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TMI Blog2024 (11) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... n the hands of the parents of the children i.e., employees and whether it is reflected as income of those parents or not is irrelevant for the reason that, we are supposed to examine whether the assessee has incurred this expenditure for the purposes of the business or not. This is not the issue raised by the learned assessing officer also. In view of this, ground number 2 of the appeal is dismissed. Disallowance u/s 14A - as submitted assessee has sufficient owned interest free funds available - provisions of rule 8D is prospective in operation or applies to the appeals for assessment year 2006 07 and 2007 08 pending? - HELD THAT:-There cannot be any interest disallowance in the hands of the bank which has sufficient own / interest free funds more than the amount invested in the stock securities earning tax free income. In view of this even in absence of separate books of accounts, even in absence of showing direct Nexus of the funds, no interest disallowance could have been made in the hands of the assessee u/s 14 A. Disallowance of administrative expenditure for earning the exempt income - We find that in the case of the assessee for assessment year 2005 06 the coordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive, hence, dismissed. Loss on revaluation of investments - assessee has booked a total loss on account of depreciation of securities on the last day of the financial year - HELD THAT:- The claim of the assessee that in accordance with the guidelines issued by the reserve bank of India investments in held to maturity category should be carried at acquisition cost. In case the purchase price is higher than the face value, the premium should be amortized over the remaining period of maturity of the security. The bank as amortized the sum being amortization cost of investment held in that bucket i.e., held to maturity [HTM]. No doubt the investments held by the assessee are trading securities therefore such amortization premium is claimed as allowable by relying on the decision of the honourable Bombay High Court in assessee s own case for assessment year 96 97 [ 2016 (8) TMI 963 - BOMBAY HIGH COURT] wherein the appeal of the revenue was dismissed on this count. Similarly for assessment year 97-98 also the honourable Bombay High Court as per order [ 2019 (6) TMI 1183 - BOMBAY HIGH COURT] decided the issue in favour of the assessee. Disallowance of contribution to pension fund by apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the deferred payment guarantee commission on receipt basis - such commission relates to subsequent years - whether guarantee commission should be accrued and chargeable to tax in the hands of the bank as and when it is received [at the time of issuing the guarantee] or such income can be spread on the basis of the time for the period for which guarantee is persisting - HELD THAT:- Revenue recognition policy of the bank as per accounting policy number 9.2 (a) wherein the commission other than the commission on deferred payment guarantee and government transactions) is recognized on realization basis. Thus, the deferred payment guarantee is recognized as income not on realization basis. We also do not find any revenue recognition policy with respect to commission on deferred payment guarantee in the annual accounts of the assessee. Therefore, those are accounted for on accrual basis as per policy number 9.1. We find that the learned Departmental Representative has correctly relied on the judgment rendered in Kerala Urban Development Finance Corpn. Ltd. [ 2002 (12) TMI 18 - KERALA HIGH COURT] in which case the administration and supervision charges were collected and retained by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax credit or exemption in accordance with those agreements. The assessee was specifically asked to give the details of the Double Taxation Avoidance Agreement where assessee is claiming benefit of exemption, in all those agreements as per article 22 or article 23 or article 25 only the credit methods for elimination of Double taxation are provided. Therefore, assessee is entitled to only credit of foreign taxes paid. Reliance on the decision of the coordinate bench by the learned authorized representative in case of bank of India [ 2015 (1) TMI 1418 - BOMBAY HIGH COURT] does not help the case of the assessee as it pertains to assessment year 2003 04. The reliance placed on the decision of Bank of India [ 2015 (1) TMI 1418 - BOMBAY HIGH COURT] also does not help the case of the assessee as it also pertains to assessment year 2003 04 - Ground dismissed. - Shri Prashant Maharishi, AM And Ms Kavitha Rajagopal, JM For the Assessee : Shri Ketan Ved Abdulkadir Jawad Wala For the Revenue : Shri P C Chhhotaray Special Counsel Shri Dr Kishor Dhule CIT DR ORDER PER PRASHANT MAHARISHI, AM: 1) We are concerned with the sets of cross appeals for two assessment Years i.e., AY 2006-07 and 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in upholding the action of the assessing officer in disallowing the appellant s claim in respect of depreciation of Rs. 365,480,537/ on lease assets. 3.2 The learned CIT (A) erred in holding that the genuineness of the lease agreement was not proved, and it was a sham agreement to give colour of finance lease. 3.3 The learned CIT (A) erred in holding that the lease transaction is not even a case of finance lease but a mere case of advancing of the loan and the lessee was the actual real owner. 4.1 The learned CIT (A) erred in not allowing deduction of Rs. 14,968,666,681/ under section 36(1)(vii) being the amount of bad debts written off (other than in respect of rural advances) 4.2 The learned CIT (A) erred in relying on explanation 2 to section 36 (1) (via) as proposed by the Finance Bill 2013 which is applicable from assessment year 2014 15 onwards. 5 The learned CIT A erred in upholding the action of the assessing officer in reducing the depreciation/taxing appreciation in the value of securities held as available for sale (AFS) and held for trading (HFT) category. 6. 1 The learned CIT Aerred in not directing the assessing officer to not tax the recovery of Baghdad s return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the taxing of interest on securities on due basis, ignoring the fact that the assessee bank has been following mercantile system of accounting and therefore, interest on securities is to be accounted for on accrual basis, while arriving at the book profit 5. On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in allowing the assessee's appeal by holding the securities as stock in trade and loss on valuation as revenue expenditure. 6. on the facts and in the circumstances of the case and in law the learned CIT (A) has erred in allowing the assessee's appeal without appreciating the fact that the similar issue appeal has been filed for the assessment year 1995 96 before the honourable Bombay High Court vide ITXAL No. 625/2010 7) Identical grounds are raised by the learned assessing officer in ITA number 4128/M/2014 in appeal for assessment year 2007 08. 8) The assessee is a public sector bank, and it has earned income from banking operation, treasury operations and other related services. It filed its return of income on 14/12/2006 for assessment year declaring a total income of ₹ 39,931,886,160/ . The case was selected fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (10) of the income tax act. The bank also relied on the ratio of the honourable Bombay High Court in the case of Mahindra and Mahindra Ltd [261 ITR 501], decision of the honourable Supreme Court in case of Venkata Satyanarayana rice mills versus CIT [223 ITR 101], honourable Madras High Court decision in the case of CIT versus India radiators limited [236 ITR 719] and honourable Gujarat High Court in the case of CIT versus Emtici engineering Ltd [242 ITR 86.] 