Consistency Over Technicalities – ITAT Allows Actuarial Pension Provision & Rejects Mechanical Disallowances

State Bank of India Vs ACIT (ITAT Mumbai)

Consistency Over Technicalities – ITAT Allows Actuarial Pension Provision & Rejects Mechanical Disallowances

Mumbai ITAT dealt with extensive cross-appeals involving multiple disallowances and claims of a banking entity, while laying down important principles on consistency, allowability of claims, and interpretation of tax provisions.

The Tribunal clarified that:

• Though res judicata does not strictly apply, the principle of consistency must be followed where facts and law remain unchanged
• Revenue cannot deviate from earlier accepted positions without demonstrating a change in facts or law
• RBI guidelines, while not overriding the Act, are relevant in determining real income and accounting treatment
• Claims made through notes or not made in return can still be entertained by appellate authorities if facts are on record

On CBDT instructions, it held:

• Instructions like 17/2008 are only administrative and cannot override the Act
• Disallowance cannot be made solely based on such instructions without statutory backing

On provision for pension (₹1972 crore):

• Based on actuarial valuation under AS-15, the liability was held to be ascertained and not contingent
• It is not a contribution to a fund, hence not hit by sections 36, 40A(7), or 40A(9)
• Allowable as business expenditure u/s 37(1) under mercantile system

The Tribunal also relied heavily on earlier years’ decisions in assessee’s own case, reinforcing that:

• Consistency and judicial discipline must prevail
• Revenue cannot take a different stand without justification

Overall, the ruling strongly reiterates that substance over form, consistency, and correct legal interpretation must guide tax assessments, especially in complex banking cases.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Present cross-appeals arise out of the order dated 21/03/2017 passed by Learned Commissioner of Income-tax (Appeals)-5, Mumbai [hereinafter “Ld.CIT(A)”], for Assessment Year 2010-11 on following grounds of appeal:-

Assessee’s Appeal:

“The appellant objects to the order of the Commissioner of Income-tax (Appeals) – 5, Mumbai [CIT(A)] dated 21 March 2017 for the aforesaid assessment year on the following among other grounds:

1. Provision for pension of Rs. 1972,64,00,000

The leaned CIT(A) erred in upholding the action of the Assessing Officer in disallowing the appellant’s claim in respect of provision for pension amounting to Rs. 1972,64,00,000.

2. Depreciation on matured securities of Rs. 13,90,80,321

The learned CIT(A) erred in confirming the disallowance of Rs. 13,90,80,321 in respect of depreciation on matured securities which had fallen due for redemption during year ended 31 March 2010 but redemption proceeds were not received.

3. Disallowance under section 14A

3.1. The learned CIT(A) erred in not specifically directing the Assessing Officer to compute disallowance under section 14A in respect to foreign currency loans, tax-free bonds, shares (other than strategic investments) and units of mutual funds as nil, as these investments of the appellant are stock-in-trade.

3.2. The learned CIT(A) erred in holding that the disallowance shall not be below the amount disallowed by the appellant himself in the computation of total income.

3.3. Without prejudice to the above, the learned CIT(A) erred in not appreciating that assets not yielding any exempt income during the year should not be considered for the purpose of computing disallowance under section 14A.

4. Depreciation on leased assets of Rs. 4,02,40,203 The learned CIT(A) erred in upholding the action of the Assessing Officer in disallowing the appellant’s claim in respect of depreciation of Rs. 4,02,40,203 on leased assets.

5. Deduction under section 36(1)(vii) of Rs. 1557,54,51,504 1. The learned CIT(A) erred in not allowing deduction of Rs. 1557,54,51,504 under section 36(1)(vii) being the amount of bad debts written-off (other than in respect of rural advances).

5.2. The learned CIT(A) erred in relying on explanation 2 to section 36(1) as inserted by the Finance Act, 2013 which is applicable from assessment years 2014-15 onwards.

6. Provision for other employee benefits of Rs. 47,04,00,000 1. The learned CIT(A) erred in not allowing a deduction of Rs. 47,04,00,000 in respect of provision for other employee benefits comprising of leave travel & home travel concession, sick leave and casual leave.

6.2. The learned CIT(A) erred in holding that the aforesaid provisions were covered under clause (f) of section 43B without appreciating that the provision in respect of casual leave and sick leave is not encashable.

7. Provision for privilege leave encashment of Rs. 107,54,00,000 The learned CIT(A) erred in not allowing the deduction of Rs. 107,54,00,000 in respect of provision for privilege leave encashment.

8. Depreciation on securities

The learned CIT(A) erred in upholding the action of the Assessing Officer in reducing depreciation / taxing appreciation in the value of securities held as Available for Sale (AFS) and Held for Trading (HFT) category.

9. Deduction under section 36(1)(viia) of Rs. 80,05,74,820

9.1. The learned CIT(A) erred in holding that the provision for standard assets amounting to Rs. 80,05,74,820 is to be excluded for determining the deduction under section 36(1)(viia).

9.2. The learned CIT(A) erred in not appreciating that even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery and accordingly qualifies for deduction under section 36(1)(viia).

10. Taxation of interest on non-performing assets (NPAs) of Rs. 24,35,22,037

The learned CIT(A) erred in confirming the action of the Assessing Officer in making an addition of Rs. 24,35,22,037 in respect of interest on sticky advances that had been classified as NPAs by the appellant in terms of RBI guidelines.

11. Taxation of income on non-performing investments (NPIs) of Rs. 3,42,54,400

The learned CIT(A) erred in confirming the action of the Assessing Officer in making an addition of Rs. 3,42,54,400 in respect of interest on NPIs.

12. Contribution to Retired Employees Medical Benefit Scheme of Rs. 92,00,00,000

12.1. The learned CIT(A) erred in confirming the action of the Assessing Officer in making disallowance of Rs. 92,00,00,000 in respect of payment towards contribution to Retired Employees Medical Benefit Scheme.

12.2. The learned CIT(A) erred in not appreciating that the said sum was actually paid by the appellant to the Fund during the year under consideration.

