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TMI Blog2015 (4) TMI 727X X X X Extracts X X X X X X X X Extracts X X X X ..... make any enquiries in this regard in exercise of his powers of enhancement. Assuming the order of the Assessing Officer to be erroneous on this aspect, the same could only be set right in proceedings under section 263 of the Act. This issue does not arise out of the order of the AO or the CIT(Appeals) at all. The issue is no doubt one facet of the claim for deduction under section 36(1)(viia)(a)but this aspect has been examined and accepted by the Assessing Officer in the order of assessment and not interfered with by the CIT (Appeals) either in the first appeal or by the Commissioner of Income-tax in exercise of powers under section 263 of the Act. We are therefore of the view that the additional ground now sought to be raised by the Revenue cannot be admitted for adjudication. - Decided against revenue. Provision for bad and doubtful debts relating to rural advances are allowed under section 36(1)(viia)(a) - Held that:- Under section 36(1)(viia)(a) deduction is allowed when (a) provision is made in the books of account at 10 per cent of the aggregate average rural advances ; (b) aggregate average rural advances is computed in accordance with rule 6ABA of the Rules ; (c) 7.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -rural branches. We have already dealt with this argument while dealing with the additional grounds raised by the assessee. The provision for bad and doubtful debts account is not relevant while allowing deduction under section 36(1)(vii) of the Act in respect of bad debts of non-rural branches written of. - Decided in favour of assessee. Provision for bad and doubtful debts - as per AO claim for deduction under section 36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision, thus proposed to disallow a sum of ₹ 2,07,93,45,318 (difference between ₹ 5,03,49,00,000 and ₹ 2,95,55,54,682) - CIT(A) deleted addition - Held that:- We allow ground raised by the Revenue and hold that disallowance to the extent of ₹ 2,07,83,45,338 be restored. - Decided in favour of revenue. Profit on sale of investments and investment trading loss - CIT(A) accepting the assessee's claim that the assessee has traded in securities, shown as investments in the balance sheet, and that the asses see has incurred loss of ₹ 3,74,97,43,513 on account of revaluing the investments, held as on March 31, 2006, at cost or market val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business in connection with expansion of industrial undertaking or in connection with setting up of a new industrial unit. Admittedly, the assessee was not an industrial undertaking. This aspect has been overlooked by the Commissioner of Income- tax (Appeals). Even assuming that the claim is not one made under section 35D of the Act, the assessee's claim for deduction as a revenue expenditure on the basis that the issue of share capital was for meeting the working capital requirement cannot also be sustained. The fact that the capital raised by issue of shares is for meeting the working capital requirement or otherwise, will not be a relevant consideration. This aspect has been made clear by the hon'ble Supreme Court in the case of Brooke Bond India Ltd. [1997 (2) TMI 11 - SUPREME Court] wherein observed that by issue of shares there is increase in capital and therefore there is a expansion of capital base of the company and therefore the expenses will retain the character of capital expenditure - Decided in favour of revenue. Disallowance of provision made for credit card reward points - Held that:- The assessee was legally bound to provide equivalent of reward points in cash o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER N. V. Vasudevan (Judicial Member).- ITA Nos. 708 and 668/Bang/ 2010 (assessment year 2006-07) I. T. A. No. 708/B/10 is an appeal by the Revenue, while I. T. A. No. 668/ B/10 is an appeal by the assessee. Both these appeals are directed against the order dated March 25, 2010 of the Commissioner of Income-tax (Appeals), Mangaluru, relating to the assessment year 2006-07. I. T. A. Nos. 708/Bang/2010 (Revenue's appeal) 2. First, we shall take up for consideration the Revenue's appeal. Ground No. 1 is general in nature and calls for no adjudication. Grounds Nos. 2 and 3 raised by the Revenue are as follows : 2. Bad debts of non-rural branches written off under section 36(1)(vii)-Rs. 1,70,62,86,484. 2a. The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim of write off of bad debts relating to urban branches amounting to ₹ 1,70,62,86,484, without first setting off the bad debts against the credit balance in the provision for bad and doubtful debts account. 2b. The learned Commissioner of Income-tax (Appeals) erred in allowing reduction from provision for bad and doubtful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjab and Haryana in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 (P H) wherein it is held that 'making of a provision for bad and doubtful debts equal to the amount mentioned in this section is a must for claiming such deduction and that proviso to clause (vii) of section 36(1) also shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under section 36(1)(viia). 3. The Revenue sought to raise three additional grounds and these are connected to ground No. 3 raised by the Revenue in its original grounds of appeal vide letter dated June 11, 2012. These grounds read as follows : The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of the hon'ble Tribunal : (i) assessee's claim of deduction under section 36(1)(viia) of ₹ 503.49 crores is not in accordance with the provisions under the Act, read with rule 6ABA of the Income-tax Rules, 1962, and hence not allowable to that extent ? (ii) Since (a) non-rural bad and doubtful debts may be written off and allowable under section 36(1)(vii) independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270 (SC) the decision of the hon'ble Kerala High Court in the case of CIT v. Lord Krishna Bank Ltd. [2011] 339 ITR 606 (Ker). These decisions were rendered after the completion of assessments by the Assessing Officer in the case of the assessee for both assessment years 2006-07 and 2007-08. 