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TMI Blog2017 (11) TMI 1425X X X X Extracts X X X X X X X X Extracts X X X X ..... of the claim made under section 36(1)(viii) - method of computation of profits of the eligible business - Held that:- It is the contention of the assessee-bank that the expenses which are directly attributed to the assessee's business have been allocated to the eligible business and common expenses and general overheads are allocated or apportioned among the eligible business and non-eligible business in proportion to the turnover of the respective businesses. The methodology adopted by the assessee-bank is in conformity with the well-accepted method. However, we remit this issue to the file of the Assessing Officer to verify the methodology adopted by the assessee is in accordance with the stated method or not. If so, to accept the same. Disallowance of premium paid which is amortised on HTM securities - Held that:- Securities of HTM category form part of stock-in-trade. It is settled proposition of law that stock-in-trade should be valued at cost or market price whichever is less. Where the assessee had paid premium at the time of acquisition of securities which are held as stock-in-trade, the same should be allowed as deduction while computing income. See Ing Vysya Bank Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loss account, the assessee was entitled to offer income by following different method of recognition of income. No doubt, the assessee was only following the mercantile system of accounting. The only issue to be decided is whether income accrued to the assessee. As held in case of Bank of Tokyo Ltd. (1993 (5) TMI 172 - CALCUTTA HIGH COURT) that even though the assessee-bank received the entire commission for the guarantee commission no debt is actually created in favour of the assessee- bank for the entire amount. A right always remains vested in the customers to recall payment in the unexpired period in the case of earlier redemption of guarantee. Similarly even in respect of the locker rent also, the same reasoning can be applied. Therefore, having regard to the decision cited supra and also the principle of consistency, we hold that no addition is warranted in respect of the guarantee commission on letter of credit or locker rent received in advance Unrealised gains on revaluation of forward contracts - Held that:- Income is recognised only on hypothetical basis which has not accrued to the company. In the light of these facts, the issue is whether this income is liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93, 1440/Bang/2014 and 931, 903/Bang/2016 - - - Dated:- 15-9-2017 - Vijay Pal Rao (Judicial Member) And Inturi Rama Rao (Accountant Member) For the Assessee : G. Sarangan, Senior advocate, and S. Ananthan, Chartered Accountant For the Department : G. R. Reddy, Commissioner of Income-Tax-Departmental Representative ORDER 1. These are cross-appeals filed by the assessee as well as the Revenue directed against different orders of the Commissioner of Income-tax (Appeals) (CIT(A)) for the assessment years 2009-10 to 2011-12. Since common issues are involved in all these appeals, we proceed to dispose of the same by this common order. 2. We shall now take up the assessee's appeal in I. T. A. No. 979/Bang/ 2013 for the assessment year 2009-10. The assessee is a Government of India undertaking engaged in the business of banking. The return of income for the assessment year 2009-10 was filed on September 30, 2009 declaring a total income of ₹ 1691,78,60,322. The assessment against the said return of income was completed by the Additional Commissioner of Income-tax, LTU, (hereinafter referred to as the Assessing Officer (AO)) vide order dated November 11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) erred in not allowing the bad debts claim of the appellant amounting to ₹ 543,00,00,000 under section 36(1)(vii) of the Income-tax Act, 1961. 2.1. The learned Commissioner of Income-tax (Appeals) erred in holding that the appellant-bank had not written off the bad debts. 2.2. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the amount was debited to the profit and loss account of the appellant-bank. 2.3. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the learned Assessing Officer had accepted the fact that the appellant-bank had written off the debts. 2.4. Without prejudice to the above, the learned Commissioner of Income-tax (Appeals) erred in deciding the issue on a ground totally different from that of the ground raised in the appeal memo without giving an opportunity to the appellant-bank. 3. The learned Commissioner of Income-tax (Appeals) erred in not allowing the claim of ₹ 259,81,00,000 made by the bank under section 36(1)(viii). 3.1. The order of the learned Commissioner of Income-tax (Appeals) is based on surmises and conj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt are that the amount of bad debt should have formed part of income in earlier years and it should have been written off in the books of account. The contention of the Commissioner of Income-tax (Appeals) is that the provision for bad debts was not actually written off and squared off from the debtor's account in the books of account. What constitutes write off has been settled by the hon'ble apex court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166 (SC). In the said case, the hon'ble apex court held that reducing provision for bad debts from the debtor's account in the balance-sheet and debiting the provision for bad debts to the profit and loss account constitutes write off. The co-ordinate Bench of the Tribunal in the case of Joint CIT v. Vijaya Bank (I. T. A. Nos. 318 and 331/Bang/2014 dated July 22, 2016) to which both of us are parties after referring to the decision of the hon'ble apex court in the case of T. R. F. Ltd. v. CIT [2010] 323 ITR 397 (SC) and Vijaya Bank (supra) held as follows : 9.2 We heard the rival submissions and perused the material on record. The only ground on which the Commissioner of Income-tax (Appeals) confirmed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet was shown as net of the provision 'for impugned bad debt'. In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee (s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the assets side of the balance-sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for the impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of the 1961 Act as there was an actual write off by the assessee in its books, as indicated above. 