2024 (4) TMI 589 - AT - Income Tax

Disallowance of Provision for leave encashment - AO disallowed the same on the ground that, as per Section 43B(f) deduction for Leave Encashment is allowable only on actual payment and provision for Leave Encashment cannot be allowed as deduction - HELD THAT - The issue is now settled against the assessee by the decision of the co-ordinate bench of this Tribunal in the assessee s own case 2020 (3) TMI 713 - ITAT CHENNAI . Thus we are of the considered view that the assessee is not entitled for deduction towards the provision for Leave Encashment and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the assessee. Disallowance of deduction u/s 36(1)(viii) - AO has disallowed the claim, mainly on account of the fact that the amount was not transferred to Special Reserve during the financial year 2013-14 - HELD THAT - Assessee has transferred Rs. 30 Cr to Special Reserve from the profits of the previous year 2013-14 and therefore, is eligible to claim the deduction u/s 36(1)(viii). Though as per the section, Reserve needs to be created out of the income of the previous year, there is no stipulation that the Reserve should be created in the previous year itself. A similar issue has been decided by the co-ordinate Bench of this ITAT in the assessee s own case in 2016 (2) TMI 1236 - ITAT CHENNAI for the Asst Year 2009-10. The only reason for disallowing the claim of the assessee is that the Reserve was not created during the Financial Year 2013-14 and the ITAT order for the earlier year has not been accepted by the Department. Therefore, respectfully following the decision of the co-ordinate bench of the ITAT in assessee s own case supra , we hold that the assessee is entitled to the deduction u/s 36(1)(viii) as the Reserve was created out of the profits for the year 2013-14 and delete the addition made by the AO. This ground of the assessee s appeal is allowed. Enhancement by CIT(A) - Depreciation on investments - CIT(A) confirmed additions based on the enhancement petition by the AO - HELD THAT - Disallowance of depreciation on investment, was never subject matter of assessment order. Hence, we are of the view that enhancement made by CIT(A) on altogether new issue is without authority of law and accordingly, we quash the enhancement. Since we have decided the issue on technical grounds, the issue on merits is left open. Release of NPA provision - During the assessment proceedings the AO did not raise the issue - as during the appellate proceedings before the CIT(A), the AO moved an enhancement petition requesting him to enhance the income in respect of reversal of NPA provision made by the assessee in the books - HELD THAT - We find that this issue is also a purely a new issue raised by CIT(A) and this was never the subject matter of appeal before him or this was never discussed by the AO during assessment proceedings or even a whisper is not there in the assessment order about this issue. The reasons given by us in the preceding paragraph on the power of enhancement shall mutatis mutandis apply to this ground of appeal as well. Therefore, we quash the enhancement and allow the ground of assessee s appeal by directing the AO to delete the addition. Deduction u/s. 36(1)(vii) - bad debts actually written off in the books of accounts of the assessee - HELD THAT - As relying on decision of City Union Bank Ltd 2020 (3) TMI 475 - MADRAS HIGH COURT we hold that the bad debts written off relating to non-rural advances is not required to be adjusted against provision for bad and doubtful debts made u/s. 36(1)(viia) of the Act and quash the enhancement made by the CIT(A) allowing the ground of assessee s appeal by directing the AO to delete the addition. Since we have decided this issue on merits, the issue on technical ground is left open. MAT computation - computing the book profit u/s 115JB towards provision for leave encashment - assessee had made provision for leave encashment in the books based on actuarial valuation and claimed the same as deduction while computing book-profit by observing the same an unascertained liability - HELD THAT - As relying on HP. Tourism Development Corporation Ltd 2013 (6) TMI 97 - HIMACHAL PRADESH HIGH COURT we hold that the provision for leave encashment is an ascertained liability and cannot be added to book profit, allowing the ground of assessee s appeal by directing the AO to delete the addition. Enhancement ordered by the CIT(A) - rework the deduction u/s. 36(1)(viia) by reclassifying some of the banks as non rural based on the census data of the year 2011 - HELD THAT - As in the assessee s case in 2021 (11) TMI 568 - ITAT CHEENAI for the A.Y 2013-14. we hold that the branches cannot classified considering the population as per 2011 census and therefore set aside the order of the CIT(A) on this issue and allow the ground of appeal of the assessee. Since the issue is decided on merits the technical ground raised by the appellant is left open. Disallowance of stale drafts - assessee is in the business of banking, has issued demand drafts to various persons and further any unclaimed demand drafts was kept in stale draft account under the head outstanding liabilities' - HELD THAT - This issue is squarely covered in favour of the assessee by the decision of ITAT in assessee s own case for assessment year 2013-14 2021 (11) TMI 568 - ITAT CHEENAI , where under identical circumstances the Tribunal has deleted addition made by the AO by holding that amount kept under stale draft account is not income of the assessee. Identical issue in case of City Union Bank Ltd. 2020 (3) TMI 475 - MADRAS HIGH COURT where it has been clearly held that amount kept under stale draft account cannot be treated as income of the assessee. Decided against revenue. Disallowance of ex-gratia payment - AO had disallowed ex-gratia payment made by the assessee to its staff by observing that the Revenue has filed appeals before the Hon ble High Court against the orders of the ITAT and in order to keep the issue alive, the claim made by the assessee was disallowed - HELD THAT - An