TMI Blog2014 (6) TMI 1052X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee in the present AY 09-10 is not entitled to deduction u/s.36(1)(viia)(a) of the Act on an amount greater than the amount debited to the profit and loss account as provision as laid down by the Hon ble Punjab and Haryana High Court in the case of State Bank of Patial[ 2004 (5) TMI 12 - PUNJAB AND HARYANA HIGH COURT] . The disallowance made by the AO in this regard is restored and order of CIT(A) reversed on this aspect. Gr.No.2 raised by the Revenue is accordingly allowed. Interest on Securities on accrual basis - HELD THAT:- It is not in dispute before us that identical decision has also been rendered by the Hon ble High Court of Kerala in the case of CIT v. Federal Bank, [ 2008 (1) TMI 195 - KERALA HIGH COURT] In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the revenue in the past. In view of the aforesaid decision, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, ground No.3 raised by the revenue is dismissed. Loss on Valuation of Investments - HELD THAT:- The facts and circumstances in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such circumstances, we are of the view that in the light of the principles laid down by the Hon ble Supreme Court in the case of BEML (supra), the claim for deduction should be allowed. We accordingly direct the AO to allow the claim of the assessee in this regard. MAT applicability - HELD THAT:- Provisions of Sec.115JB of the Act are not applicable to the Assessee which is a banking company. Taxing unclaimed monies in NOSTRO Accounts as income of the Assessee taxable u/s.41 - whether similar sums which are credited to the Profit Loss A/C. after due permission of RBI after conditions imposed by RBI similar to the one imposed in the case of the Assessee? - HELD THAT:- The Reserve Bank of India, while giving permission to close these accounts has clearly stipulated that the amount so transferred shall not be treated as available for distribution of dividends, meaning thereby the Reserve Bank of India has not permitted the bank to treat it as an income once and for all and it has always stipulated certain conditions and prescribed certain procedures and formalities to safeguard the interest of the bank as a whole but that does not take away the basic nature of the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on towards Provision for Bad Doubtful Debts, necessary debit has to be made to the P L A/c, and is admissible only to the extent provision has been debited. 2.c. The learned CIT(A) erred in not considering the fact that the orders of Hon ble ITAT in assessee s own case, for the asst. year 1987-88, has not been accepted by the Department and direct appeal to Hon ble High Court has been filed. 2.d. The learned CIT(A) erred in not considering the decision of Hon ble High Court of Punjab and Haryana in the case of State Bank of Patiala vs. CIT (2005) 272 ITR 54 wherein it is held that making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction and that proviso to clause (vii) of Sec. 36 (1) also shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under sec. 36 (1)(viia). 3. The Revenue sought to raise three additional grounds and these are connected to Ground No.2 raised by the Revenue in its original grounds of appeal vide letter dated 11.07.2012. These grounds read as follows: The appellant seeks permission to rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g provision for rural advances only, and (c) only rural debts written off can be set off/debited against the provisions made u/s.36(1)(viia)(a) in previous years, and/or to be made during the year, amount of deduction u/s.36(1)(viia)(a) should be computed only to the extent provision for rural advances debited to the P L Account. 5. The revenue has sought to raise further additional ground vide letter dated 24.09.2013 and the additional ground is connected to Ground No.2. The ground so sought to be raised reads as follows: (i) The Ld. CIT(A) ought to have noted that assessee s claim of 10% of average rural advances u/s 36(1)(viia) is based on categorization of places as made by RBI and not in accordance with Expln.(ia) below section 36(1)(viia). Reliance is placed on the decision of the Hon ble High Court of Kerala dated 07.10.2010 in ITA No. 234 of 2009 in the case of CIT vs. The Lord Krishna Bank Ltd (195 Taxman 57) wherein it has been held that place referred to in the definition clause for the purpose of identifying the branch as a rural is the revenue village with population in the village as a unit is less than 10,000 and therefore the claim of the assessee bank ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 674,35,40,590/-. The AO was of the view that as laid down by the Hon ble Punjab and Haryana High Court in the case of State Bank of Patiala Vs. CIT 272 ITR 53 (P H), claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The AO therefore proposed to disallow a sum of ₹ 227,41,45,853 (Difference between ₹ 674,35,40,590 and ₹ 446,93,94,737). 