8. Coming to the second question, we may reiterate that it is not in dispute that section 36(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed.' The assessee-bank had not produced any evidence that similar treatment was given in its books of account. Therefore, in the interests of justice, we remit this issue back to the file of the Assessing Officer to allow the same as deduction after satisfying himself that the provision for bad debts is debited to the profit and loss account and reduced the same from the sundry debtor's account in the balance- sheet. 7.3 The provisions of section 36(1)(vii) and 36(1)(viii) operate in different fields. Both are independent provisions as held by the hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270 (SC). Therefore, reliance placed by the Assessing Officer on the decision in the case of the Full Bench decision of the hon'ble Kerala High Court in the case of South Indian Bank Ltd. (supra) which is reversed by the hon'ble apex court in the case of Catholic Syrian Bank Ltd. (supra) therefore, is misplaced and had no relevance to the facts of the case. Therefore, this issue r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ₹ 288,18,00,000. 8.1 On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) confirmed the addition. Being aggrieved, the assessee is in appeal before us. 8.2 We heard the rival submissions and perused the material on record. This issue had come up for consideration before the co-ordinate Bench of the Tribunal in the case of Joint CIT v. Vijaya Bank for the assessment year 2008-09 in I. T. A. Nos. 578 and 653/Bang/2012 dated February 27, 2015 wherein it was held as follows : 46. We have considered the rival submissions. A plain reading of the provisions of section 36(1)(viii) of the Act clearly shows that what is relevant is profits derived from eligible business computed under the head 'Profits and gains of business or profession' and not the profits derived by the entity as a whole as has been done by the Assessing Officer and the Commissioner of Income-tax (Appeals). We therefore hold that the method of computation of deduction as done by the Assessing Officer and the Commissioner of Income-tax (Appeals) is incorrect. The profits derived from eligible business computed under the head 'Profits and gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rules prescribe the method of computation of eligible business. Therefore, the computation of income should be done by one of generally accepted methods. It is the contention of the assessee-bank that the expenses which are directly attributed to the assessee's business have been allocated to the eligible business and common expenses and general overheads are allocated or apportioned among the eligible business and non-eligible business in proportion to the turnover of the respective businesses. The methodology adopted by the assessee-bank is in conformity with the well-accepted method. However, we remit this issue to the file of the Assessing Officer to verify the methodology adopted by the assessee is in accordance with the stated method or not. If so, to accept the same. 8.3 This ground of appeal is therefore partly allowed for statistical purposes. 9. Ground of Appeal No. 4 relates to the disallowance of premium paid which is amortised on HTM securities. The factual background of the addition, as set out by the Assessing Officer vide paragraph 7 of the assessment order, reads as under : Disallowance of amortisation loss related to HTM securities It is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be added, either one of the above amount can only be considered.' The assessee's submission is considered. Since the securities in the held to maturity (HTM) category are in the nature of investments, the broken period interest paid at the time of purchase cannot be allowed as revenue expenditure. The difference between the book value and the face value which is actually the broken period interest/premium paid at the time of purchase has been amortised over a period by the assessee and such amortisation loss has been claimed in the books. The assessee has not added back to the amount in the computation of income. The assessee has now consented to the disallowance and the addition of this amount to the total income. As consented by the assessee and as also on principle, the amortisation of loss of ₹ 115,88,22,975 is disallowed and added back to the assessee's income. (addition ₹ 115,88,22,975) 9.1 On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) disallowed the same vide para graph 9.2 to 9.4 as under : 9.2 I have gone through the facts and the submissions. The relevant portion from the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in appeal are found to be irreconcilable from the accounts of the appellant. It is also found that the appellant had agreed to the said disallowance. In view of this discussion I am not inclined to interfere with stand taken by the Assessing Officer. These grounds, therefore, fail. 9.2 We heard the rival submissions and perused material on record. Securities of HTM category form part of stock-in-trade. It is settled proposition of law that stock-in-trade should be valued at cost or market price whichever is less. Where the assessee had paid premium at the time of acquisition of securities which are held as stock-in-trade, the same should be allowed as deduction while computing income. This issue was considered by the co-ordinate Bench in the case of Ing Vysya Bank Ltd. v. Asst. CIT in I. T. A. No. 443/Bang/2012 dated August 14, 2013 wherein it has been held as follows : 10. We have heard the rival submissions. The issue raised by the assessee in ground No. 2 is no longer res integra and has been decided by this Tribunal in the case of Sir M. Visweswaraya Co-operative Bank Ltd. v. Joint CIT (I. T. A. No. 1122/Bang/2010) for the assessment year 2007-08 order dated May 11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predominantly capital nature. Thus, he was of the view that the assessee was not entitled to deduction of amortisation of premium on investments under section 36(1)(vii). Aggrieved, the assessee is in second appeal before us with this issue. 