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TMI Blog2014 (10) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... (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) which is overriding in nature. 2.3 The Learned CIT (A) erred in not considering the accounting principle that bad debts actually written off u/s 36(1)(vii) has to be first adjusted against the provision for bad and doubtful debts created u/s 36(1)(viia) and the balance of unabsorbed bad debts only can be written off." 4. The assessee is a nationalized bank. In the course of assessment proceedings, the Assessing Officer noticed that the Assessee had claimed deduction Rs. 131,78,25,000/- u/s. 36(1)(vii) of the Income Tax Act, 1961 (Act) as an allowable deduction regarding the bad debts written off. Additionally, the Assessee had also claimed deduction u/s. 36(1)(viia)(a) of the Act amounting to Rs. 128,40,29,809/- on account of provision for bad & doubtful debts. As per the Annexure enclosed with the ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recoverable 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 which claim deduction u/s.36(1)(viia)(a) of the Act, the examined the aforesaid claim made by the Assessee. The AO found that as per actual provision made as per the books of accounts towards bad & doubtful debts was Rs. 187,00,00,000/-. The AO was of the view that since the Assessee had already claimed Rs. 128,40,29,809/- u/s. 36(1)(viia)(a) of the Act towards provision for bad and doubtful debts, the claim for deduction on account of Bad debts written off u/s.36(1)(vii) of the Act of a sum of Rs. 168.97 Crores could not be allowed. The AO held that as laid down in the proviso to Sec.36(1)(vii) bad debts written off should first be adjusted towards provision created u/s.36(1)(viia) of the Act and only if the bad debts written off is more than the credit balance in the PBDD account can deduction u/s.36(1)(vii) be allowed to the extent of such excess. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 brought to the notice of the CIT(A) that the Hon'ble High Court of Karnataka has held in DCIT (Asst.) Special Range, Bangalore, Vs. The Karnataka Bank Ltd. [2008 175 Taxman 325, that deduction under section 36(1)(vii) is allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to the advances of the rural branches, subject to the limitation that an amount should not be deducted twice under section 36(1) (vii) and 36(1) (via) simultaneously. The facts in that case were that the appellant bank had, in the return for assessment year 1993-94 filed on 30- 12-1993, claimed a sum of Rs. 38,28,836 as bad debts actually written off. It had also claimed provision for bad and doubtful debts under section 36(1)(via) in a sum of Rs. 1,10,94,360. The assessing officer did not allow the claim for deduction of debts amounting to Rs. 38, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction, 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 bad and doubtful debts account made under clause (viia). If the bad debt written off related to debts other than those for which provision was made under section 36(1)(viia), such debts would fall squarely under the main part of subsection (vii) and would be entitled to the deduction. In respect of that part of 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 the debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). 10. The ld. CIT(Appeals) agreed with the contentions put forth by the Assessee and he held as follows:- "7. I have carefully considered the rival contentions. In the latest decision on the subject, the Hon'ble High Court of Karnataka has, in the case of DCIT (Asst.) Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction, 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 bad and doubtful debts account made under clause (viia)." The Addition made by the AO was deleted by the CIT(A) on the above reasoning. 11. Aggrieved by the order of the CIT(Appeals), the revenue has raised grounds No. 2.1 to 2.3 before the Tribunal. The ld. DR relied on the order of the AO. The ld. counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank v. CIT, 343 ITR 270 (SC), wherein the Hon'ble Supreme Court has clearly held that deduction u/s. 36(1)(vii) of the Act is an independent deduction and the provision for doubtful debts made u/s. 36(1)(viia) of the Act has nothing to do with the claim for deduction u/s. 36(1)(vii) of the Act. 12. We have considered the rival submissions. Identical issue raised by the Revenue in grounds No.2.1 to 2.3 had come for consideration before the Hon'ble Supreme Court in the case of Catholic Syr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit 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 absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under s. 36(1)(viia). The Explanation to s. 36(1)(vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of s. 36(1)(vii) simpliciter. (iv) As per the proviso to cl. (vii) of s. 36(1), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble 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 been explained by the circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to cl. (vii)." 