12. With regard to the proposal of the AO to restrict deduction u/s.36(1)(viia) of the Act to the extent of provision created by debit to profit and loss account of only a sum of ₹ 446,93,94,737 based on decision of Hon ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra), the Assessee submitted that its claim is based on the decision of the ITAT, Bangalore in Assessee s own case reported in 78 ITD 103 wherein it was held that irrespective of the debit to the profit and loss account on account of Provision for Bad and Doubtful Debts (PBDD), an Assessee is entitled to 10% of the AARA as deduction u/s.36(1)(viia) of the Act. 13. The AO however held that the decision of the ITAT in Assessee s own cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 and additional grounds referred to in the earlier part of this order. 17. At the time of hearing it was brought to our notice that identical issue had come for consideration in Assessee s own case in A.Y.06-07 07-08 in ITA No.708 709/Bang/2010 order dated 19.6.2013 and this Tribunal held in favour of the Revenue by allowing the main ground raised by the Revenue. With regard to the admissibility of the additional grounds for adjudication that are sought to be raised vide AO s letter dated 11.7.2012, 27.3.2013 and 24.9.2013, the Tribunal referred to the provisions of Sec.36(1)(viia)(a) of the Act which 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 non-scheduled 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 bra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 295,55,54,682). b) Apart from the above the AO also disallowed the sum of ₹ 295,55,54,682 out of ₹ 503,49,00,000 claimed as deduction u/s.36(1)(viia) of the Act. The reasons given for disallowing claim for deduction of ₹ 295,55,54,682/- u/s.36(1)(viia) of the Act by the AO was that there was already credit balance in the PBDD as on 1.04.2005 Balance B/F was ₹ 912,57,47,169. According to the AO 10% of AARA can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the PBDD account. 10% of the AARA as admitted by the Assessee as per revised census of 2001 was 352.53 crores. According to the AO even if Bad debts written off of ₹ 179,21,88,992 is reduced still the balance in the PBDD account was ₹ 733,35,58,177/-. Since the balance so available in PBDD account was more than 10% of AARA, the AO held that deduction on the basis of new provision of ₹ 295,55,54,682/- cannot be allowed. In this regard the AO referred to the contention of the Assessee which was to the effect that in each year the Assessee can create 10% of AARA and concluded that the expression not exceeding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of State Bank of Patiala (supra) and held that the decision rendered by the Hon ble High Court has to be followed. The above decision is the decision brought to our notice on the issue rendered after the decision in Assessee s own case. Judicial discipline demands that we follow the later decision which has considered both the decisions on the issue. We therefore respectfully following the decision of the Tribunal in the case of Canara Bank (supra), allow Gr.No.3 raised by the Revenue and hold that disallowance to the extent of ₹ 207,83,45,338/- be restored. Thus Gr.No.3 raised by the revenue is allowed. 19. Respectfully following the decision of the Tribunal referred to above on identical facts and circumstances, we hold that the Assessee in the present AY 09-10 is not entitled to deduction u/s.36(1)(viia)(a) of the Act on an amount greater than the amount debited to the profit and loss account as provision as laid down by the Hon ble Punjab and Haryana High Court in the case of State Bank of Patiala Vs. CIT 272 ITR 53 (P H). The disallowance made by the AO in this regard is restored and order of CIT(A) reversed on this aspect. Gr.No.2 raised by the Revenue is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be treated as revenue as per Reserve Bank of India (RBI) guidelines, he sought the bank s explanation as to why this amount should not be brought to tax in the current assessment year. The bank replied that, though it was following the mercantile system of accounting, it had consistently offered to tax interest on securities on cash basis and this was accepted by the Commissioner (Appeals) in assessment year 2005-06. The assessing officer rejected this contention on the ground that the department had not accepted the Commissioner (Appeals) s decision in assessment year 2005-06 and the same issue was in various levels of appeals in the case of other banks also, for earlier assessment years. He was of the view that according to section 145, the assessee could not follow dual method of accounting and should have offered to tax interest on securities on accrual basis only, as that was the regular method of accounting it employed. 