6. Learned counsel for the assessee opposed the admission of the additional ground for adjudication. According to him, the additional grounds sought to be raised by the Revenue seeks to enlarge the scope of the original grounds raised by the Revenue as also the very basis on which the Assessing Officer and the Commissioner of Income-tax (Appeals) proceeded to decide the issue. If the additional grounds are entertained, then the Tribunal will virtually enhance the assessment. According to him, the Tribunal can neither directly nor indirectly enhance assessment. In this regard, reference was made to two decisions of the hon'ble Supreme Court viz., Pathikonda Balasubba Setty [1967] 65 ITR 252 (Mys) and Mcorp Global P. Ltd. [2009] 309 ITR 434 (SC). 7. We will deal with the admissibility of the additional grounds sought to be raised afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,80,470 1,79,21,88,992 Less : Bad debts written off By non-rural branches Out of income 57,66,26,877 Out of provision 1,12,96,59,608 1,70,62,86,485 Less : Bad debts written off Pertaining to rural branches 8,59,02,507 Balance under provision carried over as on 31.3.2006 11,99,53,99,344 Average advances at rural branches for FY 2005-06 (AY 2006-07) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad and doubtful debts claimed under section 36(1)(viia). 13. The Assessing Officer called upon the assessee to explain the basis on which the above working of deduction under section 36(1)(vii) and 36(1)(viia) of the Act was done by the assessee. 14. With regard to deduction under section 36(1)(vii) of the Act, it is already seen that the assessee had claimed a sum of ₹ 1,70,62,86,485 as deduction on account of bad debts written off out of which ₹ 1,12,96,59,608 was Prudential write off out of provision . The Assessing Officer wanted two clarifications : 1. How prudential write off of ₹ 1,12,96,59,608 can be claimed as a deduction under section 36(1)(vii) of the Act. 2. Under proviso to section 36(1)(vii) of the Act, bad debts written off has first to be adjusted against provision created. Since this has not been done, the Assessing Officer proposed to do so. If so adjusted the credit balance in the provision for bad and doubtful debts account will still be available and therefore deduction under section 36(1)(vii) of the Act will not be allowed in view of the proviso to section 36(1)(vii) of the Act. 15. With regard to the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances as deduction under section 36(1)(viia) of the Act. 17. The Assessing Officer however held that the decision of the Income-tax Appellate Tribunal in the assessee's own case was not accepted by the Revenue and an appeal has been preferred to the hon'ble Karnataka High Court and therefore he would prefer to follow the decision of the hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala [2005] 272 ITR 54 (P H). Accordingly the Assessing Officer disallowed a sum of ₹ 2,07,93,45,338. 18. Apart from the above, the Assessing Officer also disallowed the sum of ₹ 2,95,55,54,682 out of ₹ 5,03,49,00,000 claimed as deduction under section 36(1)(viia) of the Act. The reasons given for disallowing claim for deduction of ₹ 2,95,55,54,682 under section 36(1)(viia) of the Act by the Assessing Officer was that there was already credit balance in the provision for bad and doubtful debts as on April 1, 2005 balance brought forward was ₹ 9,12,57,47,169. According to the Assessing Officer, 10 per cent of aggregate average rural advances can be created as provision each year provided there is no brought forward balance as on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction as stated in the body of the assessment order, but no such deduction is actually allowed in the computation of total income as made by the Assessing Officer in the order of assessment. But there is no dispute raised by the assessee with regard to deduction of 7.5 per cent. of gross total income. 19. With regard to the claim for deduction under section 36(1)(vii) of the Act, the Assessing Officer referred to the provisions of section 36(1)(vii) of the Act which allows deduction in computing the income referred to in section 28 subject to the provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee during the previous year. The Assessing Officer referred to the proviso and the Explanation below section 36(1)(vii) of the Act which reads as under : Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause : Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot open to the Assessing Officer to reduce claim for deduction on account of provision for bad and doubtful debts under section 36(1)(viia) by the amount of provision created in an earlier year. On the above submission, the Commissioner of Income-tax (Appeals) held as follows : 30. I have carefully considered the facts and the rival submissions. I am inclined to agree with the appellant that the jurisdictional Income-tax Appellate Tribunal Bench's decision in the appellant's own case is binding on the assessing authority, notwithstanding that the decision has not become final. The hon'ble Tribunal has, in its order dated June 23, 2000 in [2001] 78 lTD 103 (Bang) in the appellant's own case for the assessment year 1987-88, held that, it was a misconception that the deduction under clause (viia) was related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause was that, once a pro vision for bad and doubtful debts was made by a scheduled rural branches, the