identical issue had been considered by the Tribunal in assessee s own case for assessment year 2013-14 in 2021 (11) TMI 568 - ITAT CHEENAI , where the Tribunal after considering relevant facts held that exgratia payment to staff is deductible u/s. 37(1) - Decided against revenue. Disallowance of expenditure relatable to exempt income u/s. 14A - HELD THAT - An identical issue had been considered by the Tribunal in assessee s own case for assessment year 2013-14 2021 (11) TMI 568 - ITAT CHEENAI , where the Tribunal after considering relevant facts held that no disallowance u/s 14A is warranted held that no disallowance u/s. 14A is permissible in terms of Rule 8D, where the assessee is engaged in banking business. A similar view is taken by the Hon ble Supreme Court in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT and held that shares and securities held by a bank are stock-in-trade and income received on such shares and securities must be considered to be business income. That is why, Section 14A of the Act would not be attracted to such income. Decided against revenue. Accrual of income - Addition made towards interest on non-performing assets - AO has made addition towards interest on nonperforming assets (NPAs) by holding that interest on loans needs to be offered to tax on accrual basis in respect of NPAs, which are more than 90 days old but less than 180 days - HELD THAT - We find that an identical issue has been considered by the Tribunal in assessee s own case for assessment year 2013- 14 2021 (11) TMI 568 - ITAT CHEENAI , where under identical set of facts and by following the decision of Vasisth Chary Vyapar Ltd., 2018 (3) TMI 56 - SUPREME COURT held that interest income cannot be said to have been accrued to the assessee on NPAs account - Decided against revenue. Disallowance of depreciation on ATMs - assessee has claimed depreciation on ATMs at 60% - AO treated the ATMs as Plant Machinery and restricted the depreciation @ 15% - HELD THAT - We find that an identical issue has been considered in the case of NCR Corporation 2020 (6) TMI 439 - KARNATAKA HIGH COURT wherein held that the ATM machines are computers and are eligible for 60% depreciation. Disallowance of deduction claimed by the bank u/s 36(1)(viia) by computing the Aggregate Average Rural Advances by considering the incremental advance and not outstanding advance - HELD THAT - We find that an identical issue has been considered by the Tribunal in the case of City Union Bank 2024 (3) TMI 613 - ITAT CHENNAI where under identical set of facts has decided the issue in favour of the assessee as held AO is erred in computing deduction u/s. 36(1)(viia) of the Act, by considering only incremental advances made by rural branches of appellant bank as against the aggregate average advances made by rural branches of appellant bank as outstanding at the end of the financial year and thus, we direct the Assessing Officer to consider aggregate average advances outstanding at the end of the relevant financial year for the purpose of computing deduction u/s. 36(1)(viia) of the Act - Decided against revenue. Depreciation on investments - notional appreciation adjustment against the depreciation - HELD THAT - We find that this issue is squarely covered by the ITAT in the case of State Bank of India 2020 (2) TMI 1350 - ITAT MUMBAI with regard to addition of notional appreciation. In the said decision, the ITAT after analysing various decisions of the Hon ble Supreme Court held that notional appreciation cannot be taxed. Valuation of Preference Shares , we find that the same is held by the assessee as stock in trade. The Courts have consistently held in various decisions that the securities held by the Bank are stock in trade and can be valued at lower of cost or market value. Further we also find that the Board has issued a circular No. 18/2015 dated 02-11- 2015 in which it has stated that all the securities held by the Bank are business assets. In view of the above, we hold that the notional appreciation need not be offered to tax and the depreciation on the Preference shares is allowable and we delete the addition made by the AO and allow the assessee s ground of appeal. Computation of deduction u/s. 36(1)(viii) - Assessee has followed a particular method. But the AO has substituted his own method and has disallowed a sum - HELD THAT - We find that this issue has been decided by the ITAT in the assessee s case for the Asst Year 2013-14 2021 (11) TMI 568 - ITAT CHEENAI wherein as held AO had already accepted computation methodology adopted by the assessee bank for assessment years 2010-11 2011-12, based on directions of ITAT, we are of the considered view that this year also the issue needs to go back to the file of the AO to consider the issue in light of directions of the Tribunal for earlier years. Hence, we set aside the issue to the file of the AO and direct him to follow the directions given by the Tribunal for earlier assessment years. This ground of the assessee is allowed for statistical purpose. Classification of 8 branches as non rural by the AO - HELD THAT - As we find that the CIT(A) has not adjudicated this ground. Hence, in the interest of justice, we remit the issue back to the CIT(A) with a direction to adjudicate the same. This ground of the assessee is allowed for statistical purpose. Addition made towards interest accrued but not due on Government securities - AO made this addition by holding that income has accrued on the Government securities for the period from December 2014 to May 2015 and the same should be offered to tax for the Asst Year 2015-16 - CIT(A) deleted addition - AR submitted that the income on government securities accrues only on appointed days and therefore, the broken period interest receivable is not liable to tax - HELD THAT - We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We find that this issue has been decided by the Hon'ble Madras High Court in the assessee s own case in favour of the assessee. Further, we find that the Hon'ble Karnataka High Court also decided the issue in favour of the assessee.

