Case Law Details
Brief Facts of the case:
First Issue:
The assessee a regional rural bank is doing banking activity in the state of undivided AP. For the AY under consideration, assessee filed its return of income on declaring total income of Rs. 36,33,59,291. During the assessment proceeding, AO noticed that assessee has claimed an amount of Rs. 1,58,65,512 as broken period interest paid on purchase of securities.
He disallowed such interest taking the view that the same is not allowable as per the Act. Being aggrieved of such disallowance, assessee preferred appeal before CIT (A).
CIT(A) after considering the submissions of assessee found that ITAT, Hyderabad Bench in case of SBH Vs. JCIT [2005] has held that broken period interest paid by assessee bank is allowable as deduction. Thus, relying on the same judgment he allowed the broken period interest. Aggrieved by the CIT(A)’s order the department preferred an appeal to ITAT.
Second Issue:
During the assessment proceedings, AO noticed that assessee has debited an amount of Rs. 2,70,27,000 to P&L A/c towards amortization. Bank purchases government securities in the market through SBI. While purchasing bank needs to pay premium on the face value of the government security. As per RBI guideline bank holds the government securities till its maturity (held to maturity). The premium so paid is amortized over the maturity period. Referring to AO concluded that as the claim of amortization is not in accordance with the provisions of the section 35D, assessee’s claim is not allowable. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT (A).The CIT(A) upholding the assessee’s contention that held to maturity securities were held as stock in trade ,thus, amortization of the premium in respect thereof is a revenue expenditure and allowable as per the Act.
Aggrieved by the CIT(A)’s order the department preferred an appeal to ITAT.
Contention of the Assessee:
First Issue:
The learned counsel for the assessee submitted that RBI had advised banks that they should not capitalize broken period interest paid to the seller as part of cost but to treat it as an expenditure in P&L A/c. Subsequently, circulars issued by RBI also reiterated the same fact. It was submitted, as per RBI guidelines assessee bank debited broken period interest paid to seller to P&L A/c. It was submitted that assessee bank has been following same method of accounting consistently which is also followed by other banks. Thus, he contended that the appeal filed by the revenue should be dismissed.
Second Issue:
The learned counsel for the assessee submitted that all the investments in government securities were held as stock-in-trade and not as investment and the securities on which premium was paid even though held under the ‘held to maturity’(HTM) category, but, they were to be treated as stock-in-trade and the amortization on the HTM securities is revenue expenditure. In support of such contention, assessee relied upon a decision of Hon’ble Supreme Court in case of UCO Bank, 237 ITR 889.
Contention of the Revenue:
First issue:
The learned counsel for the department submitted that the provisions of Income-tax Act will supersede not only accounting norms, but, also the circulars issued by RBI. Therefore, the broken period interest is not allowable as expenditure and accordingly disallowing the same added back the amount of Rs. 1,58,65,512 to income of assessee.
Second Issue:
The learned counsel for the revenue contended that the since the securities are treated as stock in trade and not investment they are not eligible for amortization. Further, such amortization is also not covered by Sec 35D.Therefore, the amortization claimed in the books for accounting purpose could not be stretched to taxation for claiming deduction.
Decision of the ITAT:
First Issue:
The ITAT after considering the rival submissions observed that both the counsels agreed before us that the issue in dispute is squarely covered by the decision of the Tribunal in assessee’s own case for AY 2010-11 in ITA No. 1742/Hyd/2014 dated 25/03/2015 wherein broken period interest were allowed as the securities were held as stock in trade and not as capital investment. In the present case also the assessee was holding the securities as stock in trade, therefore, broken period interest is allowable.
Therefore, relying on the above decision the appeal of revenue is disallowed.
Second Issue:
The learned representatives of both the sides have agreed that this issue is also squarely covered in favour of the assessee by the various orders of the Tribunal passed in assessee’s own case for earlier years. Copies of the said orders are placed on record before us.
One of the order of the this tribunal in the assessee’s own case for AT 2002-03 to AY 2006-07 has directed the AO to allow the premium amortized by the assessee over the period remaining to maturity holding that the same was claimed as per the relevant RBI guidelines and even the CBDT has issued instructions to allow the same. Respectfully following the said order of the Tribunal in assessee’s own case for earlier years, the ITAT uphold the order of the CIT(Appeals) giving relief to the assessee on this issue and dismiss the revenue’s appeal.
Appeal No. ITA 1579 filed by the assessee arising out of the same assessment order:
Question to be decided by ITAT:
Whether the disallowance as made by AO and upheld by CIT(A) u/s 36(1)(viia) amounting to Rs. 2,94,61,564 is right in law considering the facts & circumstances of the case?
Decision of the ITAT:
ITAT observed that the assessee has not made any provision for bad and doubtful debts in the books of account as required u/s 36(1)(viia). Only in computation of income filed along with return of income assessee has claimed deduction towards provision for bad and doubtful debts. Section 36(1)(viia) very clearly state that that for claiming deduction under the said provision, the mandatory requirement is assessee must have made a provision in the books of account for claiming deduction in the manner prescribed therein. Therefore, when assessee has not made any provision in the books of account in so far as bad and doubtful debts are concerned, assessee is not eligible for deduction u/s 36(1)(viia).
Thus, the appeal of assessee is dismissed.
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