2024 (10) TMI 1574 - HC - Income Tax

Exclude interest earned from securities on accrual basis for the purpose of income tax - assessee is entitled for deduction of bad debts on the total average outstanding rural advances made by the bank at the end of the accounting year without restricting the deduction to incremental advance made during the year - non-rural bad debts written off and debited to reserve account can be claimed as deduction of bad debt u/s 36(1)(vii) - balances lying unclaimed with the bank for more than 3 years cannot be treated as income of the assessee - assessee is a banking company bound to follow mercantile system of accounting as per Income Tax Act, Indian Companies Act, RBI guidelines - HELD THAT - The issue was covered by the decision of this Court in the case of City Union Bank Limited, 2007 (2) TMI 187 - MADRAS HIGH COURT and that of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. vs. Commissioner of Income Tax 1997 (2) TMI 11 - SUPREME COURT - Substantial question of law at Sl.No.1 and 4 require no further deliberation as the substantial questions of law has already been answered by this Court in the above case. Allowance of deduction of amortization loss/expenses on Government securities classified as Held to Maturity Category - Tribunal held that share listing fees is allowable as revenue expenditure and cannot be treated as capital expenditure - HELD THAT - Hon'ble Supreme Court has answered the issues arising in Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME COURT placing reliance on its earlier decision in the case of Punjab State Industrial Development Corpn. Ltd 1996 (12) TMI 6 - SUPREME COURT held though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Deduction u/s 36(1)(vii) and 36(1)(vii)(a) - We are inclined to remit the issue back to the Assessing Officer to re-examine the issue afresh in the light of the decision of SC in Catholic Syrian Bank Limited 2012 (2) TMI 262 - SUPREME COURT as the matter would require a proper redetermination as to whether the Respondent/Assessee had correctly computed the deduction under Section 36(1)(vii) (a) of the Income Tax Act, 1961 to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (vii)(a) to Section 36. Proviso to Section 36(1)(vii) relates to cases covered under Section 36(1)(vii)(a) and has to be read with Section 36(2)(v) of the Act. Depreciation is to be allowed on on account of shifting of securities from available for sales category (AFS) to held to maturity category (HTM) - HELD THAT - This issue is covered by the decision of United Commercial Bank 1999 (9) TMI 4 - SUPREME COURT as held whether the assessee is entitled to the particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, the Central Government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act, and on the recommendation of the RBI, permitted the assessee not to disclose the market value of its investment in the balance sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on mercantile system, he was entitled to show his real income by taking into account market value of such investments in arriving at real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee. Entitlement for deduction of amortization loss/expenses on Government securities classified as Held to Maturity Category - HELD THAT - The issue is answered against the revenue in terms of the decision of The Lakshmi Vilas Bank Limited, Karur 2020 (11) TMI 945 - MADRAS HIGH COURT In the result, Substantial Question of Law are answered against the revenue in favour of the Respondent/Assessee. However, for re-examination of the benefit claim under Section 36(1)(vii) and 36(1)(vii)(a) of the Income Tax Act, 1961 are concerned they are remitted back to the Assessing Officer to pass a fresh order on merits and in accordance with law.

Issues Involved:

1. Accrual Basis of Interest on Securities
2. Deduction of Bad Debts on Rural Advances
3. Deduction of Non-Rural Bad Debts
4. Treatment of Unclaimed Balances
5. Depreciation on Shifting of Securities
6. Provision for Depreciation on Investments
7. Amortization Loss on Government Securities
8. Share Listing Fees as Revenue Expenditure

Issue-wise Detailed Analysis:

1. Accrual Basis of Interest on Securities:

The primary issue was whether the assessee, a banking company, could exclude interest earned from securities on an accrual basis for tax purposes, despite being bound to follow the mercantile system of accounting. The Tribunal held in favor of the assessee, relying on precedents such as CIT vs. City Union Bank and CIT vs. Karnataka Bank, which supported the view that interest should be assessed based on due dates rather than accrual.

2. Deduction of Bad Debts on Rural Advances:

The Tribunal considered whether the assessee was entitled to a deduction for bad debts based on total average outstanding rural advances without restricting it to incremental advances. The Tribunal's decision was influenced by cases like CIT vs. City Union Bank and CIT vs. Canara Bank, which allowed deductions on total advances, not just incremental ones. However, the court remitted this issue back to the Assessing Officer for re-examination to ensure compliance with Section 36(1)(viia).

3. Deduction of Non-Rural Bad Debts:

The question was whether non-rural bad debts written off could be deducted under Section 36(1)(vii) without setting off against the provision for bad debts. The Tribunal's decision was consistent with the Supreme Court's ruling in Catholic Syrian Bank vs. CIT, which clarified that deductions for non-rural bad debts are allowable without the offset requirement. This matter was also remitted for further examination.

4. Treatment of Unclaimed Balances:

The court addressed whether unclaimed balances over three years could be treated as income. The Tribunal ruled in favor of the assessee, supported by decisions like CIT vs. City Union Bank and CIT vs. Karnataka Vikas Grameen Bank, which held that such balances should not be considered income.

5. Depreciation on Shifting of Securities:

The issue was whether depreciation could be claimed when securities were shifted from the "Available for Sale" to "Held to Maturity" category. The Tribunal, referencing CIT vs. City Union Bank and United Commercial Bank vs. CIT, allowed the depreciation claim, emphasizing that the real income should reflect market value adjustments.

6. Provision for Depreciation on Investments:

This issue involved whether the assessee could claim depreciation on investments despite valuing closing stock differently for tax purposes. The Tribunal upheld the claim, citing CIT vs. City Union Bank and United Commercial Bank vs. CIT, which recognized the practice of valuing stock at cost or market price, whichever is lower.

7. Amortization Loss on Government Securities:

The Tribunal examined if amortization loss on government securities classified as "Held to Maturity" could be deducted without capitalizing the loss over the maturity period. The decision, supported by cases like CIT vs. City Union Bank and CIT vs. Lakshmi Vilas Bank, favored the assessee, allowing immediate deduction of such losses.

8. Share Listing Fees as Revenue Expenditure:

The final issue was whether share listing fees should be treated as revenue or capital expenditure. The Tribunal, referencing CIT vs. Alembic Chemical Works and CBDT Circular No.10/67/65, concluded that these fees are revenue expenses, thus deductible.

Conclusion:

The court addressed multiple substantial questions of law, often siding with the assessee based on established precedents. However, it remitted specific issues related to deductions under Section 36(1)(vii) and 36(1)(viia) for further examination by the Assessing Officer. The appeals were disposed of with no costs, and the judgments largely favored the assessee, reinforcing established legal principles regarding banking and taxation.

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