assessee was entitled to a deduction which was quantified not with respect to the amount provided for in the accounts, but with resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons made under section 36(1)(viia) are in respect of aggregate advances made by rural branches, whereas the write-off under section 36(1)(vii) is in respect of a separate set of urban branches' debts, i.e., other than the rural debts covered by the provision made under section 36(1)(viia). The proviso clearly indicates that the debts for which provision has been made under section 36(1)(viia), if written off under section 36(1)(vii), would not be allowed to the extent of the provision made for such debt. The proviso does not apply to debts that are independent of the provisions under section 36(1)(viia), viz., urban debts. The restriction laid down by the proviso is to prevent double claims for deduction under both sections 36(1)(vii) and 36(1)(viia) in respect of rural debts . . . 34. The hon'ble High Court of Karnataka has held in Deputy CIT v. Karnataka Bank Ltd. [2009] 316 ITR 345 (Karn), that deduction under section 36(1)(vii) is allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to the advances of the rural branches, subject to the limitation that an amount should not be deducted twic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose that the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. The scope of the proviso to clause (vii) of section 36(1) of the Act was only to deny the deduction to the extent of bad debt written off in the books with respect to which the provision was made under clause (viia) of the Act. If the bad debt written off related to debts other than for which the provision was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). 37. If the bad debt written off related to debts other than those for which provision was made under section 36(1)(viia), such debts would fall squarely under the main part of sub-section (vii) and would be entitled to the deduction. In respect of that part of debt with refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'place' referred to in the definition clause for the purpose of identifying the branch as a rural is the revenue village with population in the village as a unit is less than 10,000 and therefore the claim of the assessee-bank needs to be restricted to the advances made by such branches. Under section 36(1)(viia) of the Act, in respect of any provision for bad and doubtful debts made by a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, is entitled to deduction (a) of an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and (b) an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. In respect of the deduction referred to in (b) above, rural branch has been defined under Explanation (ia) to section 36(1)(viia) of the Act as a branch of a scheduled bank or a non-scheduled bank situated in a place which has a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears in urbanisation process, the Government notifications and figures of census 2001, published in year 2002. 29. The learned Departmental representative has in his submissions given an analysis of some of the branches/centres classified as rural by the assessee stated to have been made based on the census figures and classification of 2001, as indicated in the table below. Verification of other branches could not be made in the absence of their geographical location, and municipal status : Sl. No Branch Name Population claimed Population as per census 2001 Census town/2001- Municipalities 15 7108 8604 Census town 16 5390 15860 MC 20 8798 14913 MC 24 6754 11194 MC 38 39 7446 - C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax (Appeals) has also not thought it fit to make any enquiries in this regard in exercise of his powers of enhancement. Assuming the order of the Assessing Officer to be erroneous on this aspect, the same could only be set right in proceedings under section 263 of the Act. This issue does not arise out of the order of the Assessing Officer or the Commissioner of Income-tax (Appeals) at all. The issue is no doubt one facet of the claim for deduction under section 36(1)(viia)(a) of the Act but this aspect has been examined and accepted by the Assessing Officer in the order of assessment and not interfered with by the Commissioner of Income-tax (Appeals) either in the first appeal or by the Commissioner of Income-tax in exercise of powers under section 263 of the Act. We are therefore of the view that the additional ground No. 3f now sought to be raised by the Revenue cannot be admitted for adjudication. 32. With regard to the additional ground sought to be raised by the Revenue in the covering letter dated June 11, 2012, the same reads thus : The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. 35. Section 36(1)(viia)(a) of the Act allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank : An amount not exceeding seven and one-half per cent (7.5 per cent) of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding 10 per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. 36. A comparison of section 36(1)(vii) and section 36(1)(viia)(a) would show that section 36(1)(vii) of the Act provides deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee, while section 36(1)(viia)(a) provides the deduction merely for making provision for bad and doubtful debts u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to section 36(2). It is obligatory upon the assessee to prove to the Assessing Officer that the case satisfies the ingredients of section 36(1)(vii) on the one hand and that it satisfies the requirements stated in section 36(2) on the other. The proviso to section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under section 36(1)(viia). The Explanation to section 36(1)(vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of section 36(1)(vii) simpliciter. (iv) As per the proviso to clause (vii) of section 36( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vii) was inserted which says that in respect of bad debt(s) aris ing out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the circulars issued by the Cen tral Board of Direct Taxes. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii). 38. The ratio of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for actual write off of bad debts relating to rural advances, until or unless there is a balance lying in the provision account made under clause (viia). This is so because of the proviso to section 36(1)(vii) of the Act which provides that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Thus the proviso ensures that there is no double deduction, i.e., firstly getting a deduc tion when a provision is created and secondly getting a deduction when bad debts are written off. 41. Rule 6ABA of the Income-tax Rules, 1962 (the Rules) lays down the manner of computation of aggregate average advances for the purpose of clause (viia) of section 36(1) and it reads thus: Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36. For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Supreme Court in the case of Catholic Syrian Bank Ltd. [2012] 343 ITR 270 (SC) was rendered on the presumption that banks maintain separate accounts for rural and non-rural debts. According to him prior to the aforesaid decision revenue looked at provision for bad and doubtful debts account only for assessee as a whole and did not bifurcate, the provision for bad and doubtful debts account as pertaining to rural and non-rural branches. His submission was that the assessee should be directed to give bifurcation of provision for bad and doubtful debts account as one relating to Rural branches and one relating to non-rural branches, so that the available credit balance in the bifurcated account can be seen and deduction under section 36(1)(viia)(a) can be allowed at 10 per cent of the aggregate average rural advances subject to the available credit balance in the bifurcated provision for bad and doubtful debts account referable to rural branches. 44. We have considered his submission and are of the view that the submissions are made on a total misconception of the manner in which provision for bad and doubtful debts relating to rural advances are allowed under section 36(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.5% of total income 5 Total eligible amount 40 Provision made in the books during the year 30 Deduction allowable under section 36(1)(viia)(a) 30 In the first example, though the assessee made provision for bad and doubtful debts of ₹ 50 crores in the books of account, since 10 per cent of aggregate average rural advances is only ₹ 35 crores, deduction to that extent alone will be allowed under section 36(1)(viia)(a) of the Act. In the second example, though the assessee made provision for bad and doubtful debts of ₹ 35 crores in the books of account, 10 per cent of the aggregate average rural advances is only ₹ 30 crores and therefore deduction of only ₹ 30 crores will be allowed under section 36(1)(viia)(a) of the Act. 45. Thus, the submission made by the learned Departmental representative with regard to opening balance available in provision for bad and doubtful debts account are all irrelevant and therefore ground No. (ii) even if found admissible is without any merit. 46. As far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as it does not arise out of the order of the Assessing Officer or the Commissioner of Income-tax (Appeals). 47. Now, we will deal with the main ground Nos. 2 and 3 raised by the Revenue. As far as ground No. 2 of the original grounds raised by the Revenue is concerned, the Assessing Officer disallowed the claim for deduction on account of bad debts written off in respect of non-rural debts. The Assessing Officer did not allow the claim of the assessee by applying the proviso to section 36(1)(vii) which lays down that bad debts written off should first be adjusted towards provision created under section 36(1)(viia) of the Act and only if the bad debts written off is more than the credit balance in the provision for bad and doubtful debts account can deduction under section 36(1)(vii) be allowed to the extent of such excess. He thereafter found that the credit balance in the provision for bad and doubtful debts as on April 1, 2005 balance brought forward was ₹ 9,12,57,47,169 and the provision created during the year as on March 31, 2006 provision for NPA's ₹ 2,95,55,54,682 making a total credit balance of ₹ 12,08,13,01,851. He found that the assessee had c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een ₹ 5,03,49,00,000 and ₹ 2,95,55,54,682). (b) Apart from the above the Assessing Officer also disallowed the sum of ₹ 2,95,55,54,682 out of ₹ 5,03,49,00,000 claimed as deduc tion under section 36(1)(viia) of the Act. The reasons given for dis allowing claim for deduction of ₹ 2,95,55,54,682 under section 36(1)(viia) of the Act by the Assessing Officer was that there was already credit balance in the provision for bad and doubtful debts as on April 1, 2005 balance brought forward was ₹ 9,12,57,47,169. According to the Assessing Officer 10 per cent. of aggregate average rural advances can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the provision for bad and doubtful debts account. 