Summary

Issues Involved:
1. Disallowance of Provision for Leave Encashment
2. Disallowance of Deduction u/s 36(1)(viii)
3. Depreciation on Investments
4. Addition of Reversal of NPA Provision
5. Disallowance of Bad Debts u/s 36(1)(vii)
6. Addition of Provision for Leave Encashment while computing Book Profit u/s 115JB
7. Enhancement of Income by CIT(A)
8. Disallowance of Ex-Gratia Payment
9. Disallowance u/s 14A
10. Addition of Interest on NPAs
11. Depreciation on ATMs
12. Deduction u/s 36(1)(viia)
13. Income Received in Advance
14. Interest Accrued but not Due on Government Securities

Summary:

1. Disallowance of Provision for Leave Encashment:
The Tribunal upheld the disallowance of Rs. 16,79,49,238/- towards provision for leave encashment as per Section 43B(f) of the Income Tax Act, 1961, which allows deduction only on actual payment.

2. Disallowance of Deduction u/s 36(1)(viii):
The Tribunal allowed the deduction of Rs. 30,00,00,000/- claimed u/s 36(1)(viii), holding that the reserve created in the subsequent financial year from the profits of the previous year satisfies the requirement of the section.

3. Depreciation on Investments:
The Tribunal quashed the enhancement made by the CIT(A) on the disallowance of depreciation on investments, holding that the CIT(A) cannot introduce new sources of income not considered by the AO during assessment proceedings.

4. Addition of Reversal of NPA Provision:
The Tribunal quashed the enhancement made by the CIT(A) regarding the addition of Rs. 24,27,60,018/- being the reversal of NPA provision, stating that the CIT(A) cannot consider new issues not raised by the AO.

5. Disallowance of Bad Debts u/s 36(1)(vii):
The Tribunal allowed the deduction of bad debts written off relating to non-rural advances without adjusting the same against the provision for bad and doubtful debts u/s 36(1)(viia), following the decision in the case of Karnataka Bank Ltd vs DCIT.

6. Addition of Provision for Leave Encashment while computing Book Profit u/s 115JB:
The Tribunal held that the provision for leave encashment is an ascertained liability and cannot be added back while computing book profit u/s 115JB.

7. Enhancement of Income by CIT(A):
The Tribunal quashed the enhancement made by the CIT(A) on various issues, holding that the CIT(A) cannot introduce new sources of income not considered by the AO during assessment proceedings.

8. Disallowance of Ex-Gratia Payment:
The Tribunal upheld the deletion of disallowance of ex-gratia payment, following the decision in the assessee's own case for earlier years.

9. Disallowance u/s 14A:
The Tribunal upheld the deletion of disallowance u/s 14A, following the decision in the assessee's own case and the Supreme Court decision in the case of South Indian Bank Ltd vs CIT.

10. Addition of Interest on NPAs:
The Tribunal upheld the deletion of addition made towards interest on NPAs, following the decision in the assessee's own case and the Supreme Court decision in the case of Vasisth Chary Vyapar Ltd vs CIT.

11. Depreciation on ATMs:
The Tribunal upheld the deletion of disallowance of depreciation on ATMs, holding that ATMs are akin to computers and eligible for 60% depreciation.

12. Deduction u/s 36(1)(viia):
The Tribunal upheld the deletion of disallowance of deduction u/s 36(1)(viia), holding that the computation should consider aggregate average advances outstanding at the end of the financial year.

13. Income Received in Advance:
The Tribunal deleted the addition made towards income received in advance, following the decision of the Hon'ble Madras High Court in the assessee's own case.

14. Interest Accrued but not Due on Government Securities:
The Tribunal upheld the deletion of addition made towards interest accrued but not due on government securities, following the decision of the Hon'ble Madras High Court in the assessee's own case.

Conclusion:
The appeals filed by the assessee for both assessment years were partly allowed for statistical purposes, and the appeals filed by the revenue for both assessment years were dismissed.