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TMI Blog2015 (8) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, assessee had filed its return of income on 31/10/07 declaring total income of Rs. 495,28,37,146. Assessment in case of assessee was originally completed u/s 143(3) of the Act vide order dated 30/09/08 by disallowing expenditure of Rs. 5,83,68,430 u/s 14A of the Act. Against such assessment order assessee preferred appeal before ld. CIT(A). Ld. CIT(A), however, directed AO to disallow the expenditure in terms with rule 8D of the IT Rules. Assessee carried further appeal to ITAT. ITAT disposed of the appeal of assessee vide order dated 07/09/2012 holding that rule 8D of IT Rules will not be applicable for the impugned AY. Further ITAT directed AO to estimate the disallowance of expenditure u/s 14A at a reasonable rate. Though, the department challenged the order of ITAT before the Hon'ble high Court, but, the department's appeal was dismissed by the Hon'ble High Court vide order dated 07/08/2013 in ITTA No. 323 of 2013. 4. Thus, in terms with the direction of ITAT to reasonably estimate the disallowance of expenditure u/s 14A of the Act, AO passed impugned assessment order on 29/11/2013 quantifying the disallowance u/s 14A at Rs. 5,83,68,430. While doing so, AO observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be deleted and the appeal Is allowed." 7. We have considered the submissions of the parties and perused the materials on record. While DR relied upon the reasoning of AO, ld. AR submitted before us, Tribunal in assessee's own case for the preceding AYs has held that reasonable expenditure which could be disallowed u/s 14A would be an amount equal to expenditure incurred by assessee towards two months salary of officers and staff of investment division. In this context, ld. AR placed on record order passed by ITAT in assessee's own case for AYs 1996-97 to 1998-99 in ITA No. 661,662 & 663/Hyd/2003 dated 19/03/10 passed in ITA No. 584/Hyd/08 for AY 2005-06 and order dated 06/08/2010 passed in ITA No. 827/H/09 for AY 2006-07. 8. Having considered the submissions of the parties, the only issue which arises for consideration, in our view, is whether the disallowance of expenditure u/s 14A of the Act is valid or not. As can be seen, in assessee's own case for preceding AY, the Tribunal has held that before introduction of Rule 8D, disallowance u/s 14A of the Act has to be made at a reasonable rate. In this context, Tribunal in assessee's own case has held that expenditure incurred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. However, as per the books of account, assessee has created provision for an amount of Rs. 616.55 for NPAs, which also includes Rs. 596.57 for non-rural branch advances and Rs. 19.98 crores for rural branches advances. Thus, it was inferred by AO that assessee has claimed deduction u/s 36(1)(viia) to the maximum limit prescribed even though the actual provision made in books is less. AO thereafter relying upon number of decisions including the decision of Hon'ble Supreme Court in case of Catholic Syrian Bank Ltd. Vs. CIT, 343 ITR 270 as well as referring to the provisions of section 36(1)(viia) and section 36(1)(vii) held that since assessee has created provision for rural debts at Rs. 19.98 crores in the books of account for the year ending 31/03/2012, deduction u/s 36(1)(viia) has to be restricted to that amount only and the balance amount of Rs. 640,52,77,954 has to be disallowed. Accordingly, he added back the amount of Rs. 640,52,77,594. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT(A). 13. Before ld. CIT(A), assessee submitted that section 36(1)(viia) provides for a special deduction which has to be calculated as per the said provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts written off in the accounts of assessee representing urban advances is an allowable deduction. He, therefore, accepted assessee's claim of deduction u/s 36(1)(vii) for an amount of Rs. 209,07,50,831 as the same was less than the provision made in the books of account at Rs. 596.57 crores. Having held so, AO observed that if it is ultimately held that assessee is entitled to make provision for both urban and rural advances u/s 36(1)(viia), the, proviso u/s 36(1)(vii) will operate and assessee will not be entitled to write off bad debts claimed u/s 36(1)(vii) for the amount of Rs. 209,07,50,831. Being aggrieved of such decision of AO, assessee challenged the same before ld. CIT(A). Ld. CIT(A), however, upheld the decision of AO by observing as under: "9.2 This alternative disallowance by the Assessing Officer is a natural corollary to the rejection of the disallowance u/s 36(1)(viia). A debt cannot be claimed both on the basis of its being written off and its being part of the provision. The appellant admittedly had made a provision of only Rs. 19.98 crores in its books for rural bad debts. The balance Provision admittedly related to urban debts. The disallowance of Rs. 209,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have considered the rival submissions and perused the materials on record as well as the orders of revenue authorities. As could be seen from the finding of AO as well as ld. CIT(A), only reason for which claim of deduction for Rs. 209,07,50,831 representing actual write off of bad debts relating to non-rural advances u/s 36(1)(vii) was denied is, assessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances." Concurring with the aforesaid majority view, Hon'ble CJI, S.H. Kapadia, as the then he was, held as under: "2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation or taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 1 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 CBDT. 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)." Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt provided in the books of account, restricted deduction to Rs. 79,01,00,000 and added back the balance amount of Rs. 178,11,34,622. Being aggrieved of such disallowance, assessee challenged the same before ld. CIT(A). 24. Ld. CIT(A) following the decision of ITAT, Hyderabad in assessee's own case for AY 2003-04 in ITA No. 1232/Hyd/06, dated 28/11/08 and the decision of the Hon'ble AP High Court in assessee's own case reported in 151 ITR 203 deleted the addition by holding that as HTM category of securities as well as HFT and AFS securities are held as stock-in-trade, claim of depreciation has to be allowed. Being aggrieved, department is before us. 25. We have heard the parties and perused the materials on record. At the outset, learned counsels of both the parties have agreed that the issue in dispute is squarely covered by the decisions of the coordinate benches in assessee's own case for different assessment years. On perusal of materials on record, we find that this particular issue has been subject matter of dispute from AY 2003-04 onwards. In AY 2003-04, ITAT while deciding the issue in dispute in ITA No. 1232/hyd/06 dated 28/11/08 allowed assessee's claim of depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispute is squarely covered by the decisions of the coordinate benches in assessee's own case for previous AYs, following the view expressed by the Tribunal, we uphold the order of ld. CIT(A) by dismissing the ground raised. 