10 per cent of the aggregate average rural advances as admitted by the assessee as per revised census of 2001 was ₹ 352.53 crores. According to the Assessing Officer even if bad debts written off of ₹ 1,79,21,88,992 is reduced still the balance in the provision for bad and doubtful debts account was ₹ 7,33,35,58,177. Since the balance so available in the provision for bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts. 50. In the appeal before the Tribunal, in ground No. 3 of the original grounds of appeal, the Revenue has challenged the order of the Commissioner of Income-tax (Appeals) in so far as it relates to the deletion of a sum of ₹ 2,07,83,45,338 which is the difference between ₹ 5,03,49,00,000 and ₹ 2,95,55,54,682. The learned Departmental representative relied on the decision of the Income-tax Appellate Tribunal Bangalore Bench in the case of Canara Bank in I. T. A. No. 58/Bang/2004 dated June 9, 2006. In the aforesaid decision this Bench considered the decision of the Income-tax Appellate Tribunal in the case of Syndicate Bank [2001] 78 ITD 103 (Bang) and the decision of the hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala [2005] 272 ITR 54 (P H) and held that the decision rendered by the hon'ble High Court has to be followed. The above decision is the decision brought to our notice on the issue rendered after the decision in the assessee's own case. Judicial discipline demands t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt amounting to ₹ 10,32,20,170 and amortisation amounting to ₹ 29,60,93,787. Apart from the above, the assessee also claimed loss on trading of investments amounting to ₹ 3,74,97,43,513 by filing an investment trading account as under : Opening stock of Securities ₹ 19,694,87,62,367 By sales ₹ 91,858,05,08,997 Purchases ₹ 88,562,07,25,257 Closing stock ₹ 16,023,92,35,114 Loss ₹ 374,97,43,513 ₹ 108,256,94,87,624 ₹ 108,256,94,87,624 53. According to the assessee, it has been consistently treating income from investments other than shares as income from business and offering to tax such income under the head Income from business . The assessee pointed out that the Revenue has accepted the claim of the assessee in the past. The assessee therefore submitted that the stock of investments have to be treated as stock-in-tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed as deduction disallowed + ₹ 71,85,54,022 profit on sale of investments not offered to tax but brought to tax). 55. Aggrieved by the addition made by the Assessing Officer, the assessee preferred appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals) the assessee contended that it has been consistently and historically treating the entire investments as stock-in-trade in all these years and it was a legally accepted practice in the banking industry. It was also a prudent practice that enabled the banking industry to bring out the real income for taxation purpose and therefore, there was no justification to deny this consistent practice, which had been accepted even by the Reserve Bank of India. The department had also taxed the income from such investments as business income. All investments of the bank were stock-in-trade and hence had to be valued at the lower of cost or market value (LCMV). The Reserve Bank of India Circular referred to by the Assessing Officer only gave directions for uniform presentation in the published balance sheet and not for the purpose of computation of real income under the Income-tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 7, 2005 of the Chennai Bench of the Income-tax Appellate Tribunal in the case of Bharat Overseas Bank Ltd. in I. T. A. No. 241/Mds/2001 for the assessment year 1996-97. 56. The Commissioner of Income-tax (Appeals) on a consideration of the above submissions, held as follows : 50. I have carefully considered the rival submissions. The view that investments of banks are stock-in-trade is supported by various judicial pronouncements including those in the cases of CIT v. Karur Vysya Bank Ltd. [2005] 273 ITR 510 (Mad), ITO v. J K Bank Ltd. [2005] 95 lTD 141 (Asr), United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), Lakshmi Vilas Bank Ltd. v. CIT [2006] 284 ITR 93 (Mad), CIT v. Corporation Bank Ltd. [1998] 174 ITR 616 (Karn), CIT v. South Indian Bank Ltd. [2000] 241 ITR 374 (Ker), CIT v. Bank of Baroda [2003] 262 ITR 334 (Bom), CIT v. Nedungadi Bank Ltd. [2003] 264 ITR 545 (Ker), Deputy CIT v. Nedungadi Bank [2003] 85 ITD 1 (Coch), Ivory Mart v. Union of India [2002] 255 ITR 425 (Delhi), and the decision of the hon'ble Income-tax Appellate Tribunal in I. T. A. No. 50/Bang/1997, dated July 29, 2003, in the case of Karnataka Bank Ltd. 51. The h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2886/2005 dated June 6, 2012 [2013] 356 ITR 532 (Karn) . In the aforesaid decision, the hon'ble High Court of Karnataka took a view that the guidelines issued by the Reserve Bank of India will not be relevant while computing income under the Income-tax Act. The hon'ble court further took the view that every investment held by a bank cannot be considered as stock-in-trade. The hon'ble High Court finally concluded that 30 per cent of the investments can be clothed to the character of stock-in-trade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction. 59. Learned counsel for the assessee, however, submitted that in the assessee's own case for the assessment year 2005-06, this Tribunal has confirmed the order of the Commissioner of Income-tax (Appeals), deleting identical addition made by the Assessing Officer. Our attention was also drawn to the order of the Tribunal in the assessee's own case in I. T. A. No. 492/Bang/2009 for the assessment year 2005-06, order dated January 13, 2012, wherein the Tribunal had to deal with identical issue as to whether the Commissioner of Income-tax (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is per incuriam the decision of the hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 240 ITR 355 (SC). He brought to our notice that the hon'ble Supreme Court approved the practice of nationalised bank governed by the Banking Regulation Act, following mercantile system of accounting both for book keeping as well for Income-tax purposes. The hon'ble apex court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance-sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income tax purposes. The hon'ble court took the view that all investments held by a bank are to be regarded as stock-in-trade. 