Case Law Details
Brief of the Case
ITAT Delhi held In the case of Oriental Bank of Commerce vs. ACIT that any loss arising to banks on account of classification of securities form one category to another category in compliance with RBI directions is an allowable expense. Financial institutions like banks are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements.
Facts of the Case
Claim of Bad debts (Additional ground)
The appellant is a Nationalized Bank and in return filed for AY 2007-08 appellant ’s claim of bad debt of Rs. 4,48,73,33,446/ – pertaining to non- rural branches has been set off against the provisions of Rs. 2,74,32,77,945/- with respect to rural branches u/s 36(1) (viia) of the Income Tax Act , 1961. The appellant set off this amount under impression that according to provisions of Section 36(1) (vii) the bad debt in respect of non- rural branches are also required to be restricted to the extent of such debt or part thereof exceeds the credit balance in the account of provision of bad and doubtful debts made u/s 36(1) (viia).
Disallowance of loss on account of fall in value of investments held as stock in trade
Pursuant to the direction of RBI the bank has transferred SLR securities aggregating to 1664.32 crores from ‘Available for sale’ category to ‘Held to Maturity’ category during the year. Due to this, mark to market devaluation of Rs. 205.43 crores has been debited to the P & L Account. Further deduction of Rs. 205.10 crores was also claimed being fall in value of investments as on 31 March 2007, which is allowed as deduction. During the course of assessment proceedings, AO disallowed the deduction claimed of Rs. 205.43 crores for the reason that it is loss arising out of provisions in the books and therefore it is notional loss and not real.
Disallowance u/s 14A
The assessee has earned exempt income of Rs. 38,16,00,665/- which is exempt under the provisions of Section 10. During assessment proceedings, no disallowance was offered by the assessee under the provisions of section 14A. Therefore, assessing officer rejecting the contention of the assessee applied provisions of Rule 8D of the Income Tax Rules 1962 for A.Y. 2007-08 and disallowed expenditure of Rs.39,23,61,000/-.
Contention of the Assessee
Disallowance of loss on account of fall in value of investments held as stock in trade
The ld counsel of the assessee submitted that RBI circular provides for transfer of securities from ‘available for sale’ category to ‘held to maturity’ category once in a year. The Board of the Directors of the Bank authorizes such transfer and such loss is charged to profit and loss account of the bank. He submitted that loss arising therefrom is not a notional loss but real loss arising on account of principles of valuation of stocks on the basis of cost or market value whichever less, AO and CIT (A) both have erred in terming it as notional loss. He further submitted that in case of the assessee in earlier years such loss has been allowed without dispute in assessment proceedings. He further submitted that this issue is covered in favour of the assessee by decision of State Bank of Mysore vs. DCIT 33 SOT 7 (Bangalore). He submitted that Hon’ble Bombay High Court in 107 DTR 395 has now confirmed the decision of Bangalore Bench of ITAT. Therefore, the disallowance of Rs. 205.43 crores may be deleted.
Disallowance u/s 14A
The ld counsel of the assessee submitted that CIT (A) has deleted the addition though on account of interest expenditure but has confirmed the disallowance to the expenditure of 5% of exempt income. He submitted that the assessee has not incurred any expenditure to earn that income. He further relied upon the decision of Hon’ble Mumbai High Court in case of CIT vs. HDFC Bank Ltd. Income Tax Appeal No. 330 of 2012 that no disallowance can be made in case of banking company on account of interest while applying Section 14A. Regarding disallowance of ½ % of the exempt income, Ld. Counsel further submitted that for AY 2006-07 the Hon’ble ITAT in assessee’s own case in ITA no. 22/Del/2011 has considered this issue and in view of decision of Hon’ble Delhi High Court in case of Maxopp Investment Ltd. & Ors. Vs. CIT 247 CTR 162 set aside the issue back to the file of AO.
Contention of the Revenue
Disallowance of loss on account of fall in value of investments held as stock in trade
The ld counsel of the revenue relied on the order of lower authorities and submitted that this is a notional loss.
