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TMI Blog2016 (4) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... its and gains of business’. Though the circular was issued in the provisions of sec.80P of the Act, the said principle was equally made applicable to other banks and commercial banks to which Banking Regulation Act, 1949 applies. Therefore, by virtue of the above said circular, investments made by the banking company should be treated as a business asset of the banking company or stock-in-trade. It is well settled in law that CBDT circulars are binding upon the officers who are entrusted with the responsibility of executing the provisions of the Act. Having regard to the spirit of the circular cited supra and the fact that investments are shown as stock-in-trade in the books of account, loss/depreciation on account of fall in value of securities held by the assessee-bank should be allowed as deduction. Therefore, income arising therefrom should also be treated as business income. The provisions of section 45(2) cannot be applied to the facts of the present case, as in the earlier years, for the purpose of income-tax proceedings, the investments were treated as stock-in-trade. Addition made on account of write off of investments - Held that:- The submission of the learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case. Furthermore, in the assessee’s own case, the Hon’ble High Court of Karnataka held that no notional expenditure can be attributed to exempt income.Accordingly, we hold that no disallowance can be made u/s 14A of the Act. - Decided in favour of assessee Disallowance of contribution made to Disability Trust - Held that:- Undisputedly, impugned contribution was made by the assessee-bank pursuant to the order passed by the Hon’ble Supreme Court in the case of Devkala Consultancy Service (2004 (4) TMI 73 - SUPREME Court ). Needless to say, breach of the directions of the Hon’ble Supreme Court is not in the business interest of the assesseebank. Furthermore, what is paid in the form of contribution to the trust is only excess interest collected from borrowers and such excess interest was offered to tax in the year in which it was collected. Therefore, the AO, in all fairness, should have allowed the same as deduction.- Decided in favour of assessee Addition made on realization of assets of erstwhile Lakshmi Commercial Bank (LCB) Ltd. - Held that:- It is undisputed fact that in the year of merger of LCB with assessee-bank, excess of liabilities over assets was not all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming the write off of investments of an amount of ₹ 24,00,000/- 9) For all these and other grounds that may be urged at the time of hearing the Appellant request that its appeal be allowed. 4. Briefly, facts of the case are that the assessee-bank is a Government of India undertaking and is engaged in the business of banking. Return of income for the assessment year 2006-07 was filed on 21/11/2006 disclosing nil income under normal provisions of the Income-tax Act, 1961 [hereinafter referred to as the Act ]. Tax payable u/s 115JB was computed at ₹ 1,24,11,87,097/-. The return of income was selected for scrutiny by issuing notice u/s 143(2) of the Act. The assessment was completed on a total income of ₹ 1326,82,33,656/- by the Addl.CIT, LTU, Bangalore, vide order dated 29/2/2008 passed u/s 143(3) of the Act. While doing so, Assessing Officer (AO), made the following disallowances: a) Deduction u/s 36(1)(viia) was restricted to ₹ 476,97,51,958/- as against the claim of ₹ 498,51,70,108/- thereby resulting in addition of ₹ 21,54,18,149/-. b) Bed debts claim of ₹ 903,37,86,609/- on the ground that the amounts were not wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is a relevant factor. 5.6 The ld. CIT(A) also confirmed the addition on account of write off of NP investment of ₹ 24 lakhs holding that the loss is on capital account. 5.7 In respect of addition made on account of broken period interest of ₹ 45,17,75,000/-, the ld. CIT(A) deleted the addition holding that even in a case where accrual or mercantile system of accounting is followed, interest becomes due only when holder of the securities get a right to receive interest and following the decision of this Tribunal in assessee-bank s case for earlier years, directed the AO to delete the addition. 5.8 As regards the addition made to book profits u/s 115JB, the ld. CIT(A) held that the disallowance u/s 14A cannot be added to book profit for the purpose of computing taxable income u/s 115JB of the Act following the law laid down by the Hon ble Apex Court in the case of Apollo Tyres Ltd. (255 ITR 273). 6. Being aggrieved by that part of the order which is against the assessee-bank, assessee-bank is in appeal in ITA No.479/Bang/2009 and the revenue is also in appeal on the grounds which are allowed in favour of the assessee in ITA No.530/Bang/2009. 