13. Recovery of bad-debts written off in earlier years of Rs. 931,60,69,980

13.1. The learned CIT(A) erred in not allowing the claim of the appellant in respect of non-taxability of recovery of bad debts of Rs. 931,60,69,980 written off in earlier years.

13.2. The learned CIT(A) erred in not directing the Assessing Officer to not tax the recovery of bad debts written off in terms of section 41(4), as the appellant had not claimed a deduction under section 36(1)(vii).

14. Provision for incentive towards meritorious students of Rs. 100,00,00,000

14.1. The learned CIT(A) erred in not allowing a deduction of provision made towards corpus for giving incentive to meritorious students of Rs. 100,00,00,000.

14.2. Without prejudice to the above, the learned CIT(A) erred in not directing the Assessing Officer to allow the deduction in assessment year 2011-12, as an amount of Rs. 100,00,00,000 was actually contributed in assessment year 2011-12 towards the corpus of the trust created for giving incentive to meritorious students.

15. Non-taxability of income from foreign branches

15.1. The learned CIT(A) erred in not allowing the claim of the appellant in respect of non-taxability of income earned by its foreign branches. 15.2. The learned CIT(A) erred in not directing the Assessing Officer to not tax the income earned by the foreign branches of the appellant, based in countries with whom India has entered into a tax treaty. 15.3. The learned CIT(A) erred in not directing the Assessing Officer to verify and allow the claim of the appellant.

15.4. The learned CIT(A) erred in observing that no facts were on record, without appreciating that the claim of Double Taxation Relief was verified by the Assessing Officer and hence significant facts were available on record.

16. Provision for bad and doubtful debts

The learned CIT(A) erred in upholding the action of the Assessing Officer in restricting the deduction of provision for bad and doubtful debts under section 36(1)(viia) to Rs. 5227,91,03,071 (i.e. provision made) as against Rs. 5550,55,56,221 (eligible amount).

17. Allowance of one time insurance premium paid on Special Home Loan Scheme of Rs. 151,37,00,000

17.1. The learned CIT(A) erred in not allowing the claim of the appellant in respect of allowance of one time insurance premium paid on Special Home Loan Scheme of Rs. 151,37,00,000.

17.2. The learned CIT(A) erred in not appreciating that the liability to pay the insurance premium of Rs. 151,37,00,000 had arisen during the year under consideration, it is non-refundable and accordingly the aforesaid amount should be allowed as a deduction.

18. No disallowance under section 40(a)(ia) in respect of short-deduction of TDS

The learned CIT(A) erred in not allowing the claim of the appellant in respect of no disallowance under section 40(a)(ia) in respect of short-deduction of TDS.

19. Deduction under section 80-IA in respect of windmills

The learned CIT(A) erred in not allowing the claim of the appellant for deduction under section 80-IA in relation to income from windmills.

20. Dividend distribution tax [DDT]

The learned CIT(A) erred in not allowing the appellant’s claim for refund of Rs. 5,83,05,868 in respect of additional DDT paid by it.

21. Each one of the above grounds of appeal is without prejudice to the other.

22. The appellant reserves the right to amend, alter or add to the grounds of appeal.”

Revenue’s Appeal:

The revenue in this appeal has raised following grounds:-

“1. The order of the Ld.CIT(A) is opposed to law and facts of the case

2. On the facts and the circumstances of the case and in law, the Ld CIT(A) has erred in allowing the assessee’s plea that the Interest income on securities has to be taxed on the due basis only without appreciating that as per the mercantile system of accounting followed by the assessee, interest on securities has to be taxed on accrual basis.

3. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in allowing the broken period interest holding that it is revenue in nature and in the process failing to appreciate that it is in the nature of cost of securities and therefore, capital in nature.

4. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in allowing the deferred payment guarantee commission without appreciating the fact that the right to received the commission and the actual receipt of the commission has occurred during the relevant previous year and hence, is taxable in the year of receipt.

5. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in allowing the staff welfare expenses incurred by the assessee without appreciating the fact that the amount was not incurred wholly and exclusively for the purpose of its business.

6. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in holding that no disallowance u/s 14A r.w.r 8d(2)(ii) is called for, thereby granting relief to the assessee, overlooking the fact that the A.O had correctly made the disallowance, as the assessee could not establish the nexus between its own funds and investments made in tax free income.

7. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in directing the A.O to restrict the disallowance u/s 14A r.w.r 8D(2)(ii) by excluding the long term investments in subsidiary / group relying on the decision of ITAT in the case of Garware Wall Ropes (65 SOT 86), without appreciating the fact that the decision of the ITAT has not been accepted by the department and appeal has been admitted admitted by the Hon’ble High Court.

8. On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in relating loss on account of depreciation of securities of HTM category without appreciating that no depreciation is to be provided for investment classified under the HTM category.

9. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in allowing the bonus and long term employee benefits claimed by the assesse without appreciating the fact that bonus as well as expenses on account of leave travel concession, silver jublee award, etc. unpaid till the filing of return of income is not an allowable deduction u/s. 43B of the I.T. Act, 1961.

10. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) was correct in allowing the donation of Rs. 5 Lakhs towards SBI officers Association Public School, Jaipur as business expenditure without appreciating the fact that the expenditure is not incurred wholly and exclusively for the purpose of the business and not incidental to business.

11. Whether on the facts and circumstances of the case and in law, The Ld CIT(A) is correct in allowing the Interest u/s 244A, of IT Act without appreciating the fact that, the delay in issue of refund is attributable to the assessee and hence caused by provision u/s 244A (2) Of the IT Act.

12. On the facts and the circumstances of the case and in law, the Ld CIT(A) has erred in allowing the provision or wage revision without appreciating that provision in respect of an unascertained liability which has not be quantified or a liability which has not accrued, does not qualify for deduction and such additions are covered under the CBDT Inst. No of 2008 dated 26.11.2008.”