Disallowance u/s 14A
The ld counsel of the revenue relied on the orders of lower authorities and submitted that the disallowance has rightly been made of interest expenditure as well as other expenditure by AO.
Held by CIT (A)
Disallowance of loss on account of fall in value of investments held as stock in trade
CIT (A) confirmed the disallowance.
Disallowance u/s 14A
CIT (A) held that no apportionment of expenditure towards interest can be made for disallowance u/s 14A in view of the own funds of the appellant are substantially large than amounts invested in securities earning tax free income. The CIT (A) was also of the view that there are certain expenditure that has been incurred by the appellant for earning exempt income and therefore he confirmed the disallowance of expenditure at 5% of exempt income earned u/s 14A.
Held by ITAT
Hon’ble Supreme Court in case of Catholic Syrian Bank Ltd. V. CIT 343 ITR 270 has held that the provisions of sections 36(1)(vii) and 36(1)(viia ) are distinct and independent items of deduction and operate in their respective fields. Accordingly, bad debts written off in accounts, other than those for which the provision is made under clause (viia), will not be restricted to extent of provision of bad and doubtful debts made u/s 36(1) (viia). The proviso to section 36(1) (vii) will relate to cases covered under section 36(1) (viia) and has to be read with section 36(2) (v). Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans. Deduction u/s 36(1)(vii) the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year without any restriction. This, obviously, would be subject to satisfaction of the requirements contemplated under section 36(2).
The breakup of the bad and doubtful debts shows that the banks has total bad debts of Rs. 4,49,05,86,446/- out of which bad debts claimed in computation of total income is Rs 1,74,40,55,501/- leaving a balance of Rs 2,74,65,30,945/-. Out of the above sum amount has been written off comprising bad debts in respect of rural branches of Rs. 32,53,000/- and balance amount of 2,74,32,77,945/- relates to claim of deduction on account of bad debt u/s 36(1) (vii) with respect to non-rural branches.
We have satisfied ourselves that facts and circumstances in this appeal compared to AY 2006-07 for which ITAT has decided the issue are identical. Therefore respectfully following the order of Co-ordinate bench, we set aside this ground of appeal to the file of AO for fresh examination and to grant deduction on merits to the assessee in light of decision of Hon’ble Supreme Court in case of Catholic Syrian Bank Ltd. v. CIT 343 ITR 270. Additional ground of the appeal of the assessee is allowed for statistical purposes.
Disallowance of loss on account of fall in value of investments held as stock in trade
During the year, assessee has debited the loss of Rs. 205.43 crores arising of on account of transfer of securities of Rs. 1664.32 crores from ‘available for sale’ category to ‘held to maturity’ category in terms of resolution of the Board of Directors of the appellant. Claim has arisen because of the circular issued by Reserve Bank of India on prudential norms for classification, valuation and operation of investment portfolio bank dated 1st July, 2006. According to that circular the banks are allowed to transfer securities from one category to another category once every year. It is further provided that if because of such transfer any depreciation arises, it should be fully provided for. The claim of the assessee is that this loss should be allowed as deduction because of transfer of securities from one category to another category.
Whether a banking company claims the loss, based on circulars and instructions of Reserve Bank of India, is allowable because of transfer of security from category of “available for sale” to “held to maturity”?
This issue now no longer survives in view of two decisions of Hon’ble Karnataka High Court in case of Karnataka Bank Ltd. vs. Assistant Commissioner of Income Tax 356 ITR 549 and CIT vs. Bank of Baroda 262 ITR 334 and a decision of honourable Bombay High Court in case of CIT vs. HDFC Bank Ltd. reported at 368 ITR 377 considering decision of honourable supreme court in case of united commercial bank V CIT 240 ITR 355 and Southern technologies Limited V Jt CIT 320 ITR 577, wherein Hon’ble High Court has held that it is clear that a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation.
Financial institutions like banks are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of account.