13. The ratio laid down by the Hon'ble Supreme Court can be summed up as follows:- (1) Deduction under Section 36(1)(vii) of the Act is available for deduction on account of Bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actually written off in the books and debited to Profit & Loss account. Deduction cannot be claimed for creating Provision for Bad and Doubtful Debts of Non-rural branches. It is like any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee claimed deduction of a sum of Rs. 66,24,90,750 and Rs. 148,58,25,576 in respect of Dimunition in the value of Investments held by the Assessee in the "Available for Sale" (AFS) and "Held to Maturity" (HTM) category of Investments respectively. According to the Assessing Officer, as per the RBI's Master Circular - Prudential norms for classification, valuation and operation of Investment Portfolio by banks - vide No.DBOD BP BC.21/21.04.141/2003-04 dtd. 02.09.2003 and Circular of the CBDT, investment portfolio of banks cannot be treated as stock in trade where the investments are held on the basis of "Held to Maturity" category or "Available for Sale" category. The Assessing Officer was also of the view that the assessee has valued the securities as per the guidelines of RBI while preparing the balance sheet, but for IT purposes it had chosen to treat all investments as stock in trade and claimed diminution in value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,237 Rs.67,54,23,089 Add: Appreciation under HFT category Rs.55,78,535 Disallowance Rs.68,10,01,624 Disallowance under the head Depreciation on Investment Portfolio is Rs. 68,10,01,624/-." 17. On appeal by the assessee; the CIT (A), following the decision of the Hon'ble Supreme Court in the case of UCO Bank 240 ITR 355(SC) and decision of ITAT in Assessee's own case in AY 04-05 in ITA No.112/Bang/08 dated 3/12/2008, deleted the disallowance made by the Assessing Officer. Aggrieved by the order of the CIT (A), Revenue has preferred the present appeal before the Tribunal. 18. The learned DR relied on the order of the Assessing Officer. 19. The learned counsel for the assessee brought to our notice the decision of the Hon'ble ITAT, Bangalore Bench on similar issue in the case of Syndicate Bank v. DCIT (2013) 38 taxmann.com 25 (Bangalore - Trib.) and the decision of the Hon'ble Karnataka High Court in the case of Karnataka Bank Ltd., v. ACIT (356 ITR 549). 20. We have considered the rival submissions. Similar issue as to whether depreciation on investments held under the category "Held to Maturity" or "Available for Sale" can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balancesheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-intrade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case." The Bangalore Bench of ITAT in Corporation Bank (supra) has also followed the above decision of the Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue." 21. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue. 22. The revenue has filed an application seeking to raise the following additional grounds:- "1. Ld. CIT(A) has erred in holding that Rs. 128.40 crores is the amount of provision in respect of rural bad and doubtful debts, made during the year, whereas the assessee has made provision for rural bad and doubtful debts amounting to Rs. 18.03 crores only (out of total provision of Rs. 187 crores), which could be allowed under clause (viia) of S.36(1), as held by the Hon'ble Supreme Court in 343 ITR 270. No provision which is made for non-rural/urban doubtful debts could be allowed, as deduction U/s 36(1)(viia) is applicable only in respect of bad debts of rural branches. Such urban bad and doubtful debts have to be allowed separately and independently, as and when the debts become bad and are written off in the accounts of assessee bank in accordance with provision of Sec.36( 1)(vii). 2. Ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Rs.2006,70,34,996/- E. 10% of Average rural advance of Rs. 2513,19,12,300/- Rs.251,31,91,230/- F. 7.5% of D above Rs.150,50,27,625/- Total of E & F Rs. 401,82,18,855/- Since provision for bad debts made in books was Rs. 345,25,00,000/- the claim for provision for Bad Debts was restricted to Rs. 345,25,00,000/- by the AO as per the assessee's eligibility. The total assessed income as per order u/s.143(3) included Provision for Bad Debts amounting to Rs. 336,96,38,872/-. The difference amount of Rs. 8,28,61,128/- had to be reduced from the total income and was done accordingly by the AO. The assessee accepted the above computation of deduction u/s.36(1)(viia) of the Act and did not challenge the same before the CIT (A). Thus the deduction u/s.36(1)(viia) of the Act was never the subject matter of appeal before the CIT (A). In such circumstances, we are of the view that additional grounds 1 & 2 sought to be raised by the Revenue does not arise out of the order of the CIT (A). 