores and the same as on 31.3.2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ananthan, C.A. ORDER N.V. Vasudevan, ITA 496/Bang/2010 is an appeal by the revenue against the order dated 3.2.2010 of the CIT(Appeals), Mangalore relating to A.Y. 2006-07. ITA No. 815/Bang/2011 is an appeal by the assessee against the order dated 27.1.2011 of the CIT(Appeals), Mysore relating to A.Y. 2008-09 and ITA No.816/Bang/2011 is also an appeal by the assessee against the order dated 19.4.2011 of the CIT(Appeals), Mysore relating to A.Y. 2009-10. All these appeals were heard together. We deem it convenient to pass a consolidated order. ITA No.496/B/2010 (A.Y. 2006-07) 2. Grounds No.1, 4.1 4.2 raised by the revenue are general in nature and call for no specific adjudication. 3. Grounds No.2.1 to 2.3 raised by the revenue reads as follows:- 2.1 The learned CIT(A) failed to appreciate the fact that the distinction made by the assessee in respect of urban bad debts deductible u/s 36(1)(vii) and for rural debts u/s 36(1)(viia) is not tenable as there are no such distinctions as per the said sections. 2.2 The Ld. CIT(A) has not taken into cognizance the fact that the deductions u/s 36(1)(vii) are subject to the provisions of sec 36(2)(v) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. 6. Section 36(1)(viia)(a) of the Act allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a nonscheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank:- An amount not exceeding seven and one-half per cent (7.5%) of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. 7. A comparison of Sec.36(1)(vii) and Sec.36(1)(viia)(a) would show that Section 36(1)(vii) of the Act provides deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee, while Section 36(1)(viia)(a) provides the deduction merely for making provision for bad and doubtful debts up to the prescribed limit in respect of aggregate average advances made by the rural branches (AAAR) of such bank. 8. In the light of the above provisions of law applicable to banks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the write-off and the provision are in respect of the same class of debts. It was also pointed out that both the allowances envisaged under section 36(1)(vii) and 36(1)(viia) are admissible deductions in computing the income of Banks and are independent of each other is confirmed by the Central Board of Direct Taxes (CBDT) Circular No. 258, dated 14.06.1979, which is still in force. Provisions made under section 36(1)(viia) are in respect of aggregate advances made by rural branches, whereas the writeoff under section 36(1)(vii) is in respect of a separate set of urban branches debts, i.e., other than the rural debts covered by the provision made under section 36(1)(viia). The proviso clearly indicates that the debts for which provision has been made under section 36(1)(viia), if written off under section 36(1)(vii), would not be allowed to the extent of the provision made for such debt. The proviso does not apply to debts that are independent of the provisions under section 36(1)(viia), viz., urban debts. The restriction laid down by the proviso is to prevent double claims for deduction under both sections 36(1)(vii) and 36(1)(viia) in respect of rural debts. It was also brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presumed to have intended such a result in the case of scheduled banks. The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously was only to see that a double benefit in respect of the same bad debt is not being given to a scheduled bank. It was only for the said purpose that the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. The scope of the proviso to clause (vii) of section 36(1) of the Act was only to deny the deduction to the extent of bad debt written off in the books with respect to which provision was made under clause (viia) of the Act. If the bad debt written off related to debts other than for which the provision was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e presumed to have intended such a result in the case of scheduled banks. The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously was only to see that a double benefit in respect of the same bad debt is not being given to a scheduled bank. It was only for the said purpose that the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. 10. The scope of the proviso to clause (vii) of section 36(1) of the Act was only to deny the deduction to the extent of bad debt written off in the books with respect to which provision was made under clause (viia) of the Act. If the bad debt written off related to debts other than for which the provision was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions and, therefore, cannot be intermingled or read into each other. (ii) Clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to s. 36 demonstrate that the deduction on account of provisions for bad and doubtful debts under s. 36(1)(viia) is distinct and independent of the provisions of s. 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. (iii) The language of s. 36(1)(vii) is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to s. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) on the one hand and that it satisfies the requirements stated in s. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of by the proviso to cl. (vii) which limits 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 cl. (viia). CBDT itself has recognized the position that a bank would be entitled to both the deductions, one under cl. (vii) of s. 36(1) on the basis of actual write off and another, on the basis of cl. (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to cl. (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under cl. (viia). Thus, the proviso to cl. (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of cl. (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which cl. (viia) applies. Clause (viia) applies only to rural advances. This has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the AO has passed order giving effect to directions of CIT(Appeals), in which he has considered the claim of the assessee and found that debts have been actually written off in the books of account. Order of the AO giving effect to directions of the CIT(Appeals) dated 9.2.2010 was also filed before us. 15. Grounds 3.1 to 3.3 raised by the revenue read as follows:- 3.1 The learned C1T(A) erred in allowing the assessee s claim of depreciation on valuation of investment portfolio by treating the investments held by the bank as stock-in-trade. 