2013 (8) TMI 665 - AT - Income Tax

Bank branch classification as Rural or Urban Classification as per RBI guidelines or Income Tax provisions - Overriding effect - Writing off bad debts under section 36(1)(viia) Held that - The Reserve Bank sanctions branches on different classifications, like rural, urban etc. In respect of the branches disputed in this case, permission of the Reserve Bank have been obtained by the assessee bank of the status that all branches are rural branches. Therefore, it is to be seen that according to banking norms, the disputed branches are rural branches. Now, this position has to be examined in the light of the Income Tax law. Income Tax law provides that a rural branch means a branch in a place where the population is less than 10,000 - Apropos the urban branches, writing off of bad debt, the assessee is eligible to write off of bad debt u/s 36(1)(viia) A place includes a ward of a Gram Panchayat whose population is less than ten thousand and which may be a part of a panchayat whose population may be more than ten thousand as per 1990-91 census, provided the ward branch is notified as a rural branch by RBI. - the RBI Circular produced before us pertained to 3-6-2003. Ld. Counsel contends that similar panchayats have been named in licenses issued in earlier years also. - the issues are decided on principle but restored back to the file of assessing officer for verification. Deduction of Bad-debts - Loan was given to Asia Pacific Investment Trust by consortium headed by SBI and assessee contributed a part of it Held that - The banking practice of advancing moneys to NBFC without taking any collateral security which was part of the loan policy and financing of the consortium becomes a business decision. Further, after the said trust went into liquidation and advance became irrecoverable, the RBI directed the assessee to write off the same as bad debt - A bad debt cannot be refused merely because of assessing officer s perception collateral securities should have been taken Decided in favor of Assessee. Revaluation of securities holding it to be a notional loss Held that - Securities held by the assessee bank in all these cases are the stock-in-trade of the business of the assessee banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant Disallowance of expenses on modification in respect of Ahmedabad branch of the Bank, the assessee took premises on rent at Ahmedabad for a period of three years and made certain modifications to suit its requirement Held that - Structures were temporary in nature. The lease was only for a short period of three years and the structure was to be demolished thereafter. The temporary structure was created to increase the efficiency of the place and to suit to the assessee s banking needs - Expenditure incurred was qua the income generating apparatus of the assessee. In such eventuality the theory of enduring benefit also does not apply. Therefore, the expenditure is revenue in nature - Ground of the assessee is allowed Decided in favor of Assessee.

Issues Involved:

1. Deletion of additions on account of bad debts for AYs 1996-97, 1997-98, and 1998-99.
2. Deletion of additions on account of provision for bad and doubtful debts for rural branches for AYs 1996-97, 1997-98, and 1998-99.
3. Deletion of addition on account of loss on revaluation of securities for AYs 1996-97 and 1997-98.
4. Deletion of addition on account of loan to Asia Pacific Investment Trust for AY 1998-99.
5. Addition of income received from Deposit Insurance & Credit Guarantee Corporation (DICGC) for AYs 1996-97, 1997-98, and 1998-99.
6. Disallowance of traveling expenses under Rule 6D for AYs 1996-97 and 1997-98.
7. Treatment of dividend income as income from other sources instead of business income for AY 1997-98.
8. Treatment of loss on investment in debenture of CRB Capital as a capital loss instead of revenue loss for AY 1998-99.
9. Disallowance of expenses on modification in respect of Ahmedabad branch for AY 1998-99.

Issue-wise Detailed Analysis:

1. Deletion of Additions on Account of Bad Debts:

The assessee claimed bad debts written off for both rural and urban branches. The Assessing Officer (AO) disallowed the claims for urban branches as the bad debts written off were less than the provision created, and for rural branches, the AO contended that the population criteria were not met. The CIT(A) deleted these additions based on the ITAT Cochin Bench's decision in the case of Lord Krishna Bank Ltd., which held that a "place" includes a ward of a Gram Panchayat with a population less than ten thousand. The ITAT upheld this view but remanded the issue back to the AO for verification of whether the ward branches were classified as rural by the RBI for the corresponding periods.

2. Deletion of Additions on Account of Provision for Bad and Doubtful Debts for Rural Branches:

The CIT(A) deleted the additions by relying on the Kerala High Court judgment in the case of South Indian Bank Vs. CIT, which allowed the deduction of bad debts for rural branches. The ITAT upheld the CIT(A)'s decision and remanded the issue back to the AO for verification of the classification of branches as rural by the RBI.

3. Deletion of Addition on Account of Loss on Revaluation of Securities:

The AO disallowed the claim of loss on revaluation of securities, considering it a notional loss. The CIT(A) allowed the claim, relying on the Cochin Bench of the ITAT in the assessee's own case and the Hon'ble Supreme Court judgment in United Commercial Bank Vs. CIT. The ITAT upheld the CIT(A)'s decision, dismissing the revenue's ground.

4. Deletion of Addition on Account of Loan to Asia Pacific Investment Trust:

The AO disallowed the claim of bad debts written off for the loan to Asia Pacific Investment Trust, questioning the lack of tangible security. The CIT(A) allowed the claim, noting that the loan was given in the ordinary course of banking business and was directed by the RBI to be written off. The ITAT upheld the CIT(A)'s decision, dismissing the revenue's ground.

5. Addition of Income Received from DICGC:

The AO added the amount received from DICGC to the assessee's income, treating it as recovery of bad debts. The CIT(A) upheld the AO's action. The ITAT, however, remanded the issue back to the AO for verification of the assessee's claim that the DICGC amount was not credited to the P&L account but to the provision account, and that no bad debt deduction had been claimed for these debts.

6. Disallowance of Traveling Expenses under Rule 6D:

The assessee did not press this ground, and hence it was dismissed.

7. Treatment of Dividend Income as Income from Other Sources:

The ground was considered academic in nature and was dismissed as it did not lead to any consequence.

8. Treatment of Loss on Investment in Debenture of CRB Capital:

The AO disallowed the claim, treating it as a capital loss. The CIT(A) upheld the AO's action. The ITAT remanded the issue back to the AO to verify whether the assessee had reduced the value of current assets and also claimed the loss, to avoid any double deduction.

9. Disallowance of Expenses on Modification in Respect of Ahmedabad Branch:

The AO disallowed the expenses, treating them as capital in nature. The CIT(A) upheld the AO's action. The ITAT, however, held that the expenditure was revenue in nature as the modifications were temporary and necessary for the assessee's banking needs, and allowed the assessee's claim.

Conclusion:

All the appeals filed by the assessee and the revenue were partly allowed for statistical purposes, with specific issues remanded back to the AO for verification and fresh consideration.

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