2018 (4) TMI 86 - AT - Income Tax

Disallowance of loss - valuation of securities - reduction in value of the investment as per the direction of the RBI - value to decrease by the premium - investments were held as stock in trade by the assessee - Held that - We find that the assessee had furnished only the journal entry stated to be suggested by the RBI and had promised to submit the Inspection Report after the hearing. We find that the said RBI Inspection Report was not furnished to us to understand the real intent behind RBI suggesting the provision to be made in the sum of ₹ 5,22,250/-. We deem it fit and appropriate, in the interest of justice and fairplay, to remand this issue to the file of the AO to decide this issue afresh in the light of RBI Inspection Report. If it is found that the RBI Inspection Report had suggested the assessee to remove this portion of investment of ₹ 5,22,250/- either in the form of provision / write off, then the same becomes a trading loss as the investments were held as stock in trade by the assessee. Hence the decision is to be taken based on the findings given in the RBI Inspection Report. Accordingly, the Ground No. 1 raised by the assessee is allowed for statistical purposes. Disallowance in respect of investments lost in Treasury Office - Held that - We find that a similar view has been taken in the case of CIT vs Bonanza Portfolio Ltd (2009 (8) TMI 636 - DELHI HIGH COURT), wherein the monies receivable from the client was treated as a debt and hence irrecoverability of the same is liable to be treated as a bad debt and write off of such bad debt would be squarely allowable as deduction. The similar is the situation in the facts of the present case. It is not in dispute that the WB Treasury was not able to trace the investments for quite a long time since 2001 and RBI accordingly having waited for considerable period of time had suggested the assessee to write off the same in its books, which in our considered opinion, would be a regular business loss. Disallowance of difference in value of deposits between Party Ledgers and the General Ledger - Held that - During this year, pursuant to the suggestion made by the RBI in its Inspection Report and in order to bring the General ledger balance at par with the personal ledgers of depositors , the assessee had further provided for the difference in liability of deposits payable by debiting its profit and loss account. This, in our considered opinion, is squarely allowable as deduction under the head income from business . We hold that they are not adhoc provisions made without any basis. The personal ledgers of depositors contained names and addresses of various depositors to whom the assessee is obligated to repay the deposits with interest on the date of maturity. Hence there is going to be physical outflow of money by the assessee in future. Hence it becomes an ascertained liability and is supported by proper scientific basis. In view of these observations, we hold that the assessee is indeed entitled for claim of deduction in the assessment. Addition made in the sum towards excess provision written back under the head Reserve for NPA Account - Held that - We find that the RBI had considered the accounting error committed by the assessee in as much as the assessee had credited the amount withdrawn from Reserve for NPA to profit and loss account ( i.e above the line) instead of profit and loss appropriation account. It was stated that similar write back of reserve for NPA to profit and loss account had not been treated as income in the hands of the assessee in Asst Years 2003-04, 2004-05, 2005-06 and 2006-07. Merely because the assessee erroneously had credited this sum of ₹ 1,00,00,000/- in its profit and loss account, the same would not assume the character of income u/s 4 of the Act for consequential taxation thereon. In any case, the same is not emanating out of current year profit. It only represents accumulated profits of the past written back to profit and loss account of the year. We hold that these facts had been duly appreciated by the ld CITA in making the aforesaid observations and accordingly do not find any infirmity in his order. - Decided against revenue.

Issues Involved:
1. Disallowance of loss of ?5,22,250.
2. Disallowance of ?7,53,998 for investments lost in Treasury Office.
3. Disallowance of ?51,06,472 due to difference in value of deposits between Party Ledgers and the General Ledger.
4. Addition of ?1,00,00,000 towards excess provision written back under the 'Reserve for NPA Account'.

Issue-wise Detailed Analysis:

1. Disallowance of loss of ?5,22,250:
The first issue is whether the CIT(A) was justified in upholding the disallowance of a loss of ?5,22,250. The assessee, a cooperative bank, had to follow the RBI's regulations, which included maintaining investments in Government Securities to meet the statutory cash reserve ratio. The RBI's inspection report suggested that the value of these investments should be decreased by the premium, leading to an accounting entry that resulted in a claimed deduction of ?5,22,250. The AO disallowed this, considering it a provision, not an actual loss. The Tribunal found that the RBI Inspection Report was not furnished to understand the RBI's intent behind the provision. Therefore, the issue was remanded to the AO to decide based on the findings in the RBI Inspection Report. The ground was allowed for statistical purposes.

2. Disallowance of ?7,53,998 for investments lost in Treasury Office:
The second issue is whether the CIT(A) was justified in upholding the disallowance of ?7,53,998 for investments lost in the Treasury Office. The assessee maintained certain investments with the West Bengal Treasury Office, which were not traceable. The RBI suggested writing off this amount in the books. The AO disallowed the deduction, considering it a provision. The Tribunal noted that the investments were part of the assessee's circulating capital and that the loss was a revenue loss, allowable under Section 28 of the Act. The Tribunal allowed the ground, considering it a regular business loss.

3. Disallowance of ?51,06,472 due to difference in value of deposits between Party Ledgers and the General Ledger:
The third issue is whether the CIT(A) was justified in upholding the disallowance of ?51,06,472 due to a mismatch between the aggregate balances in depositors' passbooks and the bank's General Ledger. The RBI's inspection report suggested creating a provision for this difference. The AO disallowed the deduction, considering it a provision. The Tribunal observed that the personal ledgers of depositors were correct and supported by proper names and addresses, making the shortfall an ascertained liability. The Tribunal allowed the deduction, considering it a write-off of circulating assets as a revenue loss.

4. Addition of ?1,00,00,000 towards excess provision written back under the 'Reserve for NPA Account':
The fourth issue is whether the CIT(A) was justified in allowing the claim of ?1,00,00,000 written back from the 'Reserve for NPA Account' as not being income. The assessee had transferred this amount from the reserve created out of past profits to the current year's profit and loss account. The RBI objected to this accounting treatment, stating it distorted the true profit picture. The CIT(A) allowed the claim, noting that the amount transferred from the reserve was not current profit. The Tribunal upheld the CIT(A)'s decision, stating that the amount did not constitute income merely because it was shown in the profit and loss account. The grounds raised by the revenue were dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes on the first issue, allowed the second and third issues in favor of the assessee, and dismissed the revenue's appeal on the fourth issue. The order was pronounced on 28.03.2018.

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