14) The learned assessing officer held that in the case of the assessee these payments are in the nature of outright grants or deposits. It has been held in the earlier years that such expenditure is not really for the welfare of the staff but is meant to ensure that only the senior officers of the bank are able to secure their children admitted to the top-level schools. As such the ratio of the decision in the above cases are not directly applicable to the assessee's case. The payments amounts to donation and such donations are not allowable as expenditure incurred wholly and exclusively for the purposes of the business and therefore it was disallowed under section 37 (1) of the Act as per paragraph number 5 of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned by the learned CIT Afor assessment year 1992 1993 to 1995 1996. He referred to chart of issues submitted before us wherein it was submitted that this issue is already decided in favour of the assessee by the coordinate bench in assessee's own case as per order dated:- a. 6 June 2023 for assessment year 2009 10 b. 22 March 2022 for the assessment year 2005 06 c. 30 September 2021 for the assessment year 2003 04 d. 12 July 2021 for the assessment year 2001 021 2002 03 e. 6 March 2020 for the assessment year 2000 01 f. 3 February 2020 for the assessment year 2008 09 g. 19 May 2008 for assessment year 92 93 h. 17 September 2009 four assessment year 95 96 i. 26 July 2013 for assessment year 1996 1997 19) It was further submitted that the honourable jurisdictional High Court on appeal by the income tax department against the order of the coordinate bench for assessment year 1996 1997 as per order dated 1 August 2016 has decided the issue in favour of the assessee. He referred to the several judicial precedents as stated above placed in his paper book. Accordingly, his argument was that this issue is squarely covered in favour of the assessee by the decision of the honourable Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 86,484,920/ under section 10 (15) (iv) (h), interest on foreign currency loan approved by central government of ₹ 865,301,178/ under section 10 (15) (iv), interest on long-term finance to infrastructure of ₹ 1,396,486,909/ under section 10 (23G) and a sum of ₹ 3,652,615,063 as dividend income exempt under section 10 (34) and section 10 (35) of the Act. Thus, assessee has claimed total exempt income of ₹ 6,000,888,070/ . 23) The learned assessing officer summarize the facts as per paragraph number 7.11 on following issues:- a) The assessee carries on the business of banking. In order to earn interest, the assessee borrows funds on interest on advances and invests such funds for earning interest and dividend income. The income of the assessee is the difference between interest received and paid and not the gross interest received. b) The assessee has a common pool of funds which is utilized for the purposes of making long-term advances, Foreign Exchange financing and investment in tax-free bonds and shares. The borrowings are used for the purpose of making advances and investments. c) The nature of activities carried out by the assessee is diverse. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd [(2004) 89 ITD 44 (KOL)], honourable Supreme Court in case of CIT versus United Gen trust private limited [(200 ITR 488)], Distributors(Baroda) private limited versus Union of India [155 ITR 120] and the decision of the honourable Bombay High Court in case of CIT versus Magan Lal Chhaganlal private limited (236 ITR 456). 26) Assessee aggrieved with the order of the learned assessing officer challenged the same before the learned CIT A who decided the above ground of appeal as per paragraph number 5 of his appellate order. It was submitted before the learned CIT appeal that the learned assessing officer has failed to establish nexus between the exempt income and interest expenditure incurred by the bank to earn such exempt income. Only actual expenditure directly relatable to earning of exempt income can be considered and not notional expenditure. It was also contested that bank has sufficient interest frees funds by way of share capital/reserve and surplus and earned profit and therefore no interest disallowance can be made. The learned CIT A agreed with the contention of the assessee that there should not be any disallowances of interest expenditure under section 14 A of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee is claiming that cost free funds were used to earn exempt income, it is duty of the assessee to prove with documentary evidence that the cost bearing funds were not used to earn exempt income. It is well established principle laid down by Hon. Supreme Court in case of Maxop Investment Ltd Vs CIT (402 ITR 640) that where the mixed funds are used and the assessee cannot established with documentary evidence that cost free funds were used to earn exempt income, in such situation proportionate disallowance of the expenditure incurred by the assessee for exempted income shall be made. The Hon ble Supreme Court also held that the purpose for which the investment is made is not material and all investment which bears exempted income shall be considered for the application of provisions of section 14A. The Hon ble Supreme Court in case of Maxop has also held that the assessee must have its own cost free funds on the date of investment and not at the closing date of the financial year. It is submitted that when the assessee claims that the cost bearing funds were not used for the purpose of investment and other exempted income, the assessee has to prove with documentary evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that he has used its own funds for the investment. In absence of such a finding of the fact if the mixed funds are used for the purpose of investment, then the theory of apportionment of expenses incurred for earning exempt income shall be applicable as held by the Hon ble Supreme Court in the case of Maxop Investment Limited supra. It is also held by the Hon ble Supreme Court that when the mixed funds were used for investment and the interest was paid on such mixed funds then the interest was also paid to earn exempt income. For the sake of reference, the relevant portion of the decision of Hon ble Supreme Court is reproduced as under-. 42. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words: ...Admittedly the assessee had paid total interest of Rs. 2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs. 1.70 crores and balance interest paid by the assessee is Rs. 1.21 crores. The funds utilized by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments, in our view, the said contentions require verification. Admittedly, the facts relating thereto are not available on record. Since full facts which are required to be considered in order to properly appreciate various contentions of the assessee are not available before us, the bench suggested that this issue may be set aside to the file of the assessment officer in order to enable him to examine this issue afresh. Both the parties agreed to the same. Accordingly we set aside the order passed by Ld. CIT(A) on this issue in all the three years and restore the same to the file of the assessing officer with the direction to examine this issue afresh in all the three years by duly considering the various case law relied upon by the assessee and also by duly addressing various types of contentions of the assessee and take appropriate decision in accordance with the law. 4.1 Before parting with this issue, we may state that we are of the view that the availability of own funds interest free funds for making investments should be examined as on the date of making investments, even though the Ld. A.R contended that the said examination should be carried out as on the date of Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has invested its own funds, interest free funds and the income was accrued to the assessee. However, in the impugned case no such factual finding is inferred directly or indirectly by the assessing officer, CIT(A) or even by the assessee. Therefore, the ratio laid down by the Hon ble Supreme Court in the case of South Indian Bank is not applicable to the case of assessee. For the sake of relevance, the decision of condo Supreme Court in the case of South Indian Bank is reproduced as under-. 26. Reverting back to the situation here, the Revenue does not contend that the Assessee banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular. 