7. Now, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Act before allowing deduction under the provisions of section 36(1)(viia) as well as deductions under Chapter VIA. 8.4 We heard rival submissions and perused material on record. There is no dispute as to the eligibility of the assessee bank for deduction u/s 36(1)(viia) but the bone of contention between the assessee-bank and the revenue is only with regard to manner of computation of the amount of deduction. Therefore, it is apt to reproduce the relevant provision of section 36(1)(viia): 36(1)(viia) in respect of any provision for bad and doubtful debts made by (a) a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or a nonscheduled bank, an amount (not exceeding seven and one-half per cent] of the total income (computed before making deduction under this clause and Chapter VIA) and an amount exceeding 34[ten] per cent of the aggregate average ad made by the rural branches of such bank computed in prescribed manner: Provided that a scheduled bank or a non-scheduled referred to in this sub-clause shall, at its option, be allowed any of the relevant assessment years, deduction in respect of any provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Supply Industry Co. Ltd. (113 ITR 84) wherein the Hon ble Apex Court held that for the purpose of allowing deduction under the said provision, it was necessary to first compute total income of the assessee in accordance with other provisions of the Act i.e. in accordance with all the provisions except sec.80E. Earlier decision of the Hon ble Apex Court in the case of Cloth Traders Pvt. Ltd. (118 ITR 243) was overruled. Further, the Hon ble Apex Court, following its decision in the case of Distributors (Baroda) Pvt. Ltd (supra) held in the case of H.H. Sir Rama Verma vs. CIT (205 ITR 433) held that in the context of deduction u/s 80E long term capital loss brought forward from earlier years has to be first set off against long term gains of current assessment year before deduction contemplated u/s 80T of the Act is allowed. The relief under the said Act is to be given only for the amount of long term capital gains of the current year after long term capital loss of earlier years brought forward is set off. Therefore, having regard to the law laid down by the Hon ble Apex Court in the above cases, it must be held that the total income computed in accordance with provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s own case in ITA No.291/Bang/1998 rests on the above decision. The co-ordinate bench had not considered the decision of Hon ble Supreme Court cited supra. In the circumstances, the decision rendered by coordinate bench in the assessee-bank s case is per incuriam. Therefore, these decisions cannot be held to be applicable to the issue on hand. Hence, we hold that the method of calculation adopted by the AO is in accordance with the provisions of the Act and the reasoning adopted by the CIT(A) is also in consonance with the clear provisions of the Act. Hence, we confirm the addition made by the AO. The grounds of appeal raised by the assessee on this issue are dismissed. 9. Ground Nos.4 and 5 relate to direction of the CIT(A) deleting the addition made on account of depreciation in the value of Held to Maturity (HTM) category of investments. The background facts surrounding this issue are as under: 9.1 In the return of income, the assessee-bank claimed deduction of an amount of ₹ 460,71,28,270/- on account of depreciation in the value of HTM category of investments. The undisputed fact about this category of investments is that they are shown as investment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) c. CIT vs. HDFC Bank (ITA No.250/2012 (Bom.) d. Vijaya Bank (ITA No.687/2008dt.11/3/2013)(Kar.) e. Vijaya Bank (ITA Nos.660, 596 747/2011 (ITAT, Bang) 9.4 On the other hand, ld.CIT(DR) argued that the circular No.18/2015 of CBDT was issued only in the context of provisions of section 80P of the Act. The same cannot be applied to the commercial banks. He relied on the orders of the lower authorities. 9.5 We heard the rival submissions and perused the material on record. The short issue in this ground of appeal is whether fall in value of investments made pursuant to SLR requirements of RBI can be allowed as a deduction while computing business income of a banking company. Notwithstanding treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of RBI governing SLR requirement. Even otherwise, the Hon'ble jurisdictional High Court in the case of Karnataka Bank vs. CIT (356 ITR 539) held that circular issued by the RBI for treatment in the books of account is not relevant for classifying the investments whether stock-in-trade or not. In the present case, undisputedly, assessee-bank has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the apex court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head Profits and gains of business and profession . 3.2 Even though the abovementioned decision was in the context of co-operative societies/Banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which Banking Regulation Act, 1949 applies. 