22. Before the CIT(Appeals), the assessee submitted that interest on securities accrued only on the due date for interest and not on any earlier dates. Therefore, interest accrued but not due could not be charged to tax. It had been consistently follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1995, with effect from 01.04.1997, provides that the income chargeable under the head profits and gains of business or profession or income from other sources shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assesses. So far as the system of accounting is concerned, he was of the view that the assessee bank has been following the same system in returning interest on Government securities since last several years and there is no change in the method of accounting. The bank has been consistently and regularly following the mercantile system of accounting only and not a hybrid system. The CIT(Appeals) further observed that a right to receive income does not constitute accrual and the assessee bank is entitled to recognize the revenue from interest on Government securities at the point of accrual or actual receipt, according to its own accounting policy. He was of the view that there was no material on record to show that the assessee had changed its method of accounting. Thus the CIT(A) deleted the addition of ₹ 31,20,45,192 as interest accrued on Government securities. 24. Aggrieved by the order of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest which accrued up to the end of the accounting year became taxable as the income of the previous year. The Commissioner of Income-tax (Appeals) held that the Assessing Officer was not justified in holding that the interest accrued up to the last day of the accounting year should be subjected to tax. This was upheld by the Tribunal. On appeal to the High Court: Held, dismissing the appeal that even though section 18 of the Act was deleted, the assessee was taxable for interest on securities only on specified dates when it became due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years. 26. It is not in dispute before us that identical decision has also been rendered by the Hon ble High Court of Kerala in the case of CIT v. Federal Bank, 301 ITR 188 (Ker). In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the revenue in the past. In view of the aforesaid decision, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, ground No.3 rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestments amounting to ₹ 209,62,90,162 by filing an investment trading account. 29. According to the assessee, it has been consistently treating income from investments other than shares as income from business and offering to tax such income under the head income from business . The assessee pointed out that the revenue has accepted the claim of the assessee in the past. The assessee therefore submitted that the stock of investments have to be treated as stock-in-trade and the diminution in the value of the stock-in-trade as on the last day of the previous year has to be allowed as a deduction. In this regard, the assessee also pointed out that as per the RBI guidelines, the assessee has to classify investments in India into three categories viz., (a) held to maturity, (b) available for sale, and (c) held for trading. The assessee pointed out that investments held under the head held to maturity are valued at cost, except in a case where they were acquired at a premium in which case the premium was amortized over the remaining life of the security. As far as investments under the head available for sale and held for trading is concerned, the assessee pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investments it was submitted that the AO had failed to appreciate that the profit credited to P L account had been reworked by the assessee by preparing a separate investment trading account. The said account took into consideration the actual profit on sale of investments which were offered for income-tax purposes and the loss arising on account of valuing all its investments which were held as stock-in-trade (other than shares) at LCMV, in accordance with the generally accepted accounting practice, which had been upheld in a number of judicial decisions. It was highlighted that the classification made in the books as HTM was purely temporary since banks had a right to reclassify the investments into other categories once in a year with the permission of its Board of Directors. Further, as per the said RBI circulars, there was no prohibition on banks selling securities in HTM category before maturity. It was argued that wherever the intention of the Act was to compute income in accordance with RBI circulars, the same had been provided for. For example, in the case of section 43D read with rule 6EA, the Act clearly provided that interest in relation to such categories of bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, which is to be deduced on the basis of the accounting system regularly maintained by the assessee. The method by which the assessee bank is valuing securities by treating them as stock-in-trade is in accordance with the accounting principles and the revenue itself is treating the profit on maturity of such securities as business income. Therefore, such securities cannot be treated as capital assets. 