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30) The learned authorized representative referred to the submissions made before the learned CIT A and stated that assessee has sufficient owned interest free funds available to the tune of ₹ 95,639.73 crores whereas the average investment made by the assessee earning tax free income is merely Rs. 6168 crores. It was further stated that the issue stands covered in the assessee's own case by the decision of the honourable Supreme Court in case of South India bank versus CIT wherein the assessee was one of the party in civil appeal number 2963 of 2012 wherein it has been held that in case where the interest free own funds exceed investment, proportionate disallowance of interest is not warranted under section 14 A of the income tax Act 1961 for investment made in tax-free bonds, securities which yielded tax-free dividend and interest to the assessee. The learned authorized representative heavily relied upon the decision of the honourable Supreme Court in case of Principal Commissioner Of Income Tax Versus Syntax Industries (2018) 93 taxmann.com 24, honourable Bombay High Court in case of CIT versus HDFC Bank Ltd (2016) 383 ITR 529, CIT versus HDFC bank (2014) 366 ITR 505, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10 (15) (iv) of the act. 33) He further stated that when the securities are held by the assessee as stock in trade, the provisions of section 14 A do not apply relying on the decision of the honourable Punjab and Haryana High Court in case of PCIT versus state bank of Patiala (2017) 78 taxmann.com 3. 34) The learned authorized representative further stated that section 14 A applies only when an expenditure is actually incurred relying upon the several judicial precedents and stated that when the assessee has stated that no expenditure is incurred for earning exempt income. 35) The learned authorized representative without prejudice also stated that coordinate bench in assessee's own case has restricted the disallowance to the extent of 1 % of the same to income for the assessment year 2005 06 as per order dated 22 March 2022 and for assessment year 2003 04 and 2004 05 as per order dated 30 September 2021 and further the order of the coordinate bench for assessment year 2001 02 and 2002 03 dated 12 July 2021 and for assessment year 1982 83 to 83 84. The learned authorized representative also placed reliance on the decision of the coordinate bench in case of American Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free domestic interest income of ₹ 5,135,586,892/ , the learned AO computed the total interest income and total interest expenditure. Based on this he worked out the percentage of interest expenses to interest income which is 54.72%. He also assumes the administrative expenses at the rate of 5% of the income. Therefore, he made a total of 59.72 percentage of the cost of earning tax-free income as a percentage of gross income. Accordingly, he estimated the cost of earning domestic tax free income of ₹ 3,066,793,808/ . He further worked out that there is a foreign interest income which is exempt under section 10 (15) of the act of ₹ 865,301,178/ . He worked out the total interest income of foreign offices and total interest expenditure of such foreign offices and worked out the ratio of expenditure to the income in percentage terms which is 81.36%. Over and above, he assumed 5% administrative expense which comes to the cost of earning exempt income at the rate of 86.36% of such income. Accordingly, on the interest income of foreign interest of ₹ 86,53,01,178/ he determined the total disallowance of ₹ 747,243,395/ . Thus, according to him the total claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax-free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock-in-trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee's case that investments were not made out of interest or cost bearing funds alone. In consequence, it was held by the ITAT that disallowance under section 14A is not warranted, in absence of clear identity of funds. 10. The decision of the ITAT was reversed by the High Court by acceptance of the contentions advanced by the Revenue in their appeal and accordingly the Assessee Bank is before us to challenge the High Court's decision which was against the assessee. 11. Since, the scope of section 14A of the Act will require interpretation, the section with sub-clauses (2) and (3) along with the proviso is extracted hereinbelow: 14A. Expenditure incurred in relation to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in relation to tax-free income on bonds and shares and as a corollary, there should be no disallowance under section 14A of the Act. On the other hand, the counsel for the revenue refers to the reasoning of the CIT(A) and of the High Court to project their case. 16. As can be seen, the contention on behalf of the assessee was rejected by the CIT(A) as also by the High Court primarily on the ground that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying section 14A of the Act. 17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. [2016] 75 taxmann.com 268/388 ITR 81 (Punj. Har.). Mr. S Ganesh the learned Senior Counsel while citing these cases from the High Courts have further pointed out that those judgments have attained finality. On reading of these judgments, we are of the considered opinion that the High Courts have correctly interpreted the scope of section 14A of the Act in their decisions favouring the assessee s. 20. Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessee s in bonds/shares using interest free funds, under section 14A of the Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made. 21. On behalf of Revenue Mr. Arijit Prasad, the learned Senior Advocate refers to SA Builders Ltd. v. CIT [2007] 158 Taxman 74/288 ITR 1 (SC), where this Court ruled on issue of disallowance in relation to funds lent to sister concern out of mixed funds. The issue in SA Builders is pending consideration before the larger bench of this Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G will have no application to support the Revenue's contention against the assessee. 23. It would now be appropriate to advert in some detail to Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC). This case interestingly is relied by both sides' counsel. Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for incorporation of section 14A in the Act in the following words:- 3 . The purpose behind section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income .. The following was written explaining the scope of section 14- A(1): 41. In the first instance, it needs to be recognised that as per Section 14-A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act and clarified that before applying the theory of apportionment, the Assessing Officer must record satisfaction on suo motu disallowance only in those cases where, the apportionment was done by the assessee. The following is relevant for the purpose of this judgment: 51. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. . 24. Another important judgment dealing with section 14A disallowance which merits consideration is Godrej Boyce Mfgr. Co. Ltd. v. Dy. CIT [2017] 1 SCC 421. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in earning an income, it is a condition precedent that such income should not be includible in total income of assessee. This Court accordingly concluded that for attracting provisions of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessee s. 28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work - The Wealth of Nations may aptly be quoted: The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person. Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailability of interest free funds then the amount of investment is also factually established for this year also. Therefore, as we have reached at the conclusion for assessment year 2006 07 that disallowance under section 14 A is restricted to the extent of 1% of the exempt income earned by the assessee is also apply to this case. Accordingly ground number 4 of the appeal of the AO and 1 of the appeal of the assessee are decided accordingly. 