26. The next issue as raised in Ground No. 3 relates to decision of ld. CIT(A) in deleting the addition made by AO on account of broken period interest. 27. Briefly the facts are, AO observed that every bank is required to maintain prescribed percentage of liquid asset for maintaining statutory liquidity ratio (SLR) as per the Banking Regulation Act, 1949. For this purpose, bank subscribes/buys govt. securities. Banks also deal in govt. securities by buying and selling in the open market to comply with the above norm. He observed that RBI pays half yearly interest on the due dates of such securities to the holders of the securities whose name appear in the ledger maintained by RBI. Banks are free to transfer such securities for consideration to other banks and consequently RBI pays interest to such holder on the date for payment of interest. While bank appearing in the RBI ledger is entitled to receive interest for the entire period, bank which buys securitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of broken period interest of Rs. 58.51 Crores. The bank which have purchased government securities have paid 6 ITA.No.584 & 666/Hyd/2013 State Bank of Hyderabad, Hyd. Rs. 58.51 Crores towards interest in respect of securities purchased for the broken period from the preceding due date for payment of interest upto the date of purchase. The bank had also received interest of Rs. 36.84 Crores in respect of securities sold by them for the broken period from the preceding due date for payment of interest upto the date of the sale. The assessee claimed the amount of interest paid for the broken period upto the date of purchase as deduction on the ground that the securities were held stock in trade. The AO however rejected the appellant's claim holding that the appellant's contention that the securities constituted stock in trade. It has not been accepted since it was found that the securities held in the category of HTM (held to maturity) did not form part of the stock. However, the CIT(A) allowed the claim on the ground that the same was in stock in trade and hence the interest for the broken period is an allowable deduction, following the decision of ITAT Hyderabad dated 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned out of the shares held as stock-intrade. For this proposition, assessee relied upon a decision of the Hon'ble Karnataka High Court in case of M/s CCI Ltd. Vs. JCIT, 250 CTR 291. AO, however, was not convinced with the explanation of assessee. AO noticed that as per the financial statement, assessee has incurred operating expenditure of Rs. 1735.81 and interest expenditure of Rs. 782.17 for earning total income of Rs. 11670.97. Thus, total expenditure incurred by assessee for earning income of Rs. 1667.97 is Rs. 9107.98, which works out to 77.26% of the total income. AO opined that assessee must have incurred same percentage of expenditure for earning exempt income also. He, therefore, applying the rate of 77.26% to the exempt income earned by assessee of Rs. 5,10,91,194 quantified the expenditure at Rs. 3,94,73,056. Being aggrieved of such disallowance assessee challenged the same before ld. CIT(A). 32. Ld. CIT(A) after considering the submissions of assessee in the light of decision in case of CCI Vs. JCIT (supra) held that as the tax free bonds and other investments are in the nature of security of assessee, it will be logical to hold that interest and dividend earned by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion u/s 36(1)(viia) for an amount of Rs. 660,50,77,954 being the aggregate of 7.5% of total income and 10% of the aggregate average rural advances. However, actual provision made for bad and doubtful debts in the books of account was to the tune of Rs. 616.55 crores. During the assessment proceeding, AO noticed that out of the aforesaid provision for bad and doubtful debts made in the books of account an amount of Rs. 19.98 crores represents provision towards bad and doubtful debts of rural advances whereas the balance provision of Rs. 596.57 represents urban bad debts. AO on interpreting the provisions of section 36(1)(viia) was of the view that only provision relating to rural debts can be allowed as deduction u/s 36(1)(viia) thereby restricting the deduction to Rs. 19.98 crores. AO added back the balance amount of Rs. 640,52,77,954 to the income of assessee. Being aggrieved of such disallowance, assessee challenged the same before ld. CIT(A). 36. Ld. CIT(A) following the decision of ITAT in assessee's own case, though, held, that assessee is eligible for deduction u/s 36(1)(viia) for the provision made towards rural advances as well as non-rural advances, but, she held that de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubtful debts relating to rural advances, in our view, is not acceptable. Provision contained u/s 36(1)(viia), was examined by the ITAT Bangalore Bench in case of CIT Vs. Ing Vysya Bank (supra). The ITAT after considering the legislative history of section u/s 36(1)(viia) from its inception has lucidly explained the true import of section u/s 36(1)(viia) as it stands in the present form. For better clarity, we thought it proper to reproduce the observations of the ITAT Bangalore Bench in extenso, which are as under: 34. It can be seen from the history of Sec.36(1)(viia) of the Act that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBDD had to be linked to the advances made by Bank's rural branches. At stage-II of Sec.36(1)(viia), the deduction while computing the taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary. 37. Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) of the Act, PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec.36(1)(viia) of the Act, this condition was done away with and it was only necessary to create PBDD in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s.36(1)(viia) of the Act had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s.36(1)(viia) of the Act will not be available to the bank. The second part of the deduction u/s.36(1)(viia) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making ..... X X X X Extracts X X X X X X X X Extracts X X X X
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