2. Brief facts of the case are as under:-

The assessee is a Public Sector Bank filed its return of income on 30.09.2010 declaring total income of Rs.15099,42,00,848/- and claimed a refund of Rs.1522,56,20,355/-. The case was selected for scrutiny and notice u/s 143(2) of the I.T. Act 1961 was issued on 06.09.2011 which was served on the assessee by speed post. Appellant had filed a revised return on 14.02.2012 declaring income of Rs.14030,59,55,985/- and claimed a refund of Rs. 2146,05,38,929/-.

2.1. Various statutory notices were issued to assessee and the return was processed u/s 143(1) of the Act. Case was selected for scrutiny and notice u/s 143(2) of the Act was issued. In response to the statutory notice, assessee furnished various details. After verification of the records and the details filed during the assessment proceedings, Ld.AO completed the assessment proceedings by making various additions in the hands of assessee, details of which are as under:-

Particulars	Amount (Rs.)
Add: Disallowances / Additions to Income
Interest accrued but not due	45,23,86,69,146
Broken Period Interest	5,56,19,72,591
Provision of Pension under AS-15	19,726,400,000
Deferred payment guarantee commission	6,276,216
Staff Welfare expenses	2,012,520
Depreciation on matured securities (write back)	139,080,321
Disallowance u/s 14A (Para 117)	5,441,414,880
Depreciation on leased assets	40,240,203
Provision for amortization of premium on securities (HTM)	10,989,400,000
Disallowance u/s 43B	592,830,755
Interest accrued on NPA not complying with Rule 6EA	243,522,037
Interest on Non Performing Investment	34,254,400
Provision for retired employees medical benefit	920,000,000
Recovery in Written Off Accounts	9,316,069,980
Total Additions	57,993,411,941
Adjusted Additions	57,929,182,304
Deduction u/s 36(1)(viia)
Deduction claimed u/s 36(1)(viia) (considered separately)	52,279,103,071
Less: Deduction allowable u/s 36(1)(viia)	—
Add: 10% of aggregate average advances (rural branches)	—
Restricted to provision made (after reducing prudential provision)	51,478,528,251
Other Heads of Income

Aggrieved by the order of Ld.AO, assessee preferred appeal before Ld.CIT(A).

3. The Ld.CIT(A) granted substantial relief to the assessee by allowing the claim in respect of interest on securities on due basis. The Ld. CIT(A) further allowed the claim of broken period interest, deferred payment of guarantee commission, and staff welfare expenses. The disallowance made under section 14A was also restricted to the extent of average investments in terms of Rule 8D(2)(iii). The Ld.CIT(A) also allowed the assessee’s claim in respect of loss on valuation of investments and amortisation of premium paid on securities held under the HTM category. Further, the disallowance made under section 43B of the Act was deleted. The disallowance of donation amounting to ₹5,00,000/- made in respect of contribution to SBI Officers’ Association Public School, Jaipur, was also deleted. The Ld.CIT(A) additionally granted relief in respect of provision for wage revision and directed grant of interest under section 244A of the Act.

Aggrieved by the order passed by Ld.CIT(A) both assessee as well as the revenue are in appeal before this Tribunal.

4. At the outset, the Ld. AR submitted that all the issues arising in the present cross-appeals, both by the assessee as well as the Revenue, stand squarely covered by the decisions of the co-ordinate benches of this Tribunal in the assessee’s own case for the preceding assessment years. He drew our attention to an issue-wise chart placed on record, detailing the orders passed in earlier years wherein identical issues, arising on identical facts, have been duly considered and adjudicated by the Tribunal.

4.1. The Ld.DR vehemently objected to the reliance placed on the decisions of the co-ordinate bench of this Tribunal in the assessee’s own case for earlier years by the Ld.AR. He submitted that though the assessee has prepared its books of account in accordance with the RBI Guidelines, the computation of income and tax has not been made strictly in accordance with the provisions of the Income-tax Act. The Ld.DR vehemently argued that the issues cannot be treated as covered merely on the basis of earlier orders of the Tribunal without independently examining the legal position under the Act for the year under consideration.

4.2. In this regard, the Ld.DR contended that the principle of res judicata does not apply to income-tax proceedings and that each assessment year is a separate and self-contained unit which must be examined independently on its own facts. He further submitted that an incorrect view taken in earlier years cannot be perpetuated and that a wrong precedent ought not to be followed. Emphasizing the primacy of statutory provisions, the Ld.DR argued that the RBI Guidelines and the Income-tax Act operate in distinct fields and that the former are not binding on the tax authorities. According to him, the assessment must be framed strictly in accordance with the provisions of the Income-tax Act.

4.3. The Ld.DR also submitted that there is no scope for claiming deductions by way of notes accompanying the return of income and that all claims must be made in the return itself. Any claim not made in the return but only by way of a note, according to him, deserves to be ignored.

4.4. Per contra, the Ld.AR strongly supported the order of the Ld. CIT(A) and the consistent view taken by the co-ordinate bench of this Tribunal in the assessee’s own case for earlier years. He submitted that the issues raised by the Revenue are no longer res integra and stand squarely covered in favour of the assessee by a series of decisions of this Tribunal, which have attained finality.

4.5. Addressing the contention of the Ld.DR that the principle of res judicata does not apply, the Ld.AR fairly submitted that while strict res judicata may not apply to Income-tax proceedings, the rule of consistency and judicial discipline requires that where identical facts and issues have been examined and decided in earlier years, the same view ought to be followed in subsequent years, unless there is a material change in facts or in law. It was submitted that no such change has been pointed out by the Revenue in the present year.

4.6. On the issue of RBI Guidelines vis-à-vis the provisions of the Income-tax Act, the Ld.AR submitted that though the RBI Guidelines may not override the provisions of the Act, they are nevertheless relevant in determining the real income and in understanding the manner in which banking transactions are to be recognized and accounted for. It was submitted that the treatment given by the assessee is in consonance with both the prudential norms prescribed by the RBI as well as the judicial precedents governing taxation of banking entities.

4.7. With regard to the argument that income has not been computed as per books, the Ld.AR submitted that computation of total income under the Act is always subject to statutory adjustments, and the mere fact that accounts are prepared under a particular regulatory framework does not disentitle the assessee from claiming deductions or adjustments permissible under the Act. What is relevant is whether the claim is otherwise allowable in law.