61. Learned counsel for the assessee further drew our attention to a very recent decision of the hon'ble High Court of Karnataka rendered on March 11, 2013 in the case of CIT v. Vijaya Bank I. T. A. No. 687 of 2008 [2013] 356 ITR 578 (Karn). The hon'ble High Court of Karnataka in the aforesaid case followed its own decision rendered in the case of Karnataka Bank Ltd. v. CIT in I. T. A. No. 172/2009 rendered on January 11, 2013 [2013] 356 ITR 549 (Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced on the apex court's decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) and the decision of the hon'ble High Court of Karnataka in the case of CIT v. ITC Hotels Ltd 2009-TIOL-678. 66. The Commissioner of Income-tax (Appeals) after considering the issue agreed with the appellant. He relied on the decision of the hon'ble jurisdictional High Court in CIT v. ITC Hotels Ltd. [2011] 334 ITR 109 (Karn), wherein it was held that the issue is no longer res integra as the hon'ble Supreme Court had dismissed the Revenue's SLP in Secure Meters Ltd. [2010] 321 ITR 611 (Raj) ; 2008-TIOL-600 where the hon'ble High Court of Rajasthan had held that such expenses were revenue expenditure. Respectfully following the ratio of these decisions, the Commissioner of Income-tax (Appeals) deleted the disallowance of ₹ 3,44,80,712 being the expenditure incurred by the bank on raising Tier-II capital. 67. We are of the view that the order of the Commissioner of Income-tax (Appeals) does not call for any interference. The contention on behalf of the Revenue that the sum raised by way of issue of bonds is capital expenditure is erroneous. The distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this Tribunal remanded the issue for fresh consideration by the Assessing Officer in the light of the decision of the hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. [2010] 328 ITR 81 (Bom). The following are the relevant observations of the Tribunal : 32. We have heard the rival submissions and considered the facts and materials on record. We find that in the assessee's own case for the assessment years 2000-01 and 2001-02 in I. T. A. Nos. 1283 and 1284/Bang/2007, the Tribunal allowed the claim of the assessee that prior to the insertion of rule 8D, there was no basis to make dis allowance on estimate basis. However, now the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. [2010] 328 ITR 81 (Bom) has held as under (pages 138 and 139) : '. . . the Assessing Officer is duty bound to determine the expen diture which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the rele vant facts and circumstances after furnishing a reasonable opportu nity to the assessee to place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annexure 5 to the assessee's letter dated February 19, 2008 to the Assessing Officer was as under : S. No. Details of IPO expenses Amount (Rs.) 1. Lead managers fees/ underwriting commission 384,36,332.70 2. Advertisement and marketing expenses 314,93,859.00 3. Printing charges (inclusive of courier) 442,20,629.00 4. Registrar s fees 52,79,828.00 5. Legal fees 88,20,686.46 6. Listing fees 36,16,500.00 7. Miscellaneous 4,26,844.87 13,22,94,680.03 Less : Advertisement expenses 96,31,723.00 12,26,62,957.03 Less : Excess provision made towards expenses 83,666.70 Follow on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer, this position is made amply clear in the amendment proposed to section 35D in the Finance Act, 2008, wherein the word industrial undertaking has been substituted with the word undertaking . This proposed amendment was with effect from April 1, 2009 and is, therefore, not applicable to this assessment year. The Assessing Officer relying on the case of Brooke Bond India Ltd. v. CIT reported in [1997] 225 ITR 798 (SC), wherein the hon'ble Supreme Court held that expenditure incurred by the assessee-company in issuing shares with a view to increase its share capital, directly related to the expansion of the capital base of the company, and the same was held to be capital expenditure, even though such expenditure may incidentally help in the business of the company and in its profit-making, the Assessing Officer rejected the assessee's claim for deduction under section 35D amounting to ₹ 2,45,15,858 being one-fifth of ₹ 12,25,79,290. 76. On appeal by the assessee, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow the claim for deduction holding as follows: 72. I have examined the issue carefully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1997] 225 ITR 798 (SC), wherein at page 801 in the concluding part of the judgment, the hon'ble Supreme Court observed that by issue of shares there is increase in capital and therefore there is a expansion of capital base of the company and therefore the expenses will retain the character of capital expenditure. In view of the above, we are of the view that the action of the Commissioner of Income-tax (Appeals) in deleting the addition made by the Assessing Officer cannot be sustained. Accordingly ground No. 7 raised by the Revenue is allowed. 79. In the result, the appeal by the Revenue is partly allowed. ITA No. 668/Bang/2010 (assessee's appeal) 80. Ground Nos. 1 and 2 raised by the assessee reads as follows : 1. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in confirming the disallowance of ₹ 38,72,634 being the provision made for credit card reward points. 