06. The learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) had failed to see the reason that a issue similar to that of the present one had been allowed by various Benches of the hon'ble Tribunals, namely : Catholic Syrian Bank Ltd. v. Asst. CIT [2010] 38 SOT 553 (Cochin) ; Khanapur Coop. Bank Ltd. v. ITO (I. T. A. No. 141/PNJ/ 2011(Panaji)) ; Corporation Bank v. Asst. CIT (I. T. A. No. 112/Bang/2008 (Bang)). The learned counsel also placed reliance on the Board's Instructions No. 17 of 2008 and pleaded that the claim of the assessee be allowed as the assessee had the powers to debit in its profit and loss account a sum of ₹ 29.02 lakhs of amortisation of premium. 07. Per contra, the learned Departmental representative was unable to controvert to the submissions of the learned counsel for the assessee. 08. We have carefully considered the rival submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim made by the assessee has to be allowed. Accordingly, the Assessing Officer is directed to allow the claim of the assessee for deduction. The fact that the assessee had agreed for disallowance before the Assessing Officer is of no consequence as it is settled principle of law that there is no estoppel against law. Therefore, respectfully following the decision of the co-ordinate Bench cited supra, we direct the Assessing Officer to allow the same as deduction. 9.3 In the result, the appeal bearing I. T. A. No. 979/Bang/2013 filed by the assessee is partly allowed for statistical purposes. I. T. A. No. 1035/Bang/2013 (assessment year : 2009-10) 10. The Revenue raised the following grounds of appeal : 1. The learned Commissioner of Income-tax (Appeals) erred on law and fact. 2. The learned Commissioner of Income-tax (Appeals) erred in restricting the disallowance under section 14A to 2 per cent. of the exempt income which is against the scope of the provisions of the Act. 3. The learned Commissioner of Income-tax (Appeals) erred in allowing depreciation on leased assets. 4. The learned Commissioner of Income-tax (Appeals) erred in allowing write ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred the same expenditure. 3.4 The Assessing Officers in the past have estimated and had disallowed under section 14A notional expenditure approximating to 3 to 6 per cent. of the exempted income. We have established that as no direct expenses are incurred in earning such tax-free income as such no expenditure is attributed for disallowance. However, the Commissioner of Income-tax (Appeals) has for the assessment year 1998-99 and other years estimated that 2 per cent. of the exempted income can be attributed as expenses under section 14A and accordingly directed the Assessing Officer to disallow 2 per cent. of the tax- free income. However, the Income-tax Appellate Tribunal in our own case for the assessment years 2000-01, 2002-03 and 2003-04 have upheld the bank's contention that when there is no specific expenditure, no expenditure can be attributed under section 14A, based on the decision of the hon'ble High Court of Karnataka in the case of Maharashtra Apex Corporation Ltd. v. CIT [2006] 286 ITR 585 (Karn). Following the Income-tax Appellate Tribunal orders in our case, for the assessment years 2005-06 and 2006-07 the Commissioner of Income-tax (Appeals) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of expenditure relatable to exempt income is prescribed in rule 8D of the Income-tax Rules, 1962 which were inserted by the fifth amendment with effect from March 24, 2008. A perusal of rule 8D will indicate that there are three sub components of such expenditure which is relatable to exempt income. The provisions of rule 8D are extracted hereunder : 'I. Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with - (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). II. The expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts, namely : (i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has incurred expenditure by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraph 12 that 'we have not incurred any direct expenditure that can be disallowed, however, as offered in the return of income a sum of ₹ 0.92 crore can be attributed under this clause.') (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula nil (The assessee has stated in the submission dated June 27, 2011 in paragraph 12 that 'We have not incurred any interest expenditure for earning the exempted income. For this assessment year our total funds in the form of capital and reserves amounts to ₹ 12207.77 crores and the investment made for earning the interest ₹ 85 crores, dividend is ₹ 1418.10 crores (average investments). Since we have not borrowed any amount for making such investments the amount disallowable under this clause is 'nil.' (iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with methods prescribed i.e., rule 8D of the Income-tax Rules. Therefore, at the first instance, himself examine the claim of the assessee that no expenditure was incurred to earn exempt income and it is only thereafter, and only if the Assessing Officer is not satisfied on this account, and after making reference to accounts, he is entitled to adopt the method prescribed under rule 8D of the Income- tax Rules. Rule 8D of the Income-tax Rules read as under : '8D. Method for determining amount of expenditure in relation to income not includible in total income.