25. The learned counsel for the assessee also filed before us an order of the ITAT, Bangalore Bench in the case of Syndicate Bank (supra) wherein identical addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be allowed only to the extent provision is created in the books; (ii) Even when such provision is created in the books, if there is opening balance in the PBDD A/C. that has to be taken into account and it is only where the provision made is in excess of the opening balance of provision available in PBDD a/c., subject to the limits prescribed in Sec.36(1)(viia)(a) of the Act that will be allowed as deduction. Therefore the additional gr.No.(i) sought to be raised by the Revenue does not arise out of the order of the AO or the CIT(A) and the same cannot be therefore admitted for adjudication. Even assuming there was an error on the part of the AO in this regard that could have been set right either in proceedings u/s.263 of the Act or by the CIT(A) in exercise of his powers of enhancement. The revenue cannot seek to raise an issue concluded in the assessment in the form of an additional ground before the Tribunal." 27. In our view, the aforesaid observations of the Tribunal will apply to the facts of the present case also. We are of the view that additional grounds nos.1 & 2 therefore cannot be admitted for consideration." 24. In the present case, the revenue by way of addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in ITA No.1393/Bang/2012 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. 25. In the result, ITA No.496/B/2010 is dismissed. ITA NO.815/BANG/2012 (A.Y. 2008-09) 26. Ground No.1 is general in nature and calls for no specific adjudication. 27. Ground Nos. 2 to 4 raised by the assessee reads as follows:- "2. Learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance of Rs. 23,99,63,931/- 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." 28. The assessee earned tax free income of Rs. 23,99,66,931. The AO invoking the provisions of section 14A r.w. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant financial year shows that Investments of the assessee in tax free securities as on 31.3.2007 was Rs. 592.48 Crores and the same as on 31.3.2008 was Rs. 850.23 crores. Own interest free funds available with the Assessee 31.3.2007 was Rs. 10,542.77 Crores and the same as on 31.3.2008 was Rs. 14,734.64 Crores. Therefore, available of interest free funds for making the investments which yielded tax free income cannot be disputed by the revenue. It is clear from the statement of available own funds and balance sheet that the assessee had enough funds out of which investments yielding tax free income were made. Therefore, no disallowance of interest expenses can be made applying Rule 8D(2)(i) or (ii) of the Rules. 35. With regard to disallowance under Rule 8D(2)(iii) of the Rules, this Tribunal held disallowance of 5% of the tax free income would be just and proper. Following were the relevant observations of the Tribunal:- "13. With regard to disallowance under Rule 8D(2)(iii) of the Rules, it is seen that even in assessee's own case in the past, the disallowance of 5% of the exempt income was considered as appropriate disallowance u/s.14A of the Act. The Hon'ble ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned AO be directed to allow the deduction of Rs. 36,54,07,903/- u/s 36(1)(vii) of the Act, being the debts written off by the non-rural branches of the appellant bank." 38. The non-rural branches of the Assessee had written off debts to the tune of Rs. 36,54,07,903 as bad debts. The Assessee was entitled to claim the said sum as deduction u/s.36(1)(vii) of the Act. It appears that the Assessee did not claim on an erroneous advise that the bad debts written off should be adjusted against provision for bad and doubtful debts created u/s.36(1)(viia)(a) of the Act. The Assessee after noticing the development of law in this regard, as we have seen earlier while deciding gr.No.2.1 to 2.3 of the grounds of appeal in ITA No.496/Bang/10 for AY 2006-07, has chosen to raise the aforesaid ground of appeal before the Tribunal, making a claim for deduction u/s.36(1)(vii) of the Act for the first time before the Tribunal. 39. We have heard the submissions of the ld. counsel for the assessee and the ld. DR. We are of the view that the claim of the assessee being a legal claim and as the facts necessary for adjudication of the legal ground are already on record, the additional ground has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is as follows:- "5. The lower authorities erred in not giving credit of Rs. 84,97,160/- being additional income tax paid u/s 115(O) of the Act on the dividend received from a 100% subsidiary of the appellant. 6. The lower authorities erred in not giving credit of Rs. 1,20,08,840/- being the refund arising u/s 115WE(3) of the Act being the excess payment of fringe benefit tax." 45. As far as ground No.5 is concerned, same was raised before the CIT(Appeals) by the assessee, but the same was withdrawn and application u/s. 154 was filed by the assessee seeking adjudication of the issue but the same has not yet been considered and decided. Provisions of section 115-O(1A) of the Act are as follows:- "Special provisions relating to tax on distributed profits of domestic companies Tax on distributed profits of domestic companies. 115-O.(1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwi ..... 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