4. In the light of the Supreme Court s decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and appeals already filed, if any, on this ground before Courts/Tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned. (Sd.) . . . . . . . . . . . . . . . D. S. Chaudhry, CIT (A J), CBDT, New Delhi. From the reading of the above circular, it is clear that investments held by the banking concern are treated as a part of business of the banking company and therefore, the income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as business income. The provisions of section 45(2) cannot be applied to the facts of the present case, as in the earlier years, for the purpose of income-tax proceedings, the investments were treated as stock-in-trade. Thus, grounds of appeal Nos.4, 5 6 are disposed of. 10. Ground of appeal No.7 relating to disallowance of expenditure on public issue of ₹ 1,92,50,000/- is not pressed by the assessee-bank, hence dismissed as such. 11. Ground of appeal No.8 challenges the addition made on account of write off of investments of ₹ 24 lakhs. The assessee made a claim of ₹ 24 lakhs for deduction as write off of investments and when it was fund that these investments are not yielding any dividend/income or the advances granted to such companies are classified as non-performing, appropriate provisions or write off of such investments was shown as per guidelines of RBI. During the previous year relevant to assessment year under consideration, amount advanced to M/s.Pennar Aluminium of ₹ 24 lakhs was converted into securities and he same is held as stock-in-trade. Since the value is found to be nil, same is written off in the books of account and claimed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case. 2) The CIT(A) erred in directing the Assessing Officer to allow the claim of deduction u/s 36(1)(vii) amounting, to ₹ 903,37,86,609/-, being the bad doubts written off pertaining to non rural branches relying on the decision of the ITAT in the case of the assessee for the AY 04-05 as well as the decision of the Kerala High Court in CIT V South Indian Bank in 262 ITR 579. The CIT(A) ought to have appreciated the fact that the said decision of the ITAT has not been accepted by the department and an appeal has been filed in the Honorable High Court of Karnataka. 3) The CIT(A) has erred in directing the Assessing Officer to allow the deduction of ₹ 16,77,57,498/- being expenditure for earning exempt income relying on the decision of the ITAT for assessment year 2003-04 in the assessee own case. The CIT(A) ought to have appreciated the fact that the department is in appeal against the above mentioned decision of the ITAT on the issue. 4) The CIT(A) has erred in deleting the addition made to book profits u/s 11h5JB relating to expenditure incurred on earning exempt income holding that in view of Apex Court decision in Apollo Tyres(255 ITR273),the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions: Bank of India: (i) (27 Taxman 335)(ITAT,Mum) (ii)ITA 3422 3437/2013, 1498/2011- ITAT,Mum. (ii)ITA 2781 3534/2010 ITAT, Mum. (iii) 5 TMI 929/2014 Indian Bank: (i)TA 470 to 472/2010 ITAT, Chennai (ii) ITA 131, 388/2001, 984, 1082/2003 ITAT, Chennai (iii) ITA 880/2010, 1395 to 1397/2014 ITAT Chennai 13.6 We heard the rival submissions and perused the material on record. The assessee made a claim for deduction of bad debts, working of which is as under: PARTICULARS AMOUNT (Rs.) Bad debts written off during the year (for all branches) .. 9,93,93,02,594 Less: Bad debt of rural branches adjusted against the provision during the FY 2005-06 .. 90,55,15,985 9,03,37,86,609 13.7 Provisions of section 36(1)(vii) grants deduction for amount of bad debts or part thereof written off by the assessee as irrecoverable in the accounts subject to provisions of sec.36(2) of the Act. The case of the AO is that the assessee-bank had not written off bad debts in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any expenditure. 14.4 On the other hand, learned counsel for the assesseebank submitted that when no expenditure is incurred by the assessee in earning exempt, no notional expenditure can be attributed. In support of this legal proposition, he relied upon the following case-laws: a) CCI Ltd. vs. JCIT (250 CTR 291)(Kar.) b) Assessee s own case (381 382/2010)(ITA 1397/2006) (Kar.) c) Corporation Bank (ITA 1310 1393/2012) ITAT, Bang. d) Bank of India (3422 of 2013) ITAT, Mum. e) Bank of Maharashtra (ITA 637/2008) ITAT, Pune Learned counsel for the assessee-bank submitted before us that since interest exempt was earned from securities which was held as stock-in-trade, provisions of sec.14A have no application. In this connection, he has relied on the decision of the Hon ble Bombay High Court in the case of HDFC Bank Ltd. vs. DCIT (366 ITR 505) and CIT vs. India Advantage Securities Ltd. (IT Appeal No.1131 of 2013 dated 30/04/2014). 14.5 We heard the rival submissions and perused material on record. It is undisputed fact that the assessee earned tax-exempt income from the following sources: Interest on PSU bonds exempt u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :............................... 