45) Ground number 4 (a) of the appeal is against the broken period interest expenditure where the facts are mentioned in paragraph number 9 of the assessment order. Broken period interest relating to government securities refers to the interest relatable the period from due date for payment of interest to the date of purchase or sale of such securities. When a security is purchased by a bank, the interest from the last due date of payment of interest till the date of purchase, is an interest which is considered as broken period interest. Therefore, the accounting treatment of such interest is given by the banks by debiting it to the profit and loss account. Similarly, when a security is sold, interest accrued from the last due date of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration of the asset and thus it is the capital cost. The amount in dispute is with respect to the disallowance of ₹ 151,011,972/ on securities which are held as closing stock at the end of the year. 48) The claim of the assessee is backed by the decision of the honourable Bombay High Court in case of American Express international banking Corporation (income tax reference number 173 of 1983/75 of 1986 and 346 of 1987 dated 25/9/2002) (2002) (125 taxman 488) and in the case of Union Bank of India (income tax reference number 149 of 1995 dated 9/10/2002) wherein it has been held by the honourable High Court that interest paid on broken period should be allowed as revenue expenditure. The learned assessing officer has categorically held that the decision of the honourable Bombay High Court has not been accepted by revenue and therefore the disallowance of ₹ 151,011,972/ was made. 49) The assessee aggrieved with the same, challenged it before the learned CIT A as per ground number 8 which has been decided as per paragraph number seven of his order. He deleted the above addition. He held that in assessee's own case for assessment year 2003 04 the learned CIT A fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction for broken period interest was being disallowed. Contrary, the assessee has relied upon the decision of Hon ble Bombay High Court in the case of American Express International Banking Corporation 125 Taxman 488 (Bombay). 52) The learned departmental representative further give an example that if a government security with face value of Rs 100/- and 12% interest per annum, wherein the date of interest is November and first May respectively, if in the month of January the assessee buy the Security for Rs 102/ out of which ₹ 2 is broken period interest and if it remains unsold and Rs 100/- is debited as purchase price of security which remains in the value of the closing stock and Rs. 2 is debited in profit and loss account as broken period interest expenditure. Since the interest is not offered for taxation on due basis, there is no realization of profit in connection with broken period interest expenditure of Rs. 2/ . This would clearly distort the picture of correct profit. In short, his contention is that the value of security in closing stock should be Rs 102/- and not Rs 100/-. 53) It was further contended that merely because the assessee has credited broken period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the valuation of the closing stock is shown at the face value of the security/purchase cost. Therefore, the broken period interest which relates to securities bought in the year but held as stock in trade on the last day of the financial year requires to be disallowed and added to the income of the assessee. 57) The learned authorized representative stated that the issue stands decided in favour of the assessee by the coordinate bench in assessee's own case for last several assessment years and the appeal filed by the assessee against the order of the coordinate bench before the honourable Bombay High Court for assessment year 1996 1997 was dismissed as per order dated 1 August 2016. The assessee submitted the copies of such decisions of the coordinate bench and the decision of the honourable Bombay High Court. He submits that when honourable high court has decided these issues, all these permutation and combination argued by the ld. DR, may also have been considered, though not mentioned in the orders, but that does not give permission to lower court to question it now. In view of this, it was submitted that in view of the principles of consistency, the issue must be dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-2002, CIT(A) upheld the order of the assessing officer by relying on the decision of the Supreme Court in Vijaya Bank Ltd. (supra) holding that expenditure claimed being broken period interest is not allowable as a revenue expenditure. 8. Aggrieved by the aforesaid order, assessee preferred further appeal before the Tribunal. 9. Tribunal framed the question for consideration as under: Whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock-in-trade? 10. After hearing rival submissions and on perusal of the decision of the Supreme Court in Vijaya Bank Ltd. (supra), Tribunal noted that the decision of the Supreme Court in Vijaya Bank Ltd. (supra) was explained by the Central Board of Direct Taxes (for short, 'CBDT' hereinafter). On the same lines, Kerala High Court in CIT v. Nedungadi Bank Ltd. [2003] 130 Taxman 93/264 ITR 545 distinguished the decision of the Supreme Court in Vijaya Bank Ltd. (supra), which held that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute an allowable deduction in the hands of the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an High Court, Supreme Court has delivered a judgment in CIT v. Citibank NA [Civil Appeal No. 1549 of 2006, dated 12-8- 2008] where the question which fell for consideration was whether the interest paid for broken period should not be considered as part of the purchase price but should be allowed as revenue expenditure in the year of purchase of securities? He submits that in the said decision, Supreme Court accepted the distinction pointed out by the Bombay High Court in American Express International Banking Corpn. (supra) and agreed with the view expressed that judgment in Vijaya Bank Ltd. (supra) would have no application. He therefore submits that appeal by the Revenue has no merit and should be dismissed. 14. Submissions made by learned counsel for the parties have received the due consideration of the Court. 15. Issue before the Court is whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock-in-trade? 16. To appreciate the above question, it would be appropriate to first examine the meaning of the expression broken period interest . This has been explained by the Bombay High Court in American Express Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, even though it had bought the said security on August 11, 1976. Therefore, it receives interest for the entire six months, though it bought the security on August 11, 1976. In the above example, since the security was sold/transferred on August 11, 1976 (i.e., after due date for payment of interest), interest had accrued to the transferor/seller from the last due date, i.e., May 12, 1976 up to August 11, 1976. 17. As explained by the Bombay High Court, every bank is required to maintain a Statutory Liquidity Ratio (SLR). For that purpose, every bank subscribes to government securities. One such security is known as Subsidiary General Ledger (SGL) which is maintained in the Public Debt Office in the Reserve Bank of India. Every bank is required as a part of its banking business to subscribe to this loan. Like any other security, such a loan/SGL is also transferable. Reserve Bank of India pays interest on due dates on such securities to the holders of the securities every six months. After subscribing to the said loans, banks are free to transfer such loans for consideration to other banks. Reserve Bank of India pays interest to the holder on the balances in a security if in its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra). Out of the four substantial questions of law which were considered by the Kerala High Court, question No. 1 pertained to whether investments made by the assessee in the form of government securities acquired for the purpose of complying with the requirements of the provisions of the Banking Regulation Act i.e., to maintain SLR, could be treated as trading asset/stock-in-trade of the business of the assessee? The 4th question considered by the Kerala High Court was as to whether interest paid for the broken period in the purchase of securities is an allowable deduction? Referring to the Circular dated 24-4-1991 issued by the CBDT, Kerala High Court held that securities held by banks constitute their stock-in-trade or investment and consequently loss claimed by banks on the valuation of their securities should be allowed as a deduction in computing the taxable profits. Therefore, Kerala High Court confirmed the view taken by the Tribunal that securities held by the assessee bank were stock-in-trade of the business of the assessee bank and that the notional loss suffered on account of revaluation of the said securities at the close of the year was an allowable deduction in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest paid on securities which are on closing stock. Thus, we do not find any merit and hence we confirm the order of the ld. CIT (A) in allowing the broken period interest included in the cost of securities at the time of purchase correctly written off/ debited to profit and loss account as allowable interest. Accordingly Ground no 4 (a) is dismissed. 