2014 (1) TMI 757 - AT - Income Tax

Allowance of bad debts - Held that - As per compliance report submitted by assessee to Reserve Bank of India provision was made for pending entry for more than two years - This provision was made on 31-03-2008 pending reconciliation of inter branch and inter bank accounts - As per advise of Reserve Bank of India the assessee did not take into account the said entry as income either in current year or in preceding year - Revenue authorities observed that provision is an expenditure relating to a particular account period but not falling due on date of filing financial statement - The expenditure relates to particular financial year a provision was made against revenue generated in said accounting period failing which financial statement could not be shown free and fair view - The provision for expenditure could be allowed as deduction only if liability accrued as on date of making provision and it is not a contingent liability. Provision so made was pre-matured - It was only contingent liability or notional loss which could not be allowed as an expenditure under provisions of I.T Act - The amount in question was not actually returned as bad or business loss during the year and it was only notional provision or loss for diminution of value if any which could not be allowed as deduction either u/s. 37 of I.T Act or u/s. 28 of I.T Act which has been rightly disallowed by Assessing Officer - Decided against assessee. Amortization of premium paid on purchase of Government Securities - Held that - As per RBI guidelines dated 16th October 2000 the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM) Held for Trading (HFT) and Available for Sale (AFS) - Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value in which case the premium should be amortised over the period remaining to maturity - In the case of HFT and AFS securities forming stock in trade of the bank the depreciation/ appreciation is to be aggregated scrip wise and only net depreciation if any is required to be provided for in the accounts. Following The Catholic Syrian Bank Ltd. Versus The Addl. Commissioner of Income-tax Range-1 Thrissur. 2013 (1) TMI 129 - ITAT COCHIN - In case of banks the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of Rs.14,50,000/- debited to Profit & Loss Account on account of provision for inter-branch and inter-bank adjustment.
2. Addition of Rs.36,62,956/- being amortization of premium paid on purchase of Government Securities.

Detailed Analysis:

Issue 1: Disallowance of Rs.14,50,000/- for Provision for Inter-branch and Inter-bank Adjustment

The assessee, a cooperative society engaged in banking, filed its return of income declaring a total income of Rs.4,55,50,220/-. The Assessing Officer (AO) assessed the total income at Rs.5,10,68,176/- by making various disallowances/additions, including Rs.14,50,000/- debited to the Profit & Loss Account for provision for inter-branch and inter-bank adjustments. This provision was made on 31.03.2008 pending reconciliation of inter-branch and inter-bank accounts as per the advice of the Reserve Bank of India (RBI).

The CIT(A) upheld the AO's decision, noting that the provision was for expenditure relating to a particular accounting period but not falling due on the date of the financial statement. The CIT(A) emphasized that a provision for expenditure could be allowed as a deduction only if the liability had accrued as of the date of making the provision and it was not a contingent liability. The CIT(A) further noted that under mercantile law accrual system, a provision for expenditure could be made only when the liability had accrued.

The Tribunal agreed with the CIT(A), noting that the provision made by the assessee was premature as the reconciliation of the inter-branch and inter-bank entries was pending as of 31.03.2008. It was deemed a contingent liability or notional loss, which could not be allowed as expenditure under the provisions of the Income Tax Act. The Tribunal cited the Supreme Court's decision in Southern Technologies Ltd. Vs. JCIT, which held that RBI guidelines do not govern the computation of taxable income under the Income Tax Act. Consequently, the Tribunal upheld the CIT(A)'s decision to disallow the provision.

Issue 2: Addition of Rs.36,62,956/- for Amortization of Premium Paid on Purchase of Government Securities

The assessee claimed a deduction of Rs.36,62,956/- for amortization of the premium paid on acquisition of Held to Maturity (HTM) securities, as per RBI guidelines. The AO disallowed this claim, and the CIT(A) confirmed the disallowance.

Before the Tribunal, the assessee argued that the issue was covered in its favor by previous ITAT decisions, including ACIT Vs. Pune Peoples Cooperative Bank and ACIT Vs. Alibag Cooperative Urban Bank Ltd. The Tribunal noted that with the advent of section 80P(4) w.e.f. A.Y. 2007-08, cooperative banks could no longer claim the benefit of deduction u/s.80P(2)(a)(i). However, they should be assessed as normal banking companies.

The Tribunal referred to RBI guidelines and CBDT Instruction No.17 of 2008, which state that investments classified under HTM should be carried at acquisition cost unless the cost exceeds the face value, in which case the premium should be amortized over the period remaining to maturity. The Tribunal cited the ITAT Mumbai Bench decision in ACIT vs. The Bank of Rajasthan Ltd., which held that the premium paid in excess of face value of investments classified under HTM and amortized over the period till maturity is allowable as revenue expenditure.

Following these precedents, the Tribunal held that the AO was not justified in making the addition of Rs.36,62,956/-, as the amount was of the nature of revenue expenditure and allowable as business expenditure u/s.36(vii) of the Income Tax Act. The Tribunal upheld the CIT(A)'s order deleting the addition.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal upholding the disallowance of Rs.14,50,000/- for provision for inter-branch and inter-bank adjustment and allowing the deduction of Rs.36,62,956/- for amortization of premium paid on purchase of Government Securities.