4.8. In response to the contention that no claim can be made by way of a note accompanying the return, the Ld.AR submitted that it is a settled position that a claim can be validly raised before the appellate authorities even if not made in the return of income, particularly where all material facts are already on record. Reliance in this regard was placed on judicial precedents which recognize the wide powers of appellate authorities to entertain such claims in order to determine the correct tax liability.

4.9. It was further submitted that the Revenue cannot selectively disregard binding judicial precedents in the assessee’s own case under the guise of re-examining the issue, especially when no distinguishing feature has been brought on record.

4.10. The Ld.AR thus submitted that the orders passed by this Tribunal in the assessee’s own case for earlier years are founded on a consistent and accepted method of accounting regularly followed by the assessee. It was contended that, in the absence of any change in the factual matrix or in the governing legal position for the year under consideration, there is no justification for the Revenue to deviate from the settled position. Accordingly, it was prayed that the principle of consistency be upheld and the claim of the assessee be allowed in line with the earlier decisions of this Tribunal.

We have considered the submissions advanced by both sides in light of various principles and settled legal position.

Res judicata does not apply to taxation matters.

5. It is true that the strict rule of res judicata, as understood in civil proceedings, does not apply with full rigour to Income-tax proceedings. However, that proposition is only a starting point and not the complete legal position. Courts have consistently held that where a fundamental aspect permeating through different assessment years has been accepted in earlier years, and there is no change in facts or law, the Revenue ought to maintain consistency and should not take a contrary stand arbitrarily. Thus, while res judicata may not strictly apply, the doctrine of consistency and certainty in tax administration certainly does.

5.1. Accordingly, the Revenue cannot justify a departure merely by invoking the phrase that “res judicata does not apply,” unless it first demonstrates a material change in facts, statutory position, or binding judicial interpretation warranting such departure.

Each assessment year is a self-contained year and should be considered independently on the facts of that year.

5.2. This principle is again correct in a limited sense, but it does not authorize the Department to disregard settled positions in a routine or mechanical manner. Each assessment year may indeed be separate, yet where the facts are identical, the legal character of a receipt, claim, method, or entitlement cannot be altered whimsically from year to year. Independence of each assessment year does not mean inconsistency without cause.

5.3. Therefore, if the facts relevant to the issue remain unchanged, earlier accepted treatment carries strong persuasive value, and the burden lies on the Revenue to show what distinguishing feature exists in the year under consideration.

Wrong precedent should not be followed. A mistake should not be perpetuated. Dead hand of the past should not govern the present.

5.4. There can be no quarrel with the proposition that a manifestly erroneous view need not be perpetuated. However, before branding an earlier view as a “mistake,” the Revenue must establish that such earlier view was contrary to law, contrary to a binding judgment, or based on incorrect facts. Mere change of opinion or a fresh preference in approach does not convert a previously accepted position into an error.

5.5. Further, an earlier assessment or appellate view cannot be dismissed as a “wrong precedent” merely because the present officer holds a different perception. If the earlier view was a possible and legally sustainable view, it cannot be discarded by rhetorical expressions such as “mistake should not be perpetuated.” The Department must point out the precise legal infirmity in the earlier view; otherwise, the principle of consistency continues to apply.

RBI Guidelines and the Income-tax Act operate in different fields. RBI Guidelines are not binding on the Income-tax Department.

5.6. This proposition is broadly correct to the extent that taxability must ultimately be determined under the provisions of the Income-tax Act, and RBI directions do not by themselves override the statute. However, the proposition becomes untenable if it is used to suggest that RBI norms are wholly irrelevant. Where the assessee is a regulated entity, RBI guidelines may furnish important evidence regarding the true nature of the transaction, recognition norms, prudential accounting treatment, and the commercial or regulatory framework in which the assessee operates.

5.7. Thus, although RBI guidelines may not control the statute, they may still be relevant in appreciating the character of income, the real nature of accrual, or the correctness of the accounting treatment, especially where judicial precedents have treated such regulatory norms as having interpretative significance. Therefore, the Department cannot simply brush aside RBI guidelines as irrelevant; the correct position is that they are not supreme over the Act, but may still be highly relevant in applying the Act to the facts.

Assessment should be done solely according to the Income-tax Act.

5.8. No doubt, the assessment must be framed in accordance with the Income-tax Act. But applying the Act properly requires the authority to consider all relevant material on record, including explanations, notes, statements, and legal submissions filed during assessment proceedings. The Act does not envisage an artificially narrow approach whereby relevant material accompanying the return is to be ignored merely because it is not reflected in a specific schedule in the exact manner the officer would prefer.

5.9. The duty of the assessing authority is to determine the correct taxable income in accordance with law, and not to assess on the basis of technical omissions while disregarding material otherwise available on record.

There is no scope for claiming any deduction by a note accompanying the return.

5.10. This proposition is stated too broadly and is legally unsustainable. A distinction must be drawn between:

(a) making a fresh claim before the Assessing Officer otherwise than by a revised return, and

(b) raising a legal or factual claim before the appellate authorities.

5.11. The decision of the Supreme Court in Goetze (India) Ltd. is often relied upon to say that a fresh claim cannot be made before the Assessing Officer except by a revised return. However, that decision itself is limited to the power of the Assessing Officer and does not impinge upon the jurisdiction of appellate authorities.

5.12. More importantly Hon’ble Delhi High Court in CIT v. Jai Parabolic Springs Ltd. reported in (2008) 306 ITR 42 held that the Tribunal was justified in entertaining the assessee’s claim even though the same had not been made in the return. The Court recognized that there is no prohibition on appellate authorities considering a legal claim arising from facts already on record. Therefore, an absolute proposition that a claim made through a note or otherwise cannot at all be considered is plainly contrary to settled law.

Everything should be claimed in the return of income.

5.13. As a matter of good procedure, claims ought ordinarily to be made in the return of income. However, law does not support the sweeping proposition that only what is claimed in the return can ever be considered. If a lawful claim emerges from the material already on record, appellate authorities are fully competent to examine and grant relief to determine the correct tax liability.