60) Ground number 5 (a) for assessment year 2007 08 about disallowance deleted of ₹ 600,785,375/ is also of the similar nature. Therefore, as we have already discussed the issue and decisions of the honourable High Court, while deciding ground number 4 (a) for assessment year 2006 07, we also dismiss ground number 5 (a) for assessment year 2007 08. 61) Ground number 4 (b) for AY 2006-07 is with respect to the interest on securities on due basis, whereas the claim of the learned AO is that when the assessee is following mercantile system of accounting the interest on securities to be accounted for on accrual basis while arriving at profit. 62) During the course of the proceedings the assessee submitted the details of interest accrued but not due as on 31st of March 2006 of ₹ 34,745,979,218/ . It was further stated that inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion contained in section 5 and is based on the stand that Section 145 cannot override provisions of section 5 of the act. It was submitted that while interpreting charging provisions the tribunal has missed an important link that is the definition of total income in which charge of income tax has been created by virtue of provisions of section 4 and 5 and therefore the link of charging provision with provisions of section 145 has also been missed. It was further stated that when the assessee on accrual method of accounting has stated in its books of accounts that the above income has accrued to the assessee, now the assessee is precluded from saying that the income has not accrued for the purpose of taxation. It was further submitted that provisions of section 145 (1) are mandatory, and the proper method of accounting regularly followed by the assessee is binding for the computation of total income of the assessee. The learned departmental representative vehemently placed reliance on the decision of the honourable Supreme Court in case of Saharanpur cotton manufacturing Co Ltd 6 ITR 36. The learned departmental representative vehemently stated that as per the accounting system of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 August 2016 has decided the issue in favour of the assessee and therefore now this issue is squarely covered in favour of the assessee and cannot be disturbed. 67) The learned DR submitted that the honourable High Court in assessee's own case has held following the decision of Director of income tax (International taxation) versus Credit Suisse first Boston (Cyprus) Ltd (2013) 351 ITR 323. Thus, it was stated that if the above logic is applied then the assessee also cannot be granted any deduction of interest expenditure which has accrued unless it is paid by the assessee. He submits that the principles of accrual cannot be different in the books of accounts and for income tax purposes and further it can also not be different for accrual of expenditure and accrual of income. 68) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The point here is that as per the accounting policies of the bank, the revenue is recognized on accrual basis. Thus, when interest accrues but not due then it is recognized as income. However, in the income tax return assessee is showing only those interest income as income, which has accrued an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned departmental representative, various examples given by the learned departmental representative, the accounting methodology applied by the assessee for revenue recognition of accrual, and also the method adopted by the assessee of offering income only which is accrued in the due instead of accrual as on the last day of the accounting year, but, respectfully following the decision of the honourable High Court, we find that the addition to the income cannot be made of interest accrued as on the last day of the accounting year but only the income which has accrued and due can be charged to tax, therefore, this ground of appeal no 4 (b) does not survive, hence, dismissed. 72) Identical ground is raised by the learned assessing officer for assessment year 2007 08 as per ground number 5 (b) and ground number 8 of his appeal. As we have already decided ground number 4 (b) for assessment year 2006 07, we also dismiss ground number 5 (b) of the appeal of the AO for assessment year 2007 08. 73) Ground number 5 (a) and (b) for AY 2006-07 are with respect to the loss on revaluation of investments allowed by the learned CIT A. The fact shows that the assessee has booked a total loss of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as held in the decision of the honourable Supreme Court in case of United Commercial Bank Versus Cit 240 ITR 355 that a bank is entitled for depreciation in valuation of closing stock. Several other judicial precedents were pressed into service. Thus, it was contested that the amortization of premium in respect of investments held in held to maturity category is another method of valuation which is prescribed by the reserve bank of India and is consistently followed by the bank. Alternatively, assessee also contested that the excess of cost price over face value should be allowed as a deduction in the initial year in itself and further alternatively the entire premium should be allowed as revenue deduction in the year in which the securities are redeemed. 75) The learned assessing officer held that in respect of held to maturity securities the assessee follows different systems which are inconsistent with each other. When the purchase price is less than the face value at which security is sold, the difference is booked as profit only in the year of sale, but when the cost price is more than the face value, the loss is not booked in the year of sale but is spread over the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A has allowed the claim of the assessee and accordingly he deleted the disallowance of ₹ 12,799,950,899/ being the amortized amount of total premium in investment held in held to maturity category of the investment. 77) The learned departmental representative aggrieved with the same and reiterated findings of the learned AO. It was further submitted that the learned CIT A has allowed the appeal of the assessee without appreciating the fact that on similar issue appeal has been filed for the assessment year 95 96 before the honourable High Court in ITA number 625/2010. 78) The learned authorized representative referred to his note on amortization of premium paid in held to maturity category of investment placed at page number 287 291 of the paper books. It was further stated that the issue is decided in favour of the assessee by the several decision of the coordinate bench in assessee's own case and further the honourable jurisdictional High Court has decided the issue in favour of the assessee for assessment year 96 97 as per order dated 1 August 2016, for assessment year 97 98 as per order dated 18 June 2019 and therefore the issue is squarely covered in favour of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employer to the fund in respect of any particular employee shall not exceed 27% of his salary for each year as reduced by the employer's contribution to any provident fund in respect of the same employee for that year. Secondly, as per rule 88 Of IT Rules the amount to be allowed as a deduction on account of initial contribution which an employer make in respect of past services of an employee admitted to the benefit of the fund shall not exceed 27% of employee s salary. Aggrieved, assessee preferred an appeal before the CIT (A). The CIT (A) placed reliance on the decision of Hon ble Bombay High Court in the case of Glaxo Smith Kline Pharmaceuticals Ltd (ITA No. 2232 of 2011) and ruled in favor of the assessee. 82) The learned departmental representative vehemently submitted that It may be appreciate that in the case of Commissioner of Income Tax, Trivandrum v. State Bank of Travancore (50 taxmann.com 240), Hon. Kerala HC held that the when the expenditure incurred by the assessee for pension fund is not admissible u/ s 36 of the act, the same cannot be allowed u/ s 40(A) (9) of the Act, Therefore, considering the facts and circumstances of the case and provision of the IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per section 3 (1) of The State Bank of India Act, 1955,. ''A Bank to be called the Stale Bank of India shall be constituted to carry on the business of banking and other business in accordance with the provisions of this Act and for the purpose of taking over the undertaking of the Imperial Bank . 