14.6 Sub-rule(1) of rule 8D extracted above states that, the AO having regard to accounts of the assessee and not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income can go on to determine disallowance under sub-rule (2) to rule 8D of the IT Rules. Sub-rule (2) does not come into operation until and unless specific condition in sub-rule (1) is satisfied. This position is reiterated by the Hon ble High Court of Karnataka in the case of Maxopp Investment Ltd. vs. CIT (347 ITR 272), and Bombay High Court in Godrej Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81). The AO had not given any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn exempt income was incorrect. In the absence of such finding, resort cannot be had to the provisions of sub-rule(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. In the result, the appeal filed by the revenue is dismissed. ITA No.530/Bang/2010 (Appeal by the assessee-bank for assessment year 2005-06): 18. The assessee-bank raised six grounds of appeal. Ground No.1 is general in nature and does not require adjudication. 19. Ground Nos. 2 to 4 relate to disallowance of depreciation on the value of investments Held To Maturity (HTM). A similar ground was raised by the assessee-bank for assessment year 2006-07 in ITA No.479/Bang/2009 and has been dealt by us in our order of even date in para.11. For the detailed reasons given in para.. above, we hold that depreciation on the value of HTM is held to be allowable. Accordingly, we allow ground Nos.2 to 4 of the assessee-bank and direct the AO to allow deduction of ₹ 553,50,00,000/- while computing income for the assessment year 2005-06. 20. Ground Nos.5 6 raised by the assessee-bank relate to disallowance of write off of investments of non-performing assets of an amount of ₹ 67,85,29,990/-. A similar ground has been raised by the assessee for assessment year 2006-07. Since the facts are identical to the facts in assessment year 2006-07, for the detailed reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of HTM is held to be allowable. Accordingly, we hold that the assessee is entitled for depreciation on the value of HTM investments of ₹ 309,73,59,173/-. Accordingly, these grounds of appeal are allowed. 29. Ground No.5 challenges the disallowance of contribution made to Disability Trust as per directions of the Hon ble Supreme Court in Interest Tax case of Devkala Consultancy Services Ltd. 29.1 Brief facts are that the Hon ble Supreme Court while dealing with public interest litigation case in the case of Indian Banks Association vs. Devkala Consultancy Service others (267 ITR 179) found that banks collected excess interest from borrowers on account of rounding off. This amount was found to be unconstitutional as Article 265 read with article 366(28) of the Constitution of India, nothing is realizable as tax or by way of recovery of tax or any amount akin thereto which is not permitted by law. Hon ble Supreme Court also realized impracticability of returning excess tax recovered from borrowers and therefore, Hon ble Apex Court gave direction for formation of a trust for benefit of disabled persons covered by the Persons with Disabilities (Equal Opportunitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us in para.13, while dealing with ITA No.530/Bang/2009 filed by the revenue, we uphold the findings of the ld.CIT(A) and the ground of appeal filed by the revenue is dismissed. 33. Ground No.3 challenges the direction of the ld.CIT(A) to delete the addition of ₹ 2,09,49,856/- made under the provisions of sec.14A of the Act. For the detailed reasons given by us in para.14 in the appeal No.530/Bang/2009 filed by the revenue for the assessment year 2006-07, we hold that no disallowance u/s 14A is called for and accordingly, this ground of appeal by the revenue is dismissed. 34. Ground No.4 raised by the revenue challenges the direction of the ld.CIT(A) directing the AO to delete the addition made on account of depreciation on assets leased to M/s.Rajinder Steels and M/s.Kedia Group of Companies of ₹ 15,68,546/-. Brief facts surrounding this issue are as under: AO disallowed claim of depreciation in respect of assets leased to M/s.Rajinder Steels and M/s.Group of companies. It may be worth mentioning here that this is not first year in which the claim was disallowed. In earlier years also, the claim has been disallowed. We are informed at the Bar that in earlier asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such. ITA No.693/Bang/2012 (Assessee s appeal for assessment year 2008-09): 37. The assessee raised five grounds of appeal. Ground No.1 is general in nature and does not require any adjudication. 38. Ground Nos.2 and 3 challenge applicability of provisions of sec.115JB to the assessee-bank. It is the contention of the assessee-bank that provisions of sec.115JB are not applicable to banking company as no accounts are drawn up as per requirement of schedule VI of the Companies Act, 1956. The accounts are drawn in conformity with Banking Regulation Act, 1939. In this connection, assessee-bank had relied upon the decision of the co-ordinate bench in the assessee s own case in ITA No.305/Bang/2011, 73/Bang/2005 ; Bank of Maharashtra in ITA 1505/2008 (ITAT, Pune) ; Union Bank of India, ITA 4155 to 4161/2011 4702 to 4706/2010 (ITAT, Mumbai) and UCO Bank in ITA No.1768/2009 (ITAT, Kolkatta). Respectfully following the decisions of the co-ordinate bench, we hold that provisions of sec.115JB are not applicable to the banking company. Hence, this ground of appeal of the assessee is allowed. 39. Ground Nos.4 and 5 relate to depreciation in the value of investments HTM. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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