5.14. Hon’ble Delhi High Court in Jai Parabolic Springs Ltd.(supra) makes this clear. The Court upheld this Tribunal’s power to entertain such a claim, thereby rejecting the narrow view that absence of a claim in the return is always fatal. Therefore, while the return is the normal vehicle for making claims, it is not the sole and exclusive source of relief in all circumstances.

5.15. Similarly, the Hon’ble Bombay High Court in CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. reported in (2012) 23 taxmann.com 23 affirmed that an assessee is entitled to raise additional claims before appellate authorities, provided the relevant facts are already on record.

5.16. Thus, the blanket proposition that a claim made by way of a note must be ignored is legally untenable. A note forms part of the material placed on record and may serve as a valid basis for raising a claim or explaining the computation. While the Assessing Officer may be constrained in certain situations, the appellate authorities are fully empowered to examine such claims in order to determine the correct tax liability.

If any claim is made by a note, that claim should be ignored.

5.17. This proposition is untenable in absolute terms. A note accompanying the return is part of the material furnished by the assessee and may serve several legitimate purposes: disclosure of facts, clarification of computation, explanation of legal position, or even raising a claim founded on admitted facts. Such a note cannot be treated as non est merely because it is styled as a note.

5.18. Even where the Assessing Officer is constrained, in view of Hon’ble Supreme Court in case of Goetze (India) Ltd., reported in (2006) 157 Taxman 1 has laid down that entertaining a wholly fresh claim not made through a revised return, does not end there. Once the issue travels to appellate forums, such claim can certainly be examined if the relevant facts are already on record. This position stands reinforced by CIT v. Jai Parabolic Springs Ltd. (supra), where Hon’ble Delhi High Court approved the consideration of a claim not made in the return. Hence, the blanket proposition that a claim made by note must be ignored is contrary to law.

5.19. To sum up we note that the propositions advanced by the Revenue are stated far too broadly and do not reflect the settled legal position. While it is true that the rule of res judicata does not strictly apply to income-tax proceedings, it is equally well settled that where the material facts and the legal position remain unchanged, the Revenue cannot arbitrarily depart from an earlier accepted view, having regard to the principle of consistency. Likewise, though each assessment year is separate, that does not license a capricious change of stand in the absence of any distinguishing feature. Further, while the assessment must undoubtedly be made in accordance with the provisions of the Income-tax Act, the authority is bound to determine the correct taxable income on the basis of all relevant material on record and cannot ignore a lawful contention merely because it is set out in a note or was not specifically claimed in the original return. In this regard, the judgment of the Hon’ble Delhi High Court in CIT v. Jai Parabolic Springs Ltd. (supra) is directly instructive, as it recognizes that this Tribunal is competent to entertain a legitimate claim even if the same was not made in the return of income. Therefore, the blanket contention that any claim made by way of note must be ignored is contrary to law and deserves to be rejected.

Accordingly, the preliminary objections raised by the Revenue are rejected.

6. The Ld.DR also placed heavy reliance on Instruction No.17/2008 dated 26/11/2008, and submitted that CBDT has issued Instruction in exercise of powers under section 119 of the Act with a view to ensure uniformity and discipline in the assessment of banking companies, particularly in relation to deduction claims which are often complex and prone to overstatement. The Instruction specifically mandates verification of such claims, including provisions, depreciation on investments, and bad debts, so as to prevent unintended revenue leakage. The instruction requires stricter scrutiny of claims made by banks, and where such verification reveals that the claim is not in conformity with the statutory scheme or is excessive in nature, the Assessing Officer is duty-bound to disallow the same. Therefore, the disallowance made in the present case is in consonance with the spirit and mandate of the said Instruction, read with the relevant provisions of the Act, and deserves to be upheld.

6.1. The Ld.DR thus relied on CBDT Instruction No.17/2008 dated 26.11.2008 to support the disallowances made by the authorities below.

We have carefully considered the rival submissions and perused the material available on record.

6.2. It is pertinent to note that the said Instruction is in the nature of administrative guidance issued to the field authorities for the purpose of ensuring proper verification and scrutiny of deduction claims in the case of banks. It neither creates a new embargo nor enlarges the scope of disallowance beyond what is contemplated under the provisions of the Act.

6.3. It is a settled position of law that executive instructions cannot override or supplant the statutory provisions. Allowability of a deduction has to be tested strictly in the light of relevant provisions of the Income-tax Act, 1961, and not merely on the basis of administrative directions. Therefore, unless the claim of the assessee is found to be contrary to any specific provision of the Act, the same cannot be disallowed solely by placing reliance on the aforesaid Instruction.

6.4. In the present case, the Ld.DR has been unsuccessful in demonstrating as to how assessee’s claims are hit by any express provision of the Act. The disallowance, made without establishing any statutory violation, cannot be sustained merely by relying on CBDT Instruction No. 17/2008 dated 26.11.2008.

We therefore do not find any merit in this contention of the Ld.DR.

Assessee’s Appeal:

7. Ground No.1 raised by the assesse is against disallowance for provision for pension amounting to Rs.1972,64,00,000/-.

During the assessment proceeding, the assessee submitted that, in accordance with Accounting standard 15- Employee Benefits(Revised 2005) issued by the Institute of Chartered Accountants of India, it provided Rs.1972.64 crores towards pension liability on the basis of actuarial valuation during the year under consideration.

7.1. It was submitted that the said provision was claimed as deduction under section 37(1) in the computation of total income on the basis that the said provision has been created for an ascertained liability and has been recognised in the books of account( i.e debited on a scientific basis,) based on actuarial valuation, and is not a contingent upon happening of any future event. The assessee had placed reliance on following decision in support:

• Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT reported in [2000] 245 ITR 428
• Hon’ble Supreme Court in the case of Calcutta Co. Ltd. vs. CIT reported in [1959] 37 ITR 1
• Hon’ble Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen reported in [1969] 73 ITR 53
• Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. vs. CIT [2009] 314 ITR 62

7.2. The Ld.AO did not agree with the contention of the assessee and held as under:

“In the present case ‘provisions for pension, is as a result of change in accountancy policy. The liability is dependent on other relevant events to happen and is contingent in nature. The allowance of liabilities of similar nature is actually made under specific provisions of 36(1)(iv), 36(1)(v) subject to the provisions of Sec. 40A(7) & (9) of the I.T. Act and is governed by several other conditions. Since these specific provisions are applicable for allowability of expenditure of similar nature, they can not be allowed under general provision of section 37(1) of the I.T.Act. Further, the conditions of section 43B would also be applicable to similar liabilities. Looking to all these facts, the “provision for pension” incurred as a result of adopting revised AS-15 are not held allowable u/s 37(1) of the I.T. Act.

