2015 (10) TMI 1611 - AT - Income Tax

Addition on account of provision for standard asset - whether Standard Assets is diminution in value of stock-in-trade, were CBDT instruction states that provision created by Banks on different accounts cannot constitute deductible expenditure for the purpose of Income-tax, hence provision for standard asset is not allowable for deduction under I.T. Act? - CIT(A) deleted the addition - Held that - The issue before us is squarely covered in favour of the assessee and against the Revenue by the decision of the Hon bleSupreme Court in the case of Nainital (1964 (9) TMI 11 - SUPREME Court ), which has been followed by the Ld. CIT(A). Therefore, no interference is called for. The provision for standard asset is the diminution in the value of stock-in-trade and the same is allowable u/s. 28(1) of the Act. - Decided against revenue. Addition on account of loss incurred by bank due to fraud - CIT(A) deleted the addition - Held that - The undisputed fact is that there was an embezzlement/fraud by the employees of the bank to the tune of ₹ 35 crores. It is also an undisputed fact that RBI asked the assessee to write off the loss in phased manner. It is also an undisputed fact that losses written off in F.Y. 2007-08 & 2008-09 have been accepted by the Assessing Officer. This is the last year of the write off wherein the dispute has arisen breaching the rule of consistency. Undoubtedly, the loss on account of fraud should be written off in the year of detection of fraud. Considering the peculiarity of the present case, in the light of the guidelines of the RBI, we agree with the findings of the Ld. CIT(A) and decline to interfere.- Decided against revenue.

Summary

Issues:
1. Deletion of addition on account of provision for standard asset.
2. Deletion of addition on account of loss incurred by bank due to fraud.

Deletion of addition on account of provision for standard asset:
The Revenue challenged the deletion of an addition related to provision for standard asset. The Assessing Officer added the provision to the returned income, citing CBDT instructions that provisions created by banks on different accounts are not deductible for income tax purposes. However, the assessee explained that the provision was created as per RBI's mandatory directions and was allowable under section 28(1) of the Act. The Ld. CIT(A) agreed, stating that the provision for standard asset is the diminution in the value of stock-in-trade and is allowable. The ITAT upheld this decision, citing the Supreme Court's decision in a similar case and dismissed the Revenue's grievance.

Deletion of addition on account of loss incurred by bank due to fraud:
The Revenue disputed the deletion of an addition concerning the loss incurred by the bank due to fraud. The Assessing Officer disallowed the provision for investment depreciation reserve, considering it a notional loss spread over three years. The assessee argued that the loss was actual due to fraud by bank employees. The Ld. CIT(A) observed that the loss was genuine and directed the Assessing Officer to allow the deduction. The ITAT agreed, noting the embezzlement of funds and the RBI's guidelines for writing off the loss in phases. The ITAT upheld the Ld. CIT(A)'s decision, emphasizing the need for consistency in treatment of such losses and dismissed the Revenue's grievance.

In conclusion, the ITAT upheld the Ld. CIT(A)'s decisions in both issues, dismissing the Revenue's appeal. The judgments were based on the legality of provisions created under RBI directions and the genuine nature of the losses incurred by the bank due to fraud, in accordance with relevant legal principles and precedents.