-(1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of appeal of the Revenue is dismissed. 10.4 As extracted above, no disallowance under section 14A can be made in the absence of finding as to the correctness or otherwise of the computation made by the assessee. In the present year, the assessee-bank itself has offered to tax a sum of ₹ 91,69,320 which was upheld by the Commissioner of Income-tax (Appeals). Since the assessee is not in appeal, we uphold the disallowance. Accordingly, the finding of the Commissioner of Income-tax (Appeals) does not call for an interference. The ground of appeal is dismissed. 11. Ground of Appeal No. 3 relates to depreciation on the leased assets to the Kedia group of companies. This issue is only consequential in nature, as in the earlier years viz., 2008-09 and 2007-08, we allowed the claim vide order dated July 13, 2016 in Miscellaneous Petition Nos. 42 and 43/Bang/ 2016 in I. T. A. Nos. 684/Bang/2012 and 813/Bang/2011. This ground of appeal is dismissed. 12. Ground of Appeal No. 4 relates to write off of miscellaneous items disallowed by the Assessing Officer. The factual background leading to the above addition, as set out by the Assessing Officer vide paragraph 6 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, they are clearly relatable to practices and systems arising out of the carrying on of the business of banking and are incidental to it. Hence, in terms of the judicial decisions cited above they are part of the accepted commercial practices in the line of banking. The disallowance is, therefore, directed to be deleted. These grounds, accordingly, succeed. 12.2 We heard the rival submissions and perused material on record. This issue has come up for consideration before the co-ordinate Bench in I. T. A. No. 318/2014 wherein it was held as under : Ground No. 4 relates to the direction of the Commissioner of Income-tax (Appeals) deleting the addition on account of sundry assets written off. The Assessing Officer disallowed the same treating it as bad debt written off. 14.1 The learned Departmental representative relied on the order of the Assessing Officer. On the other hand, the learned authorised representative of the assessee submitted that sundry debts written off represent penalties imposed in respect of accounts which are in operative for not maintaining of minimum required balance etc. The system automatically debits the customer's account with such charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our considered view that decision will not help the Revenue. Since there are more than one decision in favour of the assessee, following the same, we are inclined to hold that the provisions of section 115JB are not applicable to the assessee being a banking company. Hence, we are of the view that invoking of section 263 is not correct and accordingly quash the action under section 263 of the Act. 13.1 Respectfully following the decision of the co-ordinate Bench we hold that the assessee-bank is not liable for tax under section 115JB for the year under consideration. Therefore, we do not find any infirmity in the order of the Commissioner of Income-tax (Appeals). This ground of appeal is dismissed. 13.2 In the result, the appeal filed by the Revenue is dismissed. Assessee's appeal in I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11 : 14. The assessee raised the following grounds of appeal : 1. The order of the learned Commissioner of Income-tax (Appeals), LTU, Bangalore dated August 28, 2014 is against law and facts of the case. 2. The learned Commissioner of Income tax (Appeals), erred in law in confirming the disallowance of the bad debts cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered for arriving at the aggregate average advances. 3.2. The learned Commissioner of Income tax (Appeals) erred in interpreting that as per rule 6ABA 'advances made' to be read as 'made during the month'. 3.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that section 36(1)(viia) being an incentive provision should be interpreted liberally. 3.4. The learned Commissioner of Income tax (Appeals) failed to recompute the 'total income under section 36(1)(viia) after making the additions made in the assessment' for the purpose of allowing the deduction under section 36(1)(viia). 3.5. The learned Commissioner of Income tax (Appeals) erred in holding that the appellant-bank did not made any provisions for the entire amount of bad and doubtful debts of ₹ 900,00,00,000 and wrongly concluding that the judgment of the hon'ble Punjab and Haryana High Court decision is applicable to the appellant-bank's case. 3.6. The learned Commissioner of Income tax (Appeals) erred in confirming the addition on surmises and conjunctures. 3.7. The confirmation made by the learned Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned Commissioner of Income tax (Appeals) erred in not taxing the profit arising on sale of HTM investments under the head 'Capital gains', whereas the same is treated as business income. 5.1. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that once an asset is treated as capital asset, then the income from the transfer of the same has to be taxed only under the head 'Capital gains'. 6. The learned Commissioner of Income tax (Appeals) erred in law and on facts in confirming the disallowance of the claim of ₹ 542,37,31,200 in respect of profit from long-term finance under section 36(1)(viii) for the special reserve created. 6.1. The learned Commissioner of Income tax (Appeals) erred in law in not appreciating the fact that the appellant-bank computed the income from long-term finance consistently in the similar manner in all the years of its claim as provided in that section. 