2018 (6) TMI 520 - AT - Income Tax

Disallowance of bad and doubtful debts of non rural branches - Held that - following the decision of the Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. vs. CIT 2012 (2) TMI 262 - SUPREME COURT OF INDIA it is held that the bad debt written off in respect of non rural branches is allowable as deduction u/s. 36(1)(vii) - hence we direct the AO to allow deductions towards bad debt written off in respect of non rural branches. Disallowance of expenditure incurred in relation to exempt income u/s 14A - Held that - in view taken by the Co-ordinate Bench in the assessee s own case 2017 (10) TMI 583 - ITAT MUMBAI for AY 2009-10, we direct the Assessing Officer to restrict the disallowance worked out u/s. 14A to 2% of the exempt income. Disallowance of diminution in value of investment held as stock-in-trade - Held that - following the judgement in case of COMMISSIONER OF INCOME-TAX VERSUS BANK OF BARODA 2003 (3) TMI 80 - BOMBAY HIGH COURT we are of the view that CIT was right in deleting the additions towards diminution in value of investment held as stock-in-trade - thus appeal filed by assessee is allowed and cross objection of revenue is dismissed. Disallowance of broken period interest - Held that - CIT has deleted the additions made by AO following the judgement in case of American Express International Banking Corpn. Vs. CIT 2002 (9) TMI 96 - BOMBAY HIGH COURT . Additions towards unreconciled credit entries in the nostro mirror accounts credited to P&L a/c - Held that - where amount in question had remained with assessee-bank owing to fact that payees or holders of draft/pay orders had not encashed them, section 41(1) could not be invoked - thus unreconciled credit entries cannot be treated as income of the assessee - AO is directed to delete the addition.

Issues Involved:

1. Disallowance of bad debt written off in respect of non-rural branches u/s. 36(1)(vii) of the Income Tax Act, 1961.
2. Disallowance of expenditure incurred in relation to exempt income u/s. 14A of the Income Tax Act, 1961.
3. Disallowance of diminution in value of investment held as stock-in-trade.
4. Disallowance of broken period interest.
5. Additions towards unreconciled credit entries in the nostro mirror accounts credited to the profit and loss account.
6. Non-applicability of provisions of section 115JB of the Income Tax Act, 1961 to banking companies.

Detailed Analysis:

1. Disallowance of Bad Debt Written Off:

The assessee challenged the disallowance of bad debt written off in respect of non-rural branches u/s. 36(1)(vii) of the Income Tax Act, 1961. The ITAT noted that this issue was covered in favor of the assessee by its own decisions for earlier assessment years, including the decision for AY 2009-10, wherein the ITAT allowed the bad debt written off in respect of non-rural branches. The ITAT followed the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. vs. CIT [2012] 343 ITR 270, which held that bad debt written off in respect of non-rural branches is allowable as a deduction u/s. 36(1)(vii). Consequently, the ITAT directed the Assessing Officer to allow the deduction towards bad debt written off.

2. Disallowance of Expenditure Incurred in Relation to Exempt Income:

The assessee challenged the disallowance of expenditure incurred in relation to exempt income u/s. 14A. The ITAT observed that the issue was covered in favor of the assessee by its own decision for AY 2009-10, where the ITAT restricted the disallowance to 2% of the exempt income. The ITAT noted that the assessee’s own interest-free funds were more than the investments yielding tax-free income and that the Assessing Officer had not recorded any satisfaction regarding the assessee's claim. Therefore, the ITAT directed the Assessing Officer to restrict the disallowance to 2% of the exempt income.

3. Disallowance of Diminution in Value of Investment Held as Stock-in-Trade:

The Assessing Officer disallowed the diminution in value of investment held as stock-in-trade, considering it a notional loss. The ITAT noted that the bank followed a consistent method of accounting, valuing its investments at cost or market value, whichever is lower, as accepted by the Department in earlier years. The ITAT referred to the decision of the Hon’ble Bombay High Court in the case of Bank of Baroda and the Hon’ble Supreme Court in United Commercial Bank vs. CIT [1999] 240 ITR 355 (SC), which supported the assessee’s method of accounting. Thus, the ITAT upheld the deletion of the disallowance by the ld. Commissioner of Income Tax (Appeals).

4. Disallowance of Broken Period Interest:

The Revenue challenged the deletion of the disallowance of broken period interest. The ITAT noted that the issue was covered in favor of the assessee by the decision of the Hon’ble Bombay High Court in American Express International Banking Corpn. Vs. CIT [2002] 258 ITR 601 (Bom) and the Hon’ble Supreme Court in CIT vs. Citi Bank N. A. The ITAT upheld the deletion of the disallowance by the ld. Commissioner of Income Tax (Appeals).

5. Additions Towards Unreconciled Credit Entries in the Nostro Mirror Accounts:

The assessee challenged the addition of unreconciled credit entries in the nostro mirror accounts. The ITAT referred to the decision of the Hon’ble High Court of Karnataka in CIT vs. Karnataka Vikas Grameen Bank [2016] 282 CTR 517 (Kar) and the ITAT Bangalore Bench in M/s. Canara Bank vs. CIT, which held that such entries do not have the character of income and cannot be taxed. The ITAT directed the Assessing Officer to delete the additions made towards unreconciled entries.

6. Non-Applicability of Provisions of Section 115JB to Banking Companies:

The assessee contended that the provisions of section 115JB do not apply to banking companies. The ITAT noted that this issue was covered in favor of the assessee by its own decision for AY 2006-07, where it was held that banking companies are exempt from preparing their profit and loss account as per Schedule VI of the Companies Act and thus, section 115JB does not apply. The ITAT directed the Assessing Officer to delete the adjustments made towards book profit computed u/s. 115JB.

Conclusion:

The ITAT allowed the appeals filed by the assessee for AY 2004-05 and 2010-11, and dismissed the appeals filed by the Revenue for the same assessment years, along with the cross objection filed by the assessee for AY 2004-05.

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