8.6. Following the above decision of the Hon ble Supreme Court, and in line with its decision dated 24.01.2008 in ITA No. 253/Bang/2007 in the case of ACIT (LTU) Vs. Vijaya Bank, the Hon ble ITAT has held that the assessee bank is entitled to value all investments at LCMV by treating such investments as stock-in-trade, and has deleted the disallowance made on loss on valuation. The Hon ble High Court of Karnataka has, in the case of CIT Vs. Corporation Bank (1998) 174 ITR 616, also upheld the ITAT s decision. Respectfully following these judicial pronouncements, I delete the disallowance of the investment trading loss of ₹ 374,97,43,513 claimed by the appellant and direct the AO to allow the same as deduction inn computing the total income. This ground is allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordance 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-in-trade (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 Court as also the ITAT, Mumbai and ITAT, Chennai. Following the above decisions, we are deciding this issue in favour of the assessee. This ground of appeal by the Revenue is dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, we dismiss, Gr.No.4 raised by the Revenue. 34. In the result, the appeal by the Revenue is partly allowed. ITA No.709/Bang/12 (Assessee s appeal for AY 09-10) 35. Gr.No.1.1, 2.1 to 2.7 raised by the Assessee raised by the Assessee in its grounds of appeal revolve around the disallowance of expenses made by the AO by invoking the provisions of Sec.14A of the Act while computing income under the normal provisions of the Act and adding the sum so disallowed to the profits as per Profit Loss Account for the purpose of computing book profits u/s.115JB of the Act. 36. It is not in dispute before us that identical issue was considered by this Tribunal in assessee s own case for the A.Y. 2006-07 in ITA No.708/Bang/12 order dated 19.6.2013 and this Tribunal remanded the issue for fresh consideration by the AO in the light of the decision of the Hon ble Bombay High court in the case of Godrej Boyce Mfg. Co. Ltd., 328 ITR 81 (Bom). The following are the relevant observations of the Tribunal :- 69. It is not in dispute before us that identical issue was considered by this Tribunal in assessee s own case for the A.Y. 2005-06 and this Tribunal remanded the issue for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserves to the tune of ₹ 4488.05 Crores and non-interest bearing current account balances of ₹ 10525.68 Crores and these funds exceed the average value of investments of ₹ 377.21 Crores and therefore no disallowance whatsoever under rule 8D(2)(ii) of the Rules read with Sec.14A of the Act is called for. Reference in this regard was made to the following decisions for the proposition that overall availability of interest free funds have to be seen before making disallowance u/s.14A of the Act read with Rule 8D(2)(ii) of the rules. (i) CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom); (ii) CIT Vs. UTI Bank (2013) 32 Taxmann.com 370 and (iii) CIT Vs. Gujarat Power Corporation 352 ITR 583 (Guj.). We are of the view that it would be appropriate to direct the AO to consider this argument of the learned counsel for the Assessee in the set aside proceedings and give specific findings and decision on the same. 38. Gr.No.3.1 raised by the Assessee relates to the disallowance of claim of the Assessee for deduction on account of provision made for payment of wage arrears on the ground that the same was unascertained liability which was contingent upon the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned counsel pointed out that the settlement with the employees were reached in June, 2010 and the Assessee had to make payment of around ₹ 312.87 crores. Our attention was also drawn to the decision of the Hon ble Delhi High Court in the case of CIT Vs. BHEL 352 ITR 88 (Del) and ITAT Hyderabad in the case of NMDC LTD. Vs. JCIT 282 ITR (AT) 135 (Hyd.). The learned DR relied on the order of the CIT(A). 