3. As such, it is found that a assessee bank is neither an Indian company registered under the provisions of Companies Act, 1956 nor a Corporation established by Central or State or Provincial Act nor any institution or association or body declared by the Board or any other institution and not included in the definition of the eligible entities to claim deduction under section 36(1)(viii) of Income Tax Act. Therefore, considering the facts and circumstances of the case and in law the assessee is not eligible for the deduction under section 36(1)(viii) of the Income Tax Act 88) The learned authorized representative vehemently submitted that this issue stands covered in favour of the assessee by the order of the ITAT in assessee's own case for the assessment year 2006 07 dated 26 June 2019 and further attention in this regard was also invited to the decision of the coordinate be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2006 07 is dismissed and appeal for assessment year 2007 08 stands partly allowed. 91) Now we come to the appeal of the assessee in ITA number 3868/M/2013 for AY 2006-07 and ITA No 4105/MUM/2014 for AY 2007-08. 92) As per ground number 1 for AY 2006-07, the assessee has challenged the order of the learned CIT A wherein the order of the learned AO was upheld about the taxing the deferred payment guarantee commission on receipt basis without appreciating that such commission relates to subsequent years. The fact shows that during the year the assessee has received commission on deferred payment guarantee in advance covering the entire period of guarantee. The commission was relatable to future years was not included in the current year's income but is credited to the deferred payment guarantee commission adjustment account. The assessee has received guarantee commission during the year of ₹ 148,241,129/ but has credited the same to the profit and loss account, ₹ 176,806,013/ being commission a portion from the past. So, it was a dispute between the revenue and the assessee whether the deferred guarantee commission received during the year of ₹ 148,24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned departmental representative supported the order of the learned assessing officer and further held that assessee cannot claim that such amount received by the assessee is in the nature and character of service fee which can be spread over for the period of bank guarantee and therefore considering the facts and circumstances of the case and the provision of the Act the assessing officer and the learned CIT A is correct in taxing the guarantee fee income as and when the guarantee is issued by the bank. It was further stated that the learned assessing officer has placed reliance on the decision of Kerala Urban Development Finance Corporation[266 ITR 245]. 96) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The only issue in this ground of appeal is that when the bank issues guarantee, and receives the guarantee commission, whether guarantee commission should be accrued and chargeable to tax in the hands of the bank as and when it is received [at the time of issuing the guarantee] or such income can be spread on the basis of the time for the period for which guarantee is persisting. 97) Revenue recognition policy of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, facts in the case of assessee are distinguishable. If such guarantee commission is not received on the basis of time period for which guarantee is issued, but at the time of issue of guarantee, there is no logic and reason in saying that such guarantee commission will accrue as per period of time for which guarantee is issued. Further the facts of the decision of Honourable Kerala High court are more near and adjunct to the case of assessee. 101) We find that the learned Departmental Representative has correctly relied on the judgment rendered by the Hon'ble Kerala High Court in Kerala Urban Development Finance Corpn. Ltd. v. CIT [2004] 266 ITR 245 / 136 Taxman 24 in which case the administration and supervision charges were collected and retained by the assessee, a nodal agency for disbursement and loan realized by HUDCO to various urban local bodies. It has been held in this case that the income accrued to the assessee at the time of disbursal of loan and hence assessable to tax in the year in which the loan amount was disbursed. Certain other decision relied by the learned Departmental Representative reiterate the same view. 102) We also find that Mumbai Bench of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto by the assessee during the previous year as well as earlier years. Assessee has entered into several lease transactions as per standardized lease agreement called master lease agreement which the assessee has entered into with the lessees in respect of all these transactions. In all these cases the lessee approaches the assessee for the lease finance purchase assets required by the borrower. Assessee has claimed to have acquired new assets or equipment s at the instances of such lessees and have given them on lease in the capacity of absolute honour of such new assets and the lessees to possession of such assets directly from the manufacturers. The bank's sanction is the advance after examining the request of the applicant in the same manner as it does when the loan is sanctioned. In this case the invoices are raised in the name of the bank and ability gate to treat itself as the owner and claimed depreciation. The learned assessing officer examine such lease agreement and held that main intention of the assessee is to reduce taxable income by claim of depreciation because mostly those assets which are released carry higher depreciation rate for income tax purposes. The ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he confirmed the disallowance of depreciation. 109) The learned authorized representative submitted that this issue is decided against the assessee by the Tribunal in its own case by several orders of the coordinate benches however the jurisdictional Bombay High Court has admitted the said issue on appeal by the assessee for assessment year 96 97, 97 98 and 98 99. 110) The learned departmental representative submitted that as the issue is decided against the assessee by the coordinate benches for several assessment years, this ground on similar facts and circumstances deserves to be dismissed. 111) We have carefully considered the rival contention and perused the orders of the learned lower authorities. This issue is admitted by the learned authorized representative that it has been decided against the assessee by the coordinate benches in assessee's own case, therefore respectfully following those decisions and reasons provided therein, we confirm the disallowance of depreciation of ₹ 365,480,537/ on such leased assets. Accordingly ground number 3 of the appeal of the assessee for assessment year 2006 07 and ground number 2 for assessment year 2007 08are dismissed. 112) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances are to be limited in accordance with the proviso. Four the assessment year 2006 07, we have not claimed for any deduction on account of bad debts written off. However, it should be allowed deduction in respect of write-off of non-rural branch advances amounting to ₹ 14,968,666,681/ based on the decisions mentioned above. 115) The claim of the assessee is that in case of an assessee to which clause (viia) applies the amount of deduction relating to any such debt and part thereof shall be limited to the amount by which such debt part thereof exceeds the credit balance in the provision for bad and doubtful debts accounts made under that clause. This is relevant for claim of bad debts allowance under the proviso to section 36(1)(vii) of the act. The assessee has relied upon the decision of special bench in case relating to Catholic Syrian bank Ltd wherein it has been held that if the amount of bad debt is actually written off in the accounts of the bank the presence only debts arising out of non-rural advance is, the allowance thereof in the assessment is not affected, controlled, or limited in any way by the proviso to section 36 (1) (viii). Similar view was also of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jab and Sindh bank versus ACIT (2008) 23 SOT 103. 