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2016 (8) TMI 74 - AT - Income TaxDisallowance u/s 36(1)(viia) - Held that - Deduction u/s 36(1)(viia) should be restricted to the extent of the amount of provision created in the books of account during the previous year relevant to assessment year under consideration. There is no provision in the Act enabling the assessee-bank to make good short-fall of earlier years in the subsequent years. Therefore, the contention advanced on behalf of the assessee-bank that in the subsequent year, the short-fall in previous year was made good, cannot be accepted. Disallowance of bad debts of ₹ 55,62,08,835/- u/s 36(1)(vii) - Held that - Hon ble Supreme Court in the case of Vijaya Bank (2010 (4) TMI 46 - SUPREME COURT ) wherein the Hon ble Supreme Court held that debiting P&L Account by provision for bad debts and reducing the same from the sundry debtors in the balance sheet amounts to write off. The assessee-bank had not produced any evidence that similar treatment was given in its books of account. Therefore, in the interests of justice, we remit this issue back to the file of the AO to allow the same as deduction after satisfying himself that provision for bad debts is debited to P&L account and reduced the same from sundry debtor s account in the balance sheet. Addition u/s 14A - Held that - As provisions of sec.14A have no application in case assets are held as stock-in-trade. Therefore, provisions of sec.14A cannot be applied in the present case. Thus we hold that no disallowance is called for under the provisions of sec.14A of the Act. Loss on account of depreciation in the value of HTM securities - Held that - Loss arising on valuation of HTM category of securities should be allowed as revenue loss. This ground of appeal is dismissed. See Canara Bank Versus Joint CIT, LTU, Bangalore 2016 (4) TMI 429 - ITAT BANGALORE Loss on account of mark to market loss - Held that - As the facts emerge from the assessment order, it is clear that though derivatives are shown as investments in the books of account. However, for income-tax purposes, the same were claimed as stock-in-trade and this practice was continuously followed by the assessee-bank. Thus, for income-tax purposes, derivatives form part of the stock-in-trade. When derivatives are held as stock-in-trade, then the salutary principle for valuation of stock in trade that stock has to be valued at cost or market price whichever is lower should be followed. Loss, if any, arising as a result of such valuation should be allowed as a loss. Addition on account of sundry assets written off - AO disallowed the same treating it as bad debt written off - Held that - In the present case, amounts written off represent services charges. It is undisputed fact that in the year of recovery the same were offered to tax. Therefore, we do not find any fault with the reasoning adopted by the CIT(A) in allowing the same as the conditions prescribed u/s 36(1)(vii) are not applicable to the present case. Therefore, this ground of appeal is also dismissed
Issues Involved:
1. Disallowance under Section 36(1)(viia) of the Income-tax Act. 2. Disallowance of bad debts under Section 36(1)(vii) of the Income-tax Act. 3. Disallowance under Section 14A of the Income-tax Act. 4. Depreciation on HTM (Held to Maturity) securities. 5. Mark to market loss on derivatives. 6. Sundry assets written off. Issue-wise Detailed Analysis: 1. Disallowance under Section 36(1)(viia): The assessee-bank claimed a deduction under Section 36(1)(viia) for a provision for bad and doubtful debts amounting to ?171,14,39,327/-. The AO disallowed this amount on the grounds that the requisite reserve was not created in the books of account. The CIT(A) upheld this disallowance, referencing the decision of the Punjab & Haryana High Court in State Bank of Patiala vs. CIT, which mandates that the deduction should be limited to the actual provision created in the books. The Tribunal agreed with this interpretation, emphasizing that the creation of the requisite reserve in the books is a condition precedent for claiming the deduction. Therefore, the assessee-bank's appeal on this ground was dismissed. 2. Disallowance of Bad Debts under Section 36(1)(vii): The AO disallowed the assessee-bank's claim for bad debts of ?55,62,08,835/- on the grounds of overlapping with Section 36(1)(viia). The CIT(A) confirmed the disallowance, citing that the amounts were not actually written off in the books. The Tribunal, referencing the Supreme Court's decision in Vijaya Bank vs. CIT, held that debiting the P&L account and reducing the provision from sundry debtors in the balance sheet amounts to a write-off. The Tribunal remitted the issue back to the AO to verify if the provision for bad debts was debited to the P&L account and reduced from the sundry debtors in the balance sheet. 3. Disallowance under Section 14A: The AO disallowed ?2,54,00,000/- under Section 14A, which the CIT(A) upheld. The assessee-bank argued that it had already disallowed ?5,20,530/- suo motu and that the AO had not provided any rationale for the additional disallowance. The Tribunal, citing its decision in Canara Bank's case, held that the AO must first be dissatisfied with the assessee's claim before applying Rule 8D. As the AO did not provide such a finding, the Tribunal ruled that no disallowance under Section 14A was warranted and allowed the assessee-bank's appeal on this ground. 4. Depreciation on HTM Securities: The AO disallowed depreciation on HTM securities amounting to ?151,48,15,234/-, treating the loss as capital in nature. The CIT(A) allowed the claim, following the jurisdictional High Court's decision in the assessee's own case for AY 2003-04, which held that HTM securities form part of the stock-in-trade. The Tribunal upheld the CIT(A)'s decision, referencing its ruling in Canara Bank's case that investments held by a banking concern are part of the business of banking and should be treated as stock-in-trade. Therefore, the revenue's appeal on this ground was dismissed. 5. Mark to Market Loss on Derivatives: The AO disallowed a mark to market loss on derivatives amounting to ?111,89,71,243/-, treating it as capital in nature. The CIT(A) allowed the claim, reasoning that derivatives are part of the stock-in-trade for a banking company. The Tribunal upheld the CIT(A)'s decision, citing the principle that stock-in-trade should be valued at cost or market price, whichever is lower, and any resultant loss should be allowed as a deduction. The Tribunal referenced the decision in Edelweiss Capital Ltd. vs. ITO to support this view, thus dismissing the revenue's appeal on this ground. 6. Sundry Assets Written Off: The AO disallowed sundry assets written off amounting to ?16,04,126/-, treating it as bad debt. The CIT(A) allowed the claim, noting that these were service charges not recovered and not bad debts in the traditional sense. The Tribunal upheld the CIT(A)'s decision, agreeing that the conditions of Section 36(1)(vii) were not applicable as these were service charges and not loans. Therefore, the revenue's appeal on this ground was dismissed. Conclusion: The Tribunal partly allowed the assessee-bank's appeal and dismissed the revenue's appeal. The order was pronounced in the open court on 22nd July 2016.
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