40. We have considered the rival submissions. From a perusal of the chart of the 8th and 9th Bipartite Settlement for the period from Nov.2002 to May 2005 and from Nov.2007 to May 2011 respectively, it is seen that right from AY 03-04 to 11-12, the Assessee has been making a claim for deduction on account of wage arrears to be paid and the revenue has allowed the claim except in AY 2009-10. In this year the provision for wage arrears made by the Assessee was at 8% of the wages prevailing while the ultimate settlement with the workers was at 12%. Thus the estimate made by the Assessee was conservative and well below the ultimate increase that the Assessee conceded to workers in the settlements. As laid down by the Hon ble Supreme Court in the case of BEML v. CIT, 245 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 211 (2) of the Act , the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act , and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act . It is thus contended that the provisions of Section 115 JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act. Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient. We are urged to quash the reassessment proceedings on this short ground. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of the learned counsel, according to the departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute. The pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Gr.No.4 respectively raised by the Revenue in AY 2009-10. While dealing with those grounds we have already held on Gr.No.2 following the decision of the Tribunal in Assessee s own case for AY 06-07 on identical facts and circumstances, that the Assessee is not entitled to deduction u/s.36(1)(viia)(a) of the Act o an amount greater than the amount debited to the profit and loss account as provision as laid down by the Hon ble Punjab and Haryana High Court in the case of State Bank of Patiala Vs. CIT 272 ITR 53 (P H), claim for deduction u/s.36(1)(viia) of the Act. The disallowance made by the AO in this regard is restored and order of CIT(A) reversed on this aspect. Gr.No.2 raised by the Revenue in this AY 2010-11 is accordingly allowed. The additional grounds as were raised in AY 09-10 relatable to Gr.No.2 raised in this AY 2010-11 are dismissed for the reasons discussed in the earlier part of this order. As far as Gr.No.3 in this AY 2010-11 is concerned, it is identical to Gr.No.4 raised in AY 2009-10. We have already held that loss on valuation of investments has to be allowed as a deduction as claimed by the Assessee. For the reasons stated therein, we dismiss Gr.No.4 rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the Assessee as the Assessee has not title to the amounts in question. The AO however was of the view that the amount represented a trading liability ceased to exist and the same had to be taxed u/s.41 of the Act. He was also of the view that the amount when received was not income but that does not mean that the amount could not under any circumstances be treated as income. In coming to the above conclusion, the AO placed reliance on the decision of the Hon ble Punjab Haryana High Court in the case of CIT Vs. Modern Farm Services 159 Taxman 96 wherein similar view as canvassed by the AO has been expressed. The AO accordingly brought to tax the sum of ₹ 4,98,01,767/- as income of the Assessee. 51. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Aggrieved by the order of the CIT(A), the Assessee has raised the aforesaid grounds of appeal before the Tribunal. 52. We have heard the rival submissions. The learned counsel for the Assessee submitted before us that the issue as to whether similar sums which are credited to the Profit Loss A/C. after due permission of RBI after conditions imposed by RBI similar to the one imposed in the case of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions, the facts of the present case with reference to the cases cited. In our view the decisions cited by the learned counsel for the Assessee are squarely applicable to the facts of the present case. The nature of the sums credited to profit and loss account and the conditions imposed by the RBI for credit to the profit and loss account of the sums in question are identical in the case of the Assessee and the cases decided by the Tribunal on which reliance was placed by the learned counsel for the Assessee. The sum and substance of the decisions referred to by the learned counsel for the Assessee is that unclaimed amounts should not be automatically be treated as income of the bank arising in the course of its business activity. The Reserve Bank of India, while giving permission to close these accounts has clearly stipulated that the amount so transferred shall not be treated as available for distribution of dividends, meaning thereby the Reserve Bank of India has not permitted the bank to treat it as an income once and for all and it has always stipulated certain conditions and prescribed certain procedures and formalities to safeguard the interest of the bank a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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