119) He fairly invited our attention also to the decision of the coordinate bench in assessee's own case passed on 12 July 2021 for assessment year 2001 02 and 2002 03 wherein identical issue has been inadvertently decided against the bank assessee against which the miscellaneous application was filed which has been decided on 24 June 2022 and the issue has been decided now in favour of the assessee. 120) The learned departmental representative vehemently supported the order of the learned assessing officer and the learned CIT A. He submits that the assessee being a bank is eligible for deduction under section 36(1)(vii) and 36(1)(viia) of the income tax Act. Provisions of section 36(1)(viia) provides for a deduction to the assessee for the bad debts actually written off in the books of the accounts. The provisions of section 36(1)(viia) provide for deduction out of provision for bad and doubtful debts. It is a settled principle that if there is no provision for bad and doubtful debts in the books of accounts of the assessee, the deduction of provision under section 36(1)(viia) shall not be available to the assessee. The provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceed the opening balance for provision for bad and doubtful debts in the accounts of the assessee. Therefore, if such opening balance is nil, entire bad debt would be allowed as a deduction. However, if there is some positive amount of opening balance into (credit balance) in the provision for bad and doubtful debts account such opening balance would be reduced from the actual bad debts written off and such excess amount over the credit balance would be allowed as a deduction. The amount of such write off related to all advances during normal course of business including rural advances and non-rural advances. The assessee cannot buy for bad debts written off in the multiple categories for the purpose of provisions of section 36(1)(viia) of the act. Accordingly, it was submitted that the disallowance of Rs. 1496.86 crores was rightly made by the AO as such amount does not exceed the opening credit balance in provision for bad and doubtful debts account. 121) It was further submitted without prejudice that the assessee has arrived at an amount of bad debts actually written off to the eligible deduction under section 36(1)(viia) at Rs. 1496.86 crores. However, it is not clear how th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Accordingly ground number 4 for assessment year 2006 07 and ground number 5 for assessment year 2007 08 are allowed as indicated above. 124) Ground number 5 for AY 2006-07 is with respect to the action of the learned CIT A wherein reduction and appreciation and taxing appreciation in the value of securities held as available for sale and held for trading category. Identical ground number 6 is raised for assessment year 2007 08. 125) The facts are mentioned at paragraph number 14 of the assessment order. It shows that valuation of securities held under assets for sale and held for trading categories have been made script wise and diminish in/depreciation in the value of that script has been recognized in the profit and loss account for the year. If there is any appreciation over the carrying value of such securities, same is ignored. According to AO it is also contrary to the circular of CBDT number 665 dated 5/10/1993 wherein the board has clarified that the assessing officer should determine on the facts and circumstances of each case as to whether any particular security constitute stock in trade or investment considering the guidelines issued by the reserve bank of India in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the extent of script wise appreciation ignored by the bank. He therefore agreed with learned AO that depreciation/appreciation in individual script sale be aggregated for each category of classification and thereafter only netted depreciation shall be allowed in the profit and loss account as per RBI guidelines on valuation of securities and recognition of income and loss. Accordingly, he upheld the order of the AO. 129) The learned authorized representative referred to letter dated 4 March 2008 wherein such claim was made by way of a letter. It was stated that this issue has already been decided in favour of the assessee by the coordinate benches for assessment year 2009 10, 2005 06, 2004 05 and 2008 09. The learned AR further placed reliance on the decision of the honourable madras High Court in 17 ITR 1 and UCO bank in case of 240 ITR 355. 130) The learned CIT DR submitted that assessee has not made such claim in the return of income. During the course of assessment proceedings letter dated 4 March 2008 was submitted wherein such claim was made. The learned CIT A confirmed the action of the AO holding that the depreciation/appreciation in individual script wise shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... types of advances including advances made by rural branches. The proviso to clause (viia) of section 36 (1) therefore shall limit the application to both rural advances and nonrural advances. Therefore, there cannot be double deduction one on the provision basis and again on actual write-of basis separately and independently. He further relied upon the judicial precedent of Privy Council Maharajkumar Gopal Saran Narain Singh [3 ITR 237]. Accordingly, since the ground of appeal does not arise out of the issue in assessment proceedings, he held it to be not maintainable and dismissed. 133) The learned authorized representative submitted that this issue is covered squarely in favour of the assessee by the decision of the coordinate bench Bangalore tribunal in case of state bank of Mysore versus DCIT reported in [33 SOT 7]. Further this issue has also been decided in case of assessee by the coordinate bench wherein the issue was remanded back to the assessing officer for the purpose of verification for assessment year 2009 10 as per order dated 6 June 2023 and similarly for assessment year 2008 09 per order dated 3 February 2020. It was submitted that for assessment year 2005 06 (22 M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follow the order of the coordinate bench the learned assessing officer in pursuance of that order of the learned CIT A himself accepted that such addition cannot be made under section 41 (4) of the act. In view of these facts, this issue has been decided by the coordinate benches in assessee s own case, on remand before the assessing officer, the learned assessing officer himself has accepted the same, therefore, now this issue is squarely covered in favour of the assessee. 136) Provisions of section 41 (4) of the act provides that where the assessee is allowed any deduction in respect of bad debt or part of bad debt under the provisions of clause (viia) of subsection (1) of section 36, then if such amount is subsequently recovered which is greater than the difference between the debt and the amount so allowed, the excess albeit deemed to be the profits as business income and accordingly chargeable to income tax in which such sum is recovered, irrespective of existence of such business. Therefore, it needs to be decided that whether the assessee has been allowed any deduction under section 36(1)(viia) of the act. The second aspect required to be examined is whether the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered from bad debts. In this given case, the assessee asserts that the actual amount of Rs. 39,38,25,324 is adjusted against the reserve created by virtue of section 36(1)(viia) of the Act and had not exceeded the reserve account. Therefore, the assessee claims no amount was charged to P L account by invoking section 36(1)(vii) of the Act. Since the assessee has not claimed bad debts under section 36(1)(vii) of the Act, but purely adjusted the amount against the reserve created under section 36(1)(viia) of the Act, section 41(4) cannot be invoked. Considering the facts and the circumstances of the issue is concerned, we are in agreement with the contentions of the assessee on the basis of materials made available. Accordingly, this issue goes in favour of the assessee-Bank. However to verify the following aspects (i) Whether the assessee-Bank has debited the amounts so recovered out of bad debts against Reserve created by virtue of section 36(1)(viia) of the Act ? (ii) Whether the amounts recovered against the bad debts have not exceeded the reserve so created ? (iii) Whether the amounts recovered against the bad debts have not been charged to profit loss account of assessee-Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branches. The profits of such foreign branches should