3.2 The Ld. CIT(A) has failed to appreciate the fact that the assessee bank has followed the RBI Guidelines for valuation of investment portfolio for the purpose of books but has treated the entire investments as stock-in-trade and valued the same as per least of cost or market value, values for income tax purpose only thereby making a claim for a notional loss. 3.3 The CBDT Circular No.665 directs the Assessing Officers to approach the issue of valuation of investment portfolio held by the banks in line with the RBI Guidelines issued from time-totime. The Ld. CIT(A) has not considered this Circular properly. 16. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation computed as per RBI Guidelines in respect of AFS category amounting to ₹ 49,38,98,040/- and also have debited amortization amounting to ₹ 97,89,95,197/- in HTM category in their P L Account. Thus, the total disallowance made by the assessee bank themselves in their Income-tax Memo works out o ₹ 147,28,93,237/. The same has been verified from the annexures to return of income filed by the assessee bank. Accordingly, the disallowance of depreciation claimed under Investment Portfolio is worked out as under: a) Depreciation claimed under LCM method in respect of Available for Sale : ₹ 66,24,90,750 b) Depreciation claimed under LCM method in respect of Held to Maturity : ₹ 148,58,25,576 ₹ 214,83,16,326 Less: Depreciation disallowed by Assessee Bank in the I.T.Memo under AFS Rs.49,38,98,040 Amortization under HTM category Rs.97,89,95,197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y investment held by a bank cannot be considered as stockin- trade. The Hon ble High Court finally concluded that 30% of the investments can be clothed to the character of stock-in-trade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction. 59. The ld. counsel for the assessee, however, submitted that in the assessee s own case for the A.Y. 2005-06, this Tribunal has confirmed the order of the CIT(A), deleting identical addition made by the AO. Our attention was also drawn to the order of the Tribunal in assessee s own case in ITA No.492/Bang/2009 for the A.Y. 2005-06, order dated 13.01.2012, wherein the Tribunal had to deal with identical issue as to whether the CIT(A) was correct in deleting the addition made by the AO on account of profit on sale of investments of ₹ 200,77,13,662/- and deleting the action of the AO in disallowing loss claimed on treating investments as stock-in-trade by drawing the investment trading account of ₹ 775,96,55,047. The Tribunal held 16. We have heard both sides and find that the Supreme Court in the case of UCO Bank in 240 ITR 355 has held as under : In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat all investments held by a bank are to be regarded as stock-in-trade. 61. The ld. counsel for the assessee further drew our attention to a very recent decision of the Hon ble High Court of Karnataka rendered on 11.03.2013 in the case of CIT v. Vijaya Bank, ITA No.687/2008. The Hon ble High Court of Karnataka in the aforesaid case followed its own decision rendered in the case of Karnataka Bank Ltd. v. CIT in ITA No.172/2009 rendered on 11.01.2013, wherein the Court took the view that depreciation claimed on investments held on maturity by a bank has to be treated as stock-in-trade in accordance with RBI guidelines and CBDT Circular. It was his submission that the later decision of the Hon ble Karnataka High Court has to be followed. 62. We have given a careful consideration to the rival submissions and are of the view that the contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in assessee s own case on an identical issue for the A.Y. 2005-06 has upheld the claim of the assessee. The later decision of the Hon ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.97 crores when no such amount of bad debts has been written off by the assessee in its books of accounts nor debited to the P L account or claimed in the return. This amount is merely a provision for non-rural bad doubtful debts out of a total provision of ₹ 187 Crores which is not allowable under clause (vii) of S.36(1). 23. Similar additional grounds were also filed by the revenue in ITA No.1393/B/2012 for A.Y. 2010-11. The Tribunal considered the admissibility of the additional grounds and dismissed the same, observing as follows:- 24. As far as additional ground nos.1 2 sought to be raised by the Revenue are concerned, the facts are as follows. In its computation of income the assessee has claimed deduction u/s.36(1)(viia) of the Act of a sum of ₹ 336,96,38,872/-. Since the total income of the assessee bank was assessed higher than what the assessee had filed in the return of income the eligible provision for bad debts had to be reworked. The assessee bank has made a provision for bad debts of ₹ 345,25,00,000/- as reflected in the books of accounts. The re-computation of eligible deduction u/s.36(1)(viia) was done by the AO as below : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favourable consideration of the Hon ble Tribunal: (i) Assessee s claim of deduction u/s 36(1)(viia) of ₹ 503.49 crores is not in accordance with the provisions under the Act, read with Rule 6ABA of the IT Rules, 1962, and hence not allowable to that extent? (ii) Since (a) non-rural bad and doubtful debts may be written off and allowable u/s 36(i)(vii) independently, and (b) only