6.2. The learned Commissioner of Income tax (Appeals) erred in law in confirming the Assessing Officer's contention of disallowing the deduction on the basis that the profit from long-term finance should be arrived by prepari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsequent years since the same has been offered to tax. 8. The learned Commissioner of Income tax (Appeals) erred in law in sustaining the disallowance the unrealised gains on revaluation of forward contracts in foreign exchange amounting to ₹ 36,28,87,643. 8.1. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the unrealised gains cannot be taxed and only real income can be taxed. 8.2. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the unrealised gains did not accrue to the appellant-bank. 8.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the entries in the books alone cannot be the basis for taxing a receipt. 8.4. The learned Commissioner of Income tax (Appeals) ignored the consistent method adopted by the appellant-bank in offering the unrealised gains to tax over the years. 8.5. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years as the appellant-bank had offered to tax on the date of actual realisation. The fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... several cases it was not rural branch and rather it was situated urban agglomeration. 3. Apart from this while the computing the average aggregate advances the assessee-bank has taken into account the running balance of the advances made in the previous year as the opening balance of the subsequent year and computed the outstanding balance at the end of last day of each month comprised in the previous year. While computing the average aggregate advances the assessee-bank should have considered the fresh amount of advances made by each rural branch as outstanding at the end of each month comprised in the previous year rather the running balance. In this process, substantial amount of deduction has been claimed over and above the eligible amount. Show-cause notice dated September 26, 2012 was issued to the asses see-bank. In response to the same, the assessee furnished reply vide its letter dated December 18, 2012 as under : The details of rural branch advances are already submitted as required under rule 6ABA. The population figures considered for the purpose are of census 2001. We enclose the census certificates of rural branches collected by us/downloaded by Census ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h in every month comprised in the previous year to compute the average aggregate advances, in spite of numerous opportunities provided by the Assessing Officer. 9.7 The Assessing Officer has noted that by claiming 10 per cent. of average aggregate advances year after year on the running advance instead of advances made by each rural branch during the year which was outstanding at the end of the month the assessee had claimed benefit beyond the scope of section 36(1)(viia) over the years. This would explain why the provision of non-performing asset as per the annual report (Rs, 788.60 crores) does not match with the credit balance of the provision computed as per the Income-tax Act (Rs.3898 crores). In this regard reliance is placed upon the judgment of the hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 (P H) where it was held that making of provision for bad and doubtful debts equal to the amount mentioned in section 36(1)(viia) was a condition precedent for allowing deduction under the said section. This order was followed by the hon'ble Income-tax Appellate Tribunal Bangalore in the case of Syndicate Bank v. Deputy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of the provisions of section 36(1)(viia) which reads as under : 6ABA. 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 scheduled bank shall be computed in the following manner, namely :- (a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately ; (b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a) ; (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation : In this rule, 'rural branch' and 'scheduled bank' shall have the meanings assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36. From a bare reading of the above rule it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been correctly observed by the learned Commissioner of Income-tax (Appeals), the only dispute between the assessee and the Department is in respect of working out 10 per cent. of the aggregate average rural advances. While the assessee has made such working by considering the entire outstanding advances at the end of each month, the Assessing Officer has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances. However, a perusal of the provision contained under section 36(1)(viia) and rule 6ABA, would make it clear that the 10 per cent. of the aggregate average advances has to be worked out on the entire outstanding advances and not the advances of that month alone. That being the case, we agree with the view held by the learned Commissioner of Income-tax (Appeals). 9. Now coming to the quantum of deduction claimed under section 36(1)(vii) and 36(1)(viia), law is well settled that an assessee can claim deduction under both the clauses subject to the condition imposed under the proviso to section 36(1)(vii). As can be seen from the working submitted by the learned authorised representative, the provision created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HTM category securities In the computation of income the assessee-bank has been claiming depreciation of investments on the HTM category securities in all the assessment year. The HTM category securities are not eligible for any depreciation as per the RBI guidelines. The RBI has permitted the banks to claim depreciation on remaining two categories of securities namely, held for trade (HFT) and available for sale (AFS) whereas the banks are not entitled to claim depreciation on the HTM category securities, the profit and loss account by the company has been prepared in accordance with the RBI guidelines by not charging any such depreciation on the HTM securities. Accordingly the net profit for the year reported