Accordingly, addition of Rs.1972.64 crores.”

7.3. On an appeal before the Ld.CIT(A), after considering the submissions of the assessee, the Ld.CIT(A), observed and held as under:

“6.3 I have considered the appellant’s submission. The issue of pension provision has come into the consideration of DRP for the A.Y. 2012-13 which is reproduced as under :

“The assessee has made a provision of Rs.1663.41 crores towards pension liability. The plea of the assessee is that the said provision is allowable under section 37(1) of the Act. We are unable to accede to this plea of the assessee. Though it had been claimed the said provision was on actuarial valuation, it could not be ascertained before this Panel as to how it is an ascertained liability which has been ascertained at the time it has been debited to the books and it is not contingent in nature. We have no hesitation in agreeing with the contention that if a business liability has arisen in the relevant year, a deduction has to be allowed though the liability may be actually discharged at a later date. But then the onus is on the tax payer to demonstrate that how the said liability had arisen in the relevant year. We also agree with the view taken by the AO in this regard that when there are specific provisions dealing with the contribution to welfare funds, the same are allowable under the general provision of section 37(1)”.

DRP clearly agreed with the AO’s argument, hence, AO’s disallowance of appellant’s claim with regard to provision towards pension is upheld and ground is dismissed.”

7.4. Before this Tribunal the Ld.AR submitted that aforesaid provision for liability was claimed as deduction u/s.37(1) in the computation of total income on the basis that, the said provisions has been created for an ascertained liability. The Ld.AR submitted that the said liability was recognised in the books of account (i.e. debited on scientific basis based on actuarial valuation) and was not contingent upon happening of future event. The Ld.AR submitted that the said liability was debited to the profit and loss account and no separate adjustment in respect thereof was made in the computation of income.

7.5. The Ld.AR submitted that, Section 36(1)(iv) and (v) are specific provision pertaining to such contributions towards a recognised provident fund or an approved superannuation fund or an approved gratuity fund. It was submitted that the same does not deal with creating a liability for pension or other retirement benefits. He thus submitted that, these were ascertained liability at that point of time and it has been debited to the books of account, therefore, cannot be treated as contingent in nature. The Ld.AR emphasised that the said provision is in relation to expenditure and not towards contribution to any employee welfare fund and therefore Section 43B cannot be made applicable in these facts. He emphasised that the said sum does not represent any sum payable by the assesse by the assesse as an employer by way of contribution to the pension fund. The Ld.AR submitted that the said claim was made by the assessee by way of note no. 18.7(b) of notes to the annual accounts.

7.6. On the contrary, the Ld.DR filed his arguments submitting as under:

• The assessee has claimed provision for pension. No such provision is allowable under the Income-tax Act unless it is provided in the Act. There is no such provision in the Act.
• The assessee has made claim u/s 37 of the Act. Section 37 (1) of the Act specifically prohibits allowing deduction of such expenditure with the opening words “Any expenditure not being in the nature described in sections 30 to 36….. ”
• Sec 36(1) (iv) allows deduction of contribution made by the employer to a recognised provident fund or approved super annuation fund subject to such limits as may be prescribed for the purpose of the recognition of the provident fund or approving the superannuation fund.
• Section 35(1)(v) allows deduction of any sum paid by an employer to an approved gratuity fund.
• The provision for pension is in the nature described in section 36(1) (iv). Hence, applicability of section 37 is excluded.
• Moreover, when there is a specific provision for allowing deduction in respect of payment to superannuation funds, the general provision of section 37 is excluded. Reference is made to Maxwell on Interpretation of Statutes 12th Edition Page 196 “Generalia specialibus non derpgant”.
• In an unreported judgment of the Hon’ble Rajasthan High Court dated Feb 12 2002 in R,A Nos 420,421 and 422/Jp/1981, it has been held that the assessee is not entitled to deduction u/s 37 when there is a special provision on the subject. In para 2 (end) it is held:

“The another alternative contention of the assessee that the claim may be allowed under general provision namely, section 37 of the Act, 1961, also can hardly be accepted, for allowing such a claim specific provision has been given in the Act in section 404(7) of the Act. If the assessee fulfils the conditions laid down in the said provisions, then and only then such claim can be allowed. Under the circumstances, the assessee cannot take shelter under general provision namely, section 37 of the Act, 1961. It is settled law by now that specific provision overrides the general provision.”

This judgment lays down the obvious and clear provision of law. Hence there is no scope for invoking section 37 in such cases.

• The assessee is making an attempt to circumvent the mandate of law.
• The funds mentioned in section 36 are approved or recognized upon fulfilment of strict conditions. This is in the interest of the employees. There are checks and balances. Because of these checks and balances, law permits deduction of payment only to such funds. The AO has highlighted this point in page 28 of the assessment order as under:

“B. Further, Income-tax Rules and various circulars have been prescribed by the CBDT which attach several conditions for allowability of any sum paid towards superannuation and gratuity funds. The funds are to be approved by the CCIT or CIT. The purpose is clearly to ensure that the funds are established under irrevocable trust for the benefit of employees and to ensure that such funds should be invested in a manner which secures to them over a period of time for this purpose. Thus, ensuring the safety of the fund and prevent mis- utilization of the same has been the main purpose of various provisions under sections. If the provisions of pension are allowed u/s 37(1) of the Income Tax Act, then the entire purpose of the specific provision will be lost.”