rural debts written off can be set off/debited against the provisions made u/s 36(1)(viia) in previous years, and/or to be made during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to 10% thereof, subject to available credit balance to this account. (iii) Alternatively, and without prejudice to the grounds above, if the computation of the provision has to also include any amount not exceeding 7.5% of the total income, such income should be restricted to the total income of rural branches, or to the amount as prescribed under the RBI prudential norms. Since the grounds raised are legal grounds, which go to the root of the matter relating to allowance of deduction u/s 36(1)(viia), the same may kindly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order giving effect to the directions of the CIT(A) has found that the claim for deduction on account of bad debts written off u/s.36(1)((vii) has actually been written off in the books. The provision for Bad and Doubtful Debts made u/s.36(1)(viia)(a) of the Act in the books of accounts of the Assessee has nothing to do with the claim for bad debts made u/s.36(1)(vii) of the Act as we have already held while deciding Gr.No.2.1 to 2.3 of the grounds of appeal. As far as Addl.Grd.No.2 raised by the Revenue is concerned, the same is factually incorrect besides being an altogether new issue sought to be raised by the Revenue which was neither raised by the AO or CIT(A) in exercise of his powers of enhancement. Even this additional ground proceeds on a factually incorrect basis that the provision for bad and doubtful debts as per books of accounts and that claimed as deduction in assessment of income under the Act are one and the same. The reference of figures in the additional ground No.2 is to the PBDD made in the books of accounts which were never claimed or allowed as deduction in the past assessment. Similar additional grounds sought to be raised by the Revenue in the case of Syndi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) B Average value of investment as on the first day and last day of previous year (Rs.850,21,85,309 489,83,75,229)/2 Rs.670,02,80,269 (ii)C Average of total assets as on the first and Last day of previous year (Rs.665,97,68,14,118 + ₹ 527,20,64,35,762)/2 Rs.596,59,16,24,940 (iii) % of average value of investment ( % of ₹ 670,02,80,269) Rs.3,35,01,401 Expenditure incurred in relation to exempt income = (i) + AXB/C+(iii) Rs.37,86,54,421 29. As can be seen from the above computation, disallowance worked out by the AO was ₹ 37,86,54,421. He however restricted the disallowance u/s. 14A to the tax free income earned by the assessee i.e., ₹ 23,99,64,931. 30. On appeal, the CIT(Appeals) confirmed the order of the AO. Aggrieved by the order of the CIT(A), assessee has raised grounds No.2 to 4 before the Tribunal. 31. We have heard the submissions of the ld. counsel for the assessee, who brought to our notice the Details of investments and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever proceeded to apply the provisions of Rule 8D without having regard to the claim of the assessee that provisions of Rule 8D(2)(iii) of the Rules could not be applied. As laid down by the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd., (328 ITR 81), a claim made by the assessee with regard to disallowance u/s.14A of the Act had to be objectively examined by the Assessing Officer. It is not necessary for the Assessing Officer to resort to Rule 8D of the Rules when a reasonable and proper basis for disallowance u/s.14A of the Act exists. In the present case, such basis existed in the form of acceptance of the similar claim of the assessee in the past by the Tribunal. The Assessing Officer has not brought on record any facts to justify a higher disallowance than what is claimed by the assessee. The Bangalore Bench of the ITAT in the case of Bharatiya Reserve Bank Note Mudran Private Ltd (supra) has taken the view that resort to Rule 8D(2) cannot be had as a matter of course and it is only when no reasonable and proper parameter for making disallowance u/s.14A of the Act exists, resort to Rule 8D(2) can be had by the Assessing Officer. We are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We, however, are of the view that the factual details that are already available on record need to be verified, to adjudicate the claim of the assessee. We are of the view that it would be just and appropriate to direct the AO to consider the claim of the assessee in accordance with law, after affording reasonable opportunity of being heard. Ground No.5 is treated as allowed for statistical purposes. 40. In the result, appeal by the assessee is partly allowed. ITA 816/Bang/2011 (A.Y. 2009-10) 41. Ground No.1 raised by the assessee is general in nature and calls for no specific adjudication. 42. Ground Nos. 2 to 4 raised by the assessee read as follows:- 2. Learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance of ₹ 25,23,97,921/- u/s 14A of the Act. 3. Learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that no disallowance of interest can be made. 4. Learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the learned AO has not recorded any dissatisfaction about the claim of the appellant and the disallowance was made based on notional cost. 43. The aforesaid grounds rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent. (1A) The amount referred to in sub-section (1) shall be reduced by,- (i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,- (a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or (b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend: Provided that the same amount of dividend shall not be taken into account for reduction more than once; (ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10. Explanation.-For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value of the equity share capital of the company. 46. It is the claim of assessee that i ..... 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