by the bank to the customers was ₹ 3021,43,04,000. However, the assessee-bank has made several adjustments in the computation of income and disclosed only a sum of ₹ 2319,96,40,606 as total income in the return of income. Some of the adjustments are discussed in the earlier paragraphs and in the subsequent paragraph also. One such major deduction claimed only in the computation income was depreciation on investments in India of ₹ 953,18,96,332 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to maturity categories is reckoned for the purpose of computation of taxable income after adjusting the previous year appreciation on the HTM securities. Accordingly, we have prepared an investment trading account and claimed depreciation and offered appreciation and profit on sale of investments. As in the part assessments, as required, we are furnishing the details which are subject during the course of the assessment we will resubmit any changes that will happen'. It is noticed from the above reply that the assessee-bank has been following their own method of computation of income against the statutory provisions of the Income-tax Act and the RBI guidelines. Year after year certain deviations are noticed and it was neither prescribed by the RBI nor in the Income-tax Act and in any Accounting Standards. Out of three different securities available for sale and held for trading can be marked to market and the depreciation is allowable as per the RBI and the profit and loss account was prepared in accordance with it. However the securities of the HTM category are not entitled for any depreciation and as it was held to mature. The main intention and purpose is to safegu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquires the characteristic of stock-in-trade. A merchandise or goods or in the present situation, security does not get the character of stock-in-trade merely because it is so designated but a security can acquire the character of stock-in-trade if it is so held as part of trading stock and the assessee acts as such. In respect of securities which are held by way of permanent investment in securities by the assessee-bank as part of the requirement of the law, then such securities is not and cannot be either be construed or accepted as an investment in the form of security ready for sale. Stipulation on the bank is that it should be held as an investment and as an investment in some Government securities or other securities. It is, therefore, held that all holdings of a banking institution in the form of investment in securities does not automatically acquire the characteristic of stock-in-trade. As to whether a particular investment in any security is in the nature of stock-in-trade or otherwise is a question which has to be examined in each case having regard to the nature of transactions, manner of holding and if it is curtailed or regulated by any other external or outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case neither there was existence of a capital asset nor transfer of the capital asset within the meaning of section 2(47) of the Income-tax Act. The assessee-bank has invested some funds in the securities that are held to mature (HTM) and redeemed those securities at the date of maturity. As per the break-up of profit on sale of investment in schedule 14 was ₹ 872,42,65,224. It includes the profit on sale of investment of held to maturity, available for sale and held for trading category securities. The business of the assessee is banking and the profit/gain was computed under the head income from business or profession. The RBI has not allowed the assessee-bank to claim any depreciation on those securities. The assessee-bank has followed the instruction of the RBI and prepared the profit and loss account whereas in the computation of income they have deviated from the RBI guide lines and claim the depreciation on the HTM securities. This does not mean that they can claim capital gain on redemption on securities. Hence the claim made by the assessee-bank in their letter dated October 19, 2012 is not acceptable and rejected. 3.4 Summary and conclusion As per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) it has been held as under : 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 the RBI can be allowed as a deduction while computing business income of a banking company. Notwithstanding the treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of the RBI governing SLR requirement. Even otherwise, the hon'ble jurisdictional High Court in the case of Karnataka Bank Ltd. v. CIT [2013] 356 ITR 549 (Karn) 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, the assessee-bank has changed its method of accounting by classifying the investments from investments to stock-in-trade. In such a situation, the provisions of section 45(2) of the Act are attracted. The said provisions of the Act read as under : '45.(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned 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 the 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 the 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 arising from such investments is treated as part of business income falling under the head 'Profits and gains of business'. Though the circular was issued in the provisions of section 80P of the Act, the said principle was equally made applicable to other banks and commercial banks to which the Banking Regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Appeal Nos. 4, 5 and 6 are disposed of. The reliance placed by the Assessing Officer on the decision of the hon'ble jurisdictional High Court in the case of CIT v. Ing Vysya Bank Ltd. [2013] 356 ITR 532 (Karn) ; [2012] 208 Taxman 511 is misplaced for the reason that hon'ble jurisdictional High Court in the case of Karnataka Bank (supra) held that the decision in Ing Vysya Bank (supra) runs counter to law lay down by the hon'ble apex court in the case of UCO Bank (supra). In the light of the above position in law, we direct the Assessing Officer to allow fall in value of investments as a revenue loss. 21.3 Thus, grounds of Appeal Nos. 4 and 5 filed by the assessee are allowed. 