Therefore, we find that the issue raised in this appeal squarely covered by the decision of Hon’ble Karnataka High Court as well as Mumbai High Court in favour of asssessee. Therefore, respectfully following those judicial precedents, we reverse the order of CIT (A) and delete the disallowance of Rs. 205.43 crores on account of claim of loss of transfer of security from ‘available for sale’ category to ‘held to maturity’ category by the appellant bank in accordance with direction/ circular of Reserve Bank of India.
Disallowance u/s 14A
Undisputedly for AY 2007-08, Rule 8 D of Income Tax Rules 1962 does not apply. Therefore, any disallowance, if at all to be made, has to be without the support of rule 8D and based on reasonable basis. Regarding interest disallowance in view of decision of Hon’ble Bombay High Court in case of CIT vs. HDFC Bank Ltd. Income Tax Appeal no. 330 of 2012 dated 23rd July 2014, it is undisputed now that no disallowances cannot be made in case of a bank where assessee’s own funds and other non-interest bearing funds are more than investment in the tax free securities. However, it cannot be said without detailed examination that the assessee, which can be disallowed, has incurred no expenditure other than interest.
However, Rule 8 D does not apply for the year under appeal but reasonable amount of disallowance out of other expenditure may be determined based on details of expenses incurred which are related to earning exempt income. On identical facts and circumstances, in assessee’s own case, Hon’ble ITAT for AY 2006-07 has set aside this issue to the file of AO vide para no 22-23 with direction to determine the amount of expenditure incurred in a relation to tax free income earned by the assessee in view decision of Honourable Delhi high court on case of Maxopp Investments V CIT 247 CTR 162. Therefore respectfully following the order of coordinate bench we restore these ground back to the file of AO to examine the issue afresh with respect to work out disallowance, if any, of other expenditure other than interest expenditure relating to exempt income.
Accordingly appeal of the assessee partly allowed.
ITA No. 1961/Del/2011
Issue of broken period interest
Ao has brought to tax an amount of Rs 98.12 crores. Assessee bank has incurred broken period interest expenditure of Rs 98.12 cr at the time of purchase of securities and claimed it as revenue expenditure. As the securities of the assessee bank are stock in trade of the bank natural corollary would be that the amount of interest paid for broken period shall also be revenue expenditure in nature and allowable to the bank. This issue has been considered by various high courts, which have been considered by CIT (A) in his orders while deciding the issue. Further, the revenue has also not contested this issue in earlier years. Hon Bombay high court in case of CIT V HDFC bank Limited in 366 ITR 505 has held that even after the decision of Hon. supreme court in case of CIT v Vijaya bank (187 ITR 541) broken period interest is allowable to the assessee.
Therefore respectfully following the decision of Honourable Bombay high court we confirm the orders of CIT (A) in deleting the disallowance of Rs 98.12 crore on account of broken period Interest on purchase of securities. Therefore ground no two of the appeal is dismissed.
Excess claim of depreciation on LAN & WAN equipment and Fixture & fittings
LAN (local Area Network) and WAN (wide area network) is a bunch of cables and switches which can be used with computers only. Hon Delhi High court in case of CIT V BSES Yamuna Power Limited 358 ITR 447 has held that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent. Therefore following the decision of Jurisdictional high court we also hold that on WAN and LAN equipment are used with computers only same are also eligible for depreciation @ 60 % therefore, we confirm the order of CIT (A) in deleting the granting depreciation of disallowance of Rs. 5,77,71,439/- made by the AO on account of excess claim of depreciation of LAN and WAN equipment. Therefore this ground of the appeal is dismissed.
With regard to excess depreciation claimed on fixture & fitting, we found that it is not clear that whether it is building or furniture and fittings. Secondly, we agree with the views of the CIT (A) that AO has erred in allowing depreciation at the correct rates has amortized these expenditure over 5 years. Therefore, in absence of these facts, this ground of appeal is restored back to the file of AO for fresh verification. Hence ground no four of the appeal is allowed for statistical purposes.
Accordingly appeal of the revenue partly allowed.