2. That the Commissioner of Income-tax (Appeals) ought to have appreciated that the appellant had actually incurred the liability by way of credit card reward points with the cardholders availing the credit being a certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, and quantifiable, and is therefore not a contingent liability. However, he observed that since all cardholders do not necessarily encash reward points at the same time, or even during the same year, the bank does not incur actual expenditure in a particular year in respect of all reward points earned by cardholders during that year. While the liability to pay is definite, actual payment is not. In these circumstances, it does not matter that the bank follows mercantile system of accounting and accounts for the reward points on accrual basis. What accrues is reward points, and not expenditure. The only guide to accrued expenditure is the actual expenditure incurred. For this reason, the Commissioner of Income-tax (Appeals) allowed the assessee's alternate plea of allowing ₹ 2,97,026 being the amount actually paid during the year in respect of accumulated reward points and sustained the disallowance of the remaining sum of ₹ 35,75,608. 84. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the assessee has raised grounds Nos. 1 and 2 before the Tribunal. 85. We have heard the submissions of learned counsel for the assessee, who submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Commissioner of Income-tax (Appeals) ought to have accepted the appellant's contention that not being a company under the Companies Act, 1956 but being a bank governed by the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and deemed as a company under the latter Act could not be construed as a company for the purposes of charging minimum alternate tax in the light of a decision of the Mumbai Bench of the Tribunal in the case of Maharashtra State Electricity Board v. Joint CIT reported in [2002] 82 lTD 422 (Mum) and therefore should not have to be subjected to the minimum alternate tax. 89. The Assessing Officer rejected the computation of book profits made by the appellant on the ground that it was done as per Schedule VI of the Companies Act, but had not adopted the profit arrived at in the profit and loss account approved by shareholders in the annual general meeting, certified by the auditors, and filed before the Reserve Bank of India. He rejected the assessee's contention that the bank was not a company as per Companies Act, 1956, but a statutory corporation governed by the provisions of Banking Companies (Acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clares dividends, and is not engaged in generation or distribution of electricity. The Mumbai bench of the hon'ble Income-tax Appellate Tribunal has, in the case of Union Bank of India v. Joint CIT in their order dated July 25, 2006 in I. T. A. Nos. 5493-5495/Mum/2000 for the assessment years 1988-89 and 1990-91, held that, even though the assessee was functionally regulated by Banking Regulations Act, it was equally governed by the provisions of the Companies Act as it was basically a corporate entity. Therefore, the assessee-company was bound by the provisions of law contained in section 115J. In these circumstances, the Commissioner of Income-tax (Appeals) held that there is nothing in the provisions of section 115JB to exclude its applicability to banking companies. As regards the adoption of profit declared in the profit and loss account prepared under the Banking Companies (Acquisition and Transfer of Undertakings) Act, he relied on the decision of the hon'ble Supreme Court has, in case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 (SC), wherein it was held that the Assessing Officer had no power to rework the book profit if the profits were computed in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer to compute book profits based on recast profit and loss account prepared in accordance with the Schedule VI of the Companies Act. 96. Learned counsel for the assessee also submitted that the provisions of section 115JB of the Act were amended with effect from April 1, 2013 making it obligatory, inter alia, for banks to prepare profit and loss account in accordance with the Banking Regulation Act is clearly indicative of legislative understanding that up to and including assessment year 2012-13, section 115JB had no application to banks and insurance companies. It was so held by the Income-tax Appellate Tribunal, Hyderabad in the case of State Bank of Hyderabad v. Deputy CIT [2013] 33 Taxmann.com 312 (HydTrib). dated September 7, 2012 in I. T. A. No. 578/Hyd/2010 and Income- tax Appellate Tribunal Mumbai in the case of ICICI Lombard General Insurance Co. Ltd. dated October 10, 2012 in I. T. A. No. 2398/Mum/2009. 97. The learned Departmental representative relied on the order of the Commissioner of Income-tax (Appeals). 98. We have considered the rival submissions of learned counsel for the assessee. We find that this issue was considered by the Mumbai Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and loss account in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. The starting point of computation of minimum alter nate tax under section 115JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provi sions of Schedule VI are not applicable in view of exemption set out under proviso to section 211(2) of the Companies Act. The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act. The provisions of section 115JB cannot thus be applied to the case of a banking company. 99. We are of the view that in the light of the decision of the Mumbai Bench of the Tribunal, we have to necessarily hold that provisions of section 115JB of the Act are not applicable to the assessee which is a banking company. The decisions relied upon by learned counsel for the assessee, clearly support the plea of the assessee in this regard. Consequently, ground No. 3 raised by the assessee is also allowed. 