22. Ground of Appeal No. 6 challenges the disallowance of the claim made under section 36(1)(viii) of the Act. For the reasons given by us in the appeal by the assessee for the assessment year 2009-10 in I. T. A. No. 979/ Bang/2013 in ground of Appeal No. 3, we remit this issue to the file of the Assessing Officer to recompute profits of eligible business in the manner as prescribed by us therein. 23. Ground of Appeal No. 7 challenges the addition made on account of commission on lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the case of the Assessing Officer that income escaped assessment forever. The income is only spread over. It is settled principle of law that the treatment given in the books of account of a particular item of income or expenditure has no relevance to decide taxability or otherwise of it under the provisions of the Act. Therefore, though the amount was shown as receipt and credited to the profit and loss account, the assessee was entitled to offer income by following different method of recognition of income. No doubt, the assessee was only following the mercantile system of accounting. The only issue to be decided is whether income accrued to the assessee. The hon'ble Calcutta High Court in the case of Bank of Tokyo Ltd. (supra) held that even though the assessee-bank received the entire commission for the guarantee commission no debt is actually created in favour of the assessee- bank for the entire amount. A right always remains vested in the customers to recall payment in the unexpired period in the case of earlier redemption of guarantee. Similarly even in respect of the locker rent also, the same reasoning can be applied. Therefore, having regard to the decision cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is to be made in accordance with the method of accounting regularly employed by the assessee. No doubt the Income-tax Act, 1961 takes into account two points of time at which the liability to tax is attracted viz., the accrual of income or its receipt ; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made about hypothetical income which does not materialise. As per the decision of the Madras High Court, the gain arising on conversion of unsettled forward exchange contracts are not taxable as they are merely estimated anticipated income. As decided in the abovesaid case and as only real income is to be brought to tax as decided in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) income to the extent of ₹ 36.29 crores representing unrealised income on evaluation of forward exchange contracts has been claimed as deduction in the computation of income. However, since we have claimed deduction in this respect to the extent of ₹ 28.57 crores in the previous year, the same has been offered to tax this year. The hon'ble Supreme Court in the case of CIT v. Shoorji ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se income accrued to the assessee. 29. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. 30. The Revenue raised the following grounds of appeal for the assessment year 2010-11 : The order of the learned Commissioner of Income-tax (Appeals) is opposed to law and fact of the case. 1. The Commissioner of Income-tax (Appeals) has erred in allowing the depreciation claimed on the leased assets i.e. finance lease giver to M/s. Rajinder Steels Ltd. and M/s. Kedia Castle Dellon Ltd. and Kedia Distilleries Ltd. based on the earlier assets. 2. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the disallowance made under section 14A stating that the mandatory requirement of section 14A(2) has not been satisfied and consequential application of rule 8D(2) to compute the disallowance was not in order. 3. The Commissioner of Income-tax (Appeals) has erred in relying on the decision of the hon'ble Income-tax Appellate Tribunal in the assessee's own case for the assessment year 2005-06 in the applicability of the provisions of section 115JB of Income-tax Act for rate purpose cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als)-14, LTU erred in holding that the appellant-bank did not write off the debts of ₹ 372,70,00,000. 2.2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the amount of ₹ 372,70,00,000 is a mere provision and not a write off. 2.3. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the debts are to be written off at the branch level where advances are made. 2.4. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the appellant-bank had submitted the individual bad debts details of the write off. 2.5. The learned Commissioner of Income tax (Appeals)-14, LTU failed to appreciate the fact that in order to claim deduction under section 36(1)(vii), it is not necessary to prove that such debt has become bad. 2.6. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the amount of ₹ 372,70,00,000 debit to the profit and loss account and reduced from 'loans and advances' in the balance-sheet amounts to write off. 2.7. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in understanding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t debited to the profit and loss account). 4.2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in relying on the decision in the case of Ing Vysya Bank Ltd., which is distinguishable on facts. The learned Commissioner thus ignored the decisions of the jurisdictional High Court decisions. 4.3. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the investments of the appellant- bank are stock-in-trade and the appellant-bank is eligible to claim the loss arising out of the valuation of the stock at cost or market value whichever is lower. 4.4. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that once an income is taxed under the head 'Business or profession', then the stock on hand should be considered as stock-in-trade and the valuation loss arising by valuing the same at lower of cost or market value is an allowable deduction. 