not be included in the income of the resident assessee, state bank of India, as such profits are earned by such foreign branches are not liable to tax in India in terms of the relevant tax treaties and relying on the following judicial precedents:- i. PAVLKulandagan Chettiar (3 ITD 426) (special bench)upheld by the honourable High Court and by the honourable Supreme Court in 267 ITR 654 wherein the review petition was also dismissed in 300 ITR 5 ii. CIT versus VRSRM form (208 ITR 400) Madras) iii. CIT versus RM Muthiah(202 ITR 508 (Karnataka) iv. DCIT versus Patni computer systems limited (114 ITD 159 (Pune) v. Apollo hospitals Enterprises Ltd (53 SOT 103) (Chennai) vi. DCIT versus Turquoise Investment and Finance Limited (2008) (300 ITR 1) (SC) vii. Pooja Bhatt versus DCIT (2008) 26 SOT 574 (MU M) viii. DCIT versus Mideast India Ltd (2009) 28 SOT395 (Delhi) ix. DCIT versus SRO Ltd (2011) (47 SOT139) (MU M) x. Bank of India versus Deputy Commissioner of income tax (2012) (27 taxmann.com 335) MUM) b) It was contested before him that the relevant tax treaty provided that such business income may be taxed in a particular state in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The assessing officer as per his order dated 28 December 2016 giving effect to the order of the learned CIT A, has already excluded the income earned by such foreign branches while computing the total income of the assessee. 145) However, he also pointed out that this issue has also been decided against the assessee in an order dated 6 June 2023 for assessment year 2009 10. He referred to that decision and stated that the said decision has been applicable only prospectively from assessment year 2009 10 and therefore is not applicable for the year under consideration i.e., assessment year 2006 2007. 146) The learned CIT DR vehemently submitted that. a) Assessee has not submitted any details during the course of appellate proceedings or assessment proceedings with respect to the income earned by the assessee from foreign branches. The assessee also did not give the details of return of income filed in respect of jurisdiction where taxes paid as per the provisions of the act in such foreign countries, nature and character of the income accruing to the assessee and whether such income is taxable or exempted in foreign countries, details of tax paid and credit claimed in India, copi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive development. It was specifically stated that mere fact of taxability in the treaty partner jurisdiction will not take it out of the ambit of taxable income of the assessee in India and that of such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the income tax act and relief shall be granted in accordance with the method of elimination or avoidance of double taxation provided in such agreement. g) He further referred to the decision of the coordinate bench in case of Essar oil Ltd (42 taxmann.com 21) also proceeded to hold that notification number 91 of 2008 dated 2 August 2000 date was applicable from 1 April 2004. h) It was further submitted without prejudice that assessee made certain income from the banking operation in foreign countries. It may be appreciated that under the scheme of the law as it prevailed particularly in the light of provisions of section 90 (3) read with NOTIFICATION NO. 91/2008 [S.O. 2123(E)] [(F.NO. 500/82/2004-FTD-I)], DATED 28- 8-2008, entire global income of an Indian resident assessee was to be taxed in India and that where a double taxation avoidance agreement provided that any income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of related Double Taxation Avoidance Agreement, if any, and to the extent, admissible. 147) During the course of hearing the bench also asked the assessee to submit certain details such as details of branches for which exemption is being claimed, the countries in which the branches are registered, the profit of such branches, relevant Double Taxation Avoidance Agreement with those countries entered into by India, whether such relevant Double Taxation Avoidance Agreement has exemption method for elimination of Double Taxation Avoidance Agreement. 148) The assessee submitted a statement giving the details of branches of the assessee company for which exemptions is being claimed along with the amount of income to be eliminated as per the relevant Double Taxation Avoidance Agreement. According to that statement the assessee has submitted the relevant Double Taxation Avoidance Agreement between India and Belgium, Bangladesh, Germany, South Africa, Oman, Japan, France and Singapore. The learned authorized representative also submitted that provisions of article 7 of business profits of each of the relevant Double Taxation Avoidance Agreement provides that tax may be charged in a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee from foreign branches should be excluded from the computation of total income of the assessee. c) He further stated that assessee is a resident Indian, therefore, its global income is chargeable to tax in India on the basis of residence, if there is any foreign sourced income is required to be taxed, same is required to be looked into by looking at the double taxation avoidance agreement providing method of elimination of double taxation. d) It was submitted that mostly India has not entered into any double taxation avoidance agreement with any of the countries providing exemption method. e) Therefore, the assessee is entitled to take credit of foreign taxes paid in accordance with the provisions of double taxation avoidance agreement with those countries but now, assessee cannot claim that such income should not enter into the computation of taxation of income according to the income tax act. 153) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The simple issue involved in this ground of appeal is that the assessee has earned profit from its foreign branches in Belgium, Barry in, Sri Lanka, Bangladesh, Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the honourable Supreme Court in case of fiber boards private limited versus CIT (2015) 62 taxmann.com 135, it was held that despite reenactment after 1 October 2009 such notification still prevails. 155) Thus, according to above decision after 1 April 2004, in case of foreign branches or permanent establishment of an Indian resident, such income are required to be included in the total income of the Indian resident and relief shall be granted in accordance with the method for elimination of avoidance of double taxation as per those Double Taxation Avoidance Agreement. 156) All those decisions relied upon by the assessee before us have been considered in paragraph number 14 of that decision and held that those are no longer valid after 1/4/2004. 157) The impugned assessment year before us is assessment year 2006 07 and 2007 08. Therefore, the assessee is not entitled for exclusion of the income of foreign branches from its tax computation but is only entitled to tax credit or exemption in accordance with those agreements. 158) The assessee was specifically asked to give the details of the Double Taxation Avoidance Agreement where assessee is claiming benefit of exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a direction to the assessee to substantiate the facts before the learned assessing officer, which may be verified by the learned assessing officer with a view that no double deduction shall be allowed and thereafter may be decided on the merits of the case. Accordingly Additional ground number 1 raised as additional ground for assessment year 2006 07 and 2007 08 are admitted and allowed with above direction. 164) An additional ground number 2 for assessment year 2006 07 and 2007 08 is raised by the assessee for the purpose of claiming deduction of education cess; same are not pressed, hence dismissed. 165) This leaves us with ground number 3 of the appeal of the assessee for assessment year 2007-08, claim of the assessee is that the deduction claimed by the assessee without prejudice that deduction under section 36 (1) (viii) is required to be computed on the taxable business income of the assessee excluding the income other than treasury operations, has not been adjudicated by the learned CIT A. It was further stated that this ground is interconnected with ground number 7 of the appeal of the learned assessing officer. We have already restored ground no 7 of the appeal of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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