2022 (5) TMI 624 - AT - Income Tax

Deduction eligible u/s. 36(1)(viia) - provision for bad and doubtful debts - disallowance of provision in excess of seven and one half percent of the income as provided in section 36(1)(viia) -AR conceded that the provision towards standard assets is not liable for deduction under the Income Tax Act, 1961 - HELD THAT - We find that the issue of eligible deduction under the First proviso was not raised before the Ld. AO. We have also noted that this option of claiming deduction under the first proviso was exercised by the assessee only before the Ld. CIT(A). We note that the Cooperative Bank is basically mentioned in sub clause (a) of section 36(1)(viia) of the Act whereas in the first proviso only a scheduled and non-scheduled bank is being referred in the Act. We therefore note that the term Cooperative Bank is specifically excluded in the first proviso to sub clause (a) of section 36(1)(viia) of the Act. Accordingly, the Ld. AO has rightly computed the deduction eligible U/s. 36(1)(viia) of the Act. We therefore uphold the order of the Ld. AO on this ground. Loss incurred by the sale of Government Securities - Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless there are more than the face value, in which case the premium should be amortized over the period remaining to maturity - HELD THAT - In the instant case, the impugned loss arose on sale of Government securities emanated from the investments which were classified under AFS category. In view of that, we find merit in the claim of the assessee that the loss arising out of sale of Government Securities is of trading loss notwithstanding the securities are grouped under the head investment owing to the prescribed format of the RBI. We find that the order of the Ld. CIT(A) is in consonance with the CBDT instructions as well as the facts of the case and does not require any interference. Accordingly, grounds raised by the Revenue on this aspect are dismissed.

Summary

Issues Involved:
1. Delay in filing the Revenue's appeal.
2. Deletion of addition on account of disallowance of provision in excess of 7.5% of income as per section 36(1)(viia).
3. Deletion of addition on account of loss on sale of Government Securities.

Detailed Analysis:

1. Delay in filing the Revenue's appeal:
The Revenue's appeal was delayed by 27 days. The affidavit filed by the ACIT, Circle-1, Eluru, explained that the delay was due to the unavailability of the grounds of appeal filed by the assessee before the CIT(A), which had to be obtained from CIT(A)-11, Hyderabad. The Tribunal condoned the delay, determining it was neither deliberate nor intentional, and proceeded to adjudicate the appeal on merits.

2. Deletion of addition on account of disallowance of provision in excess of 7.5% of income as per section 36(1)(viia):
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 2,93,452/- made by the AO. The AO had disallowed the provision for standard assets/NPA Reserve as it exceeded 7.5% of the income, as stipulated under section 36(1)(viia). The CIT(A) allowed the deduction based on the first proviso to sub-clause (a) of section 36(1)(viia), which the Revenue argued was not applicable to a Cooperative Bank. The Tribunal upheld the AO's decision, noting that the first proviso to sub-clause (a) of section 36(1)(viia) specifically excludes Cooperative Banks. Thus, the AO's computation of the eligible deduction was correct.

3. Deletion of addition on account of loss on sale of Government Securities:
The AO had disallowed the loss of Rs. 5,66,869/- on the sale of Government Securities, arguing that the transactions were not passed through the profit and loss account and should be considered as capital loss, not business loss. The CIT(A) allowed the loss, stating it was in accordance with RBI guidelines and classified under "Available For Sale" (AFS). The Tribunal agreed with the CIT(A), referencing the RBI's categorization of investments and the CBDT's instructions, which allow for the depreciation/appreciation of AFS securities to be adjusted in the accounts. The Tribunal found the CIT(A)'s order consistent with the CBDT instructions and the facts of the case, thus dismissing the Revenue's grounds on this aspect.

Cross Objection by the Assessee:
The assessee's cross objection supported the CIT(A)'s decision on the deletion of the addition for the provision towards standard assets/NPA reserve and the loss on sale of Government Securities. The Tribunal upheld the CIT(A)'s decision on the loss on sale of Government Securities but upheld the AO's decision on the disallowance of the provision towards standard assets/NPA reserve. Consequently, the cross objection was partly allowed.

Conclusion:
The Tribunal partly allowed both the Revenue's appeal and the assessee's cross objection, maintaining the AO's decision on the provision towards standard assets/NPA reserve and the CIT(A)'s decision on the loss on sale of Government Securities.