4.5. The learned Commissioner of Income tax (Appeals)-14, LTU erred in concluding that since the Department has not accepted the method of accounting followed by the bank in the earlier assessment years and no final conclusion can be draw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the entries in the books alone cannot be the basis for taxing a receipt. 6.4. The learned Commissioner of Income-tax (Appeals)-14, LTU ignored the consistent method adopted by the appellant-bank in offering the unrealised gains to tax over the years. 6.5. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years as the appellant- bank had offered to tax on the date of actual realisation. 7. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law and on facts in sustaining the disallowance of expenditure under section 40(a)(ia) of ₹ 7,30,78,117. For the abovementioned grounds or any other grounds that may be pressed at the time of hearing, the appellant prays that its appeal be allowed. 35. Ground of Appeal No. 1 is general in nature and do not require any adjudication. Ground of Appeal No. 2 challenges the confirmation of disallowance of claim for bad debts under section 36(1)(vii) of the Act. In the earlier assessment year viz. 2009-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or accrued to the assessee in terms of contract entered into by the bank with its customers. Accordingly, we hold that this amount cannot be brought to tax. Respectfully following the ratio laid down in the assessment year 2010-11, we allow this ground of appeal. 39. Ground of Appeal No. 6 challenges the confirmation of addition made on account of unrealised gains on revaluation of forward contracts in foreign exchange amounting to ₹ 107,20,87,678. In the assessee's appeal viz., I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11 in paragraph 28, we held that unrealised gains on revaluation of forward contracts cannot be brought to tax. Accordingly for the detailed reasons given therein, this ground of appeal is allowed. 40. Ground of Appeal No. 7 challenges the confirmation of disallowance of ₹ 7,30,768,117 under section 40(a)(ia) of the Act. It is the claim of the assessee-bank that a sum of ₹ 7,30,768,117 claimed as deduction which was disallowed in the earlier years but claimed on payment basis under section 40(a)(ia) of the Act but the Assessing Officer denied the claim holding that the assessee-bank had failed to provide evidence in support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and pension fund. Brief facts surrounding this addition are as under : 43.1 The assessee-bank is required to contribute towards gratuity fund of the employees of the bank every year on the basis of actuarial valuation as per Accounting Standard 15 issued by the Institute of Chartered Accountants of India. During the financial year relevant to the assessment year under consideration, liability towards gratuity fund as per the actuarial valuation worked out to ₹ 1428 crores which includes additional liability on account of enhancement in the gratuity limit. However, the fund available is only ₹ 747.75 crores. Therefore, the assessee-bank was required to make a further contribution to the extent of ₹ 681.15 crores towards the fund as on March 31, 2011. The Reserve Bank of India had permitted banks to amortise additional liability on account of enhancement of gratuity limit over a period of 5 years. Accordingly, a sum of ₹ 13,753 crores was debited to the profit and loss account. The balance was carried forward for future amortisation. However, in the computation of total income, the entire additional liability has been claimed as deduction. As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussed above. Hence, the following amounts are disallowed : (a) Payment made to gratuity fund ₹ 679,52,53,142-Rs. 135,90,50,630 ₹ 543,62,02,512 (b) Payment made to pension fund ₹ 2369,18,89,449-Rs. 886,31,00,000 ₹ 1482,87,89,450 Excess amount to be disallowed ₹ 2020,49,91,960 As per the detailed discussion made above a sum of ₹ 2020,49,91,960 is disallowed. For filing inaccurate particulars and concealment income a separate penalty proceedings under section 271(1)(c) of the Income-tax Act is initiated. 43.2 Being aggrieved, an appeal was preferred before the Commissioner of Income-tax (Appeals), who, vide the impugned order allowed the claim taking into consideration that payment to this fund were made before due date for filing of return of income and also placing reliance on the decision of the co-ordinate Bench of Hyderabad in the case of Deputy CIT v. Andhra Bank (I. T. A. Nos. 167 to 169/Hyd/2014 and 244 to 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns subsequently by various High Courts as well as the hon'ble apex court. Therefore, the reasoning of the Assessing Officer does not hold water. Even otherwise, these payments were subject to the provisions of section 43B. Section 43B permits deduction only in the year of payment. Therefore, we do not find any fallacy in the reasoning of the Commissioner of Income-tax (Appeals). 43.7 This ground of appeal is dismissed. 44. Ground of Appeal No. 3 of the appeal relates to the applicability of the provisions of section 115JB to a banking company. This issue is covered in favour of the assessee and against the Revenue for the reason stated by us in the Revenue's appeal I. T. A. No. 1035/Bang/2013 for the assessment year 2009-10 and I. T. A. No. 1440/Bang/2014 for the assessment year 2010-11. For the same reasoning, we dismiss this ground of appeal. 45. Ground of Appeal No. 4 challenges the deletion of the addition made under section 14A of the Act. For the detailed reasons given by us in paragraph 10.4, in the Revenue's appeal in I. T. A. No. 1035/Bang/2013 for the assessment year 2009-10 this ground is dismissed. 46. Ground of Appeal No. 5 challenges the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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