• The Fourth Schedule of the Income tax Act lays down the specific provisions relating to Recognised Provident Fund, Approved Superannuation Fund, and Approved Gratuity Fund. The recognition and approval to these funds are given under strict conditions. The activities of these funds are regulated by law and are monitored. Every employer has to strictly comply with them for availing of the deductions.
• In the present case, all the checks and balances are abandoned. Payment is being made year after to an unapproved parallel fund created by the assessee. This is not permitted under law. If the contention of the assessee is accepted, anybody can set up any fund bypassing the specific provisions of law, flaunt actuarial valuation and claim any amount of payment as deduction. Then the door to tax evasion, in the language Supreme Court in another context in the case of CIT v, Durga Prasad More (82 ITR 540) will be wide open.. What is specially a matter of serious concern in this case is that the payment has been not made through the profit and loss account but from reserve.
• Section 40A(7) and 40A(9) specifically prohibit allowance of such deduction.
• Section 40A(9) states in clear terms that no deduction shall be allowed in respect of any sum paid by the employer towards setting up or formation of or contribution to any fund, trust, company, association of persons, body of individuals…. for any purpose except where such sum is so paid for the purposes and to the extent provided by or under clause (iv) or clause (iva) or (v) of subsection (1) of section 36 or as required by or under any law for the time being in force.
• When such clear provision of law is there, the provision for pension cannot be allowed as a deduction in the present case.
• In the case of the assessee here, this is only a provision. No payment has been actually made. The words used in section 36 refer to amounts paid. This is only a book entry. The assessee is in control of the fund. The amount has to be given to an irrevocable trust outside the control of the assessee,
• Actuarial valuation has no relevance. Actuarial valuation is only the computation of the present value of a future liability. The issue here is not the quantum of liability. The issue is whether any amount is at all allowable as deduction.
• The most glaring infirmity in the claim is that even the amount is not debited to the profit and loss account. It is debited to the reserve. This means that simply by debiting to one’s own capital by setting aside a part of one’s own reserve, the Bank seeks to claim substantial tax relief. This is a brazen claim.
• No payment has been made, Hence, the amount is also disallowable u/s 43B.
• Reliance on case laws is misplaced in view of the clear mandate and prohibition provided under law, any decision or judgment allowing the deduction is clearly erroneous being contrary to the provisions of law. Such erroneous judgments are not required to be followed. It has been laid down by the Hon’ble Supreme Court in Distributors (Baroda) P Ltd. v UOI and another 155 ITR 120 (SC) at page 124 that To perpetuate an error is no heroism. To rectify it is the compulsion of judicial conscience..”
• This mandate of the Hon’ble Supreme Court may be scrupulously followed and erroneous precedents may not be mechanically adopted. This is because, in view of the discussion in the foregoing paragraphs, allowance of deduction for provision of pension is patently wrong.

We have perused the submissions advanced by both sides in light of the records placed before us.

7.8. During the course of assessment proceedings, the assessee explained that the provision for pension has been created in accordance with Accounting Standard–15 (Revised 2005) on Employee Benefits issued by the Institute of Chartered Accountants of India, which mandates recognition of employee benefit obligations on the basis of actuarial valuation. We note that under the said standard, pension being a defined benefit obligation, the liability accrues with the rendering of service by the employees and is required to be measured on a scientific basis using actuarial methods. Such valuation determines the present value of the obligation with reasonable certainty, thereby rendering the liability ascertained and not contingent in nature. In the mercantile system of accounting, a liability which has accrued during the year, though payable at a future date, is allowable as deduction unless specifically prohibited by law. In the present case, the provision represents an accrued employee cost, determined on a scientific and recognized basis, and is not in the nature of a contribution to any fund so as to attract the restrictions under section 36 or section 40A.

7.9. We have carefully considered the rival submissions and perused the material available on record. The primary objection of the Ld.DR is that the provision for pension is not allowable either under section 37(1) of the Act or under the specific provisions of section 36, and that the same is hit by sections 40A(7) and 40A(9) of the Act. It has also been contended that actuarial valuation is irrelevant and that the claim represents a mere provision and not an allowable expenditure.

7.10. At the outset, we are unable to accept the broad proposition canvassed by the Ld.DR that in the absence of a specific provision under section 36, the claim must necessarily fail. It is a settled position of law that section 37(1) is a residuary provision intended to cover all business expenditures not falling within sections 30 to 36, provided such expenditure is laid out wholly and exclusively for the purposes of business and is not capital or personal in nature. The exclusion of section 37 would arise only where the expenditure is of the nature specifically covered by sections 30 to 36 and is subject to conditions therein. In the present case, the provision for pension is not in the nature of a contribution to a recognised provident fund or approved superannuation fund so as to fall within section 36(1)(iv) or 36(1)(v). Rather, it represents a liability accrued towards employee benefits, determined on scientific basis.

7.11. The reliance placed by the Ld.DR on the principle of generalia specialibus non derogant is misplaced in the facts of the present case. The said principle would apply only where both the general and special provisions operate in the same field. Here, section 36 governs specific deductions in respect of contributions to approved funds, whereas the present claim is not for contribution to any such fund but for recognition of an accrued liability towards pension benefits. Therefore, the field of operation is distinct, and the residuary provision under section 37 cannot be said to be excluded.

7.12. We also find no merit in the contention that sections 40A(7) or 40A(9) operate as a bar. Section 40A(7) applies to provision for gratuity, and section 40A(9) applies to contributions to unapproved funds. In the present case, the claim is neither for gratuity nor for contribution to any fund, trust, or institution, but is a provision representing accrued liability towards pension, computed on actuarial basis. Hence, the said provisions are clearly distinguishable on facts.

7.13. The argument of the Ld.DR that actuarial valuation is irrelevant is also devoid of merit. The law is well settled that where a liability has accrued and is capable of being estimated with reasonable certainty, the same cannot be regarded as contingent merely because it is to be discharged at a future date. Actuarial valuation is a recognised scientific method for determining such liabilities, particularly in the context of employee benefit obligations, and has been consistently accepted by courts.

It is noted that the nature of expenditure is supported by Actuarial valuation certificate made in terms of AS-15 could not have been held to be a contingent liability.