100. In the result, the appeal by the assessee is partly allowed. I. T. A. Nos. 709 and 669/Bang/2010 (assessment year 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entical ground in the assessment year 2006-07, we are of the view that the order of the Commissioner of Income-tax (Appeals) on the issue should be set aside and the issue remanded to the Assessing Officer for fresh consideration in the light of the directions given in assessment year 2006-07. It is ordered accordingly. 105. Ground No. 3 raised by the Revenue reads as follows : 3. Interest on securities on accrual basis-Rs. 2,95,47,10,034 3.a The learned Commissioner of Income-tax (Appeals) erred in allowing relief to the assessee on the point of accrued interest on securities amounting to ₹ 2,95,47,10,034 offered on cash basis. 3.b The learned Commissioner of Income-tax (Appeals) while acceding to the fact that the said interest income from securities is assessable on accrual basis under the mercantile system of account ing, has erred in taking a stand that the assessee has legal right to receive such income on the specified dates for payment of interest on Government securities. 3.c The learned Commissioner of Income-tax (Appeals) erred in not appreciating the fact that the assessee is following the mercantile system of accounting in respect of interest from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem of accounting, it had consistently offered to tax interest on securities on cash basis and this was accepted by the Commissioner (Appeals) in the assessment year 2005-06. The Assessing Officer rejected this contention on the ground that the Department had not accepted the Commissioner (Appeals)'s decision in the assessment year 2005-06 and the same issue was in various levels of appeals in the case of other banks also, for the earlier assessment years. He was of the view that according to section 145, the assessee could not follow dual method of accounting and should have offered to tax interest on securities on accrual basis only, as that was the regular method of accounting it employed. 107. Before the Commissioner of Income-tax (Appeals), the assessee submitted that interest on securities accrued only on the due date for interest and not on any earlier dates. Therefore, interest accrued but not due could not be charged to tax. It had been consistently following this basis of accounting which had been accepted by the Department and there is no cause to disturb the method of accounting followed by the assessee. It was submitted that this issue had been decided in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as amended by the Finance Act, 1995, with effect from April 1, 1997, provides that the income chargeable under the head profits and gains of business or profession or income from other sources shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. So far as the system of accounting is concerned, he was of the view that the assessee-bank has been following the same system in returning interest on Government securities since last several years and there is no change in the method of accounting. The bank has been consistently and regularly following the mercantile system of accounting only and not a hybrid system. The Commissioner of Income- tax (Appeals) further observed that a right to receive income does not constitute accrual and the assessee-bank is entitled to recognise the revenue from interest on Government securities at the point of accrual or actual receipt, according to its own accounting policy. He was of the view that there was no material on record to show that the assessee had changed its method of accounting. Thus the Commissioner of Income-tax (Appeals) deleted the addition of ₹ 2,95,47,10,034 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness' or 'other sources' as the case may be, and therefore, the interest which accrued up to the end of the accounting year became taxable as the income of the previous year. The Commissioner of Income-tax (Appeals) held that the Assessing Officer was not justified in holding that the interest accrued up to the last day of the accounting year should be subjected to tax. This was upheld by the Tribunal. On appeal to the High Court : Held, dismissing the appeal, that even though section 18 of the Act was deleted, the assessee was taxable for interest on securities only on specified dates when it became due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years. 111. It is not in dispute before us that identical decision has also been rendered by the hon'ble High Court of Kerala in the case of CIT v. Federal Bank Ltd. [2008] 301 ITR 188 (Ker). In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the Revenue in the past. In view of the aforesaid decision, we are of the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer had to be restored by reversing the order of the Commissioner of Income-tax (Appeals). Similar decision in the present assessment year will also be applicable so far as the said sum is concerned. 116. The remaining sum of ₹ 68,40,296 being one-fifth of expenses of ₹ 3,42,01,479 is the expenses incurred by the assessee on public issue of bonds. We have already held while deciding ground No. 5 of the Revenue in assessment year 2006-07 that expenditure incurred on raising funds by issue of bonds is akin to cost of borrowing. In the present year, we find that the claim of the assessee has been tested under section 35D of the Act. We are of the view that the claim of the assessee is allowable under section 37(1) of the Act as expenditure wholly and necessarily incurred in connection with the business of the assessee. The assessee has claimed only one-fifth of the total expenses and has amortised the claim of expenses for the period of the bond. We therefore uphold the order of the Commissioner of Income-tax (Appeals) to the extent of allowing deduction of a sum of ₹ 68,40,296. Thus, ground No. 7 of the Revenue is partly allowed. 117. In the result, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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