7.14. Further, the objection that the amount represents a mere provision and not an actual payment cannot be accepted in view of the settled principle that under the mercantile system of accounting, accrued liabilities are allowable notwithstanding that the payment is to be made in future, unless specifically prohibited by statute. In the absence of any express prohibition covering the present claim, the same cannot be disallowed merely on the ground that it is a provision.

7.15. We note that identical issue has been considered by this Tribunal in the assessee’s own case in earlier years, wherein such provision for pension, being based on actuarial valuation and representing an ascertained liability, has been held to be allowable for following assessment years on identical facts.:-

Sr. No.	Particulars
1	Order dated 03 February 2020 passed by the Income-tax Appellate Tribunal in the assessee’s own case for the Assessment Year 2008-09
2	Order dated 06 March 2020 passed by the Income-tax Appellate Tribunal in the assessee’s own case for the Assessment Year 2000-01
3	Order dated 12 July 2021 passed by the Income-tax Appellate Tribunal in the assessee’s own case for the Assessment Years 2001­02 and 2002-03
4	Miscellaneous Application Order dated 24 June 2022 (MA Nos. 20 & 21/MUM/2022) for the Assessment Years 2001-02 and 2002-03
5	Order dated 30 September 2021 passed by the Income-tax Appellate Tribunal in the assessee’s own case for the Assessment Year 2003-04 and 2004-05
6	Order dated 22 March 2022 passed by the Income-tax Appellate Tribunal in the assessee’s own case for the Assessment Year 2005-06
7	Order dated 06 June 2023 passed by the Income-tax Appellate Tribunal in the assessee’s own case for the Assessment Year 2009-10
8	Order dated 23/12/2016 for A.Y. 2009-10 in case of erstwhile State Bank of Saurashtra, which has since merged with assessee in ITA _________________  4949/Mum/2013.

7.16. The Ld.AR submitted that the assessee has been following identical approach of accounting, regarding the provision relating to pension liability. He placed reliance on the following observations of the decision of Co-ordinate Bench of this Tribunal for A.Y. 2009-10 in assessee’s own case vide order dated 06/06/2023 (supra), wherein on identical facts, following view was taken:-

“7. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee’s own case in State Bank of India v/s DCIT, in ITAs no. 3644 and 4563/Mum./2016, for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under:–

“15. We have heard rival contentions on this issue and gone through facts and circumstances of the case. We have also perused the material placed before us including assessment order, order of CIT(A) and case laws. We noted that the assessee provides post-employment benefits such as pension, gratuity, etc. to its employees, under a “Defined Benefit Plan”. In terms of the said plan, the assessee operates a Provident Fund Scheme, Gratuity scheme and Pension Scheme. The Pension scheme comprises of two parts (i) where the assessee makes a contribution to an approved Pension Fund, and (ii) where the assessee provides for pension payable to vested employees on retirement, on death or termination of employment, etc. The issue in the present appeal is only with regard to (ii) above i.e. provision for pension payable to employees based on the employment policy, the assessee provides pension benefits to its employees under a defined benefit plan. The provision is in respect of the defined benefits payable to its employees on retirement in respect of the services rendered by the said employees. The assessee has been measuring its liability for such benefits actuarially and obtains a valuation report every year and, on basis thereof, makes a provision in accordance with the Accounting Standards. During the year under consideration, the assessee has adopted AS-15 issued by the ICAI. Accordingly, an actuarial valuation was obtained to determine the additional obligation of the assessee towards pension liability. In accordance with the transitional provisions of AS-15, a provision of Rs. 3,724 crores were made based on the actuarial valuation by debiting the revenue reserves. The details are filed by the assessee in its note filed vide note 18.9(a)(v)(i) of the financial statements at page no. 73 of the Paper Book – I, filed by assessee.

16. We noted that the above amount was debited to revenue reserves, the assessee claimed a deduction for the same separately in the computation of total income and the relevant details are filed by the assessee at Sr. No. III.14 of the computation of total income on page 2 of the Paper Book – I filed by assessee. As consideration of availing the benefit of the services of the employees during the year it in addition to the salary, bonus, allowances, perquisites, etc. is also obliged to provide various retirement benefits such as pension, gratuity, etc. to the employees. These liabilities although to be discharged in the future relate to the rendering of the services during the year and because of the various imponderables determined based on an actuarial valuation. The assessee explained this by an example stating that, if as per employee policy an amount of Rs. 250/- is payable to each employee towards pension and there are 10,000 employees, the total pension payable would be Rs. 25,00,000/-. However, based on actuarial valuation, which takes into consideration entry into service, length of service and date of retirement of all employees, attrition before retirement, etc. the pension liability amounts to Rs. 18,00,000/-. Accordingly, a provision of Rs. 18,00,000/- is required to be created in the books. Therefore, the pension liability has definitely arisen during the year as the services of the employees are already availed, and they are eligible for the said pension. It is also possible to estimate the pension liability with reasonable certainty. Hence, the provision made is for a present actual liability, payable in future, and not a contingent liability. It is clearly an ascertained liability and has been recognised in the books of account on a scientific basis, based on actuarial valuation. The Supreme Court in the case of Metal Box Co. of India (supra) and Bharat Earth Movers (supra) and several other cases, have held that if a business liability has definitely arisen in the accounting year, a deduction should be allowed if the liability could be reasonably estimated though actually discharged at a later date. Also, the Delhi High Court in the case of Delhi Flour Mills vs. CIT [1974] 95 ITR 151 (Delhi), while allowing the provision for gratuity, observed as under:

“The gratuity payable to an employee represented a part of the emoluments payable to him for rendering service during each year. The right to receive gratuity accrued to the employee as soon as he completed one year of service and, as a corollary, the liability to pay the gratuity to the employee arose to the assessee at the end of each year. The amount of the liability was also ascertainable and there was no question in the instance case of the discounted present value of the liability being not ascertainable. It was no doubt true that the actual payment of the gratuity was deferred to a later date on the happening of a certain event, namely, death or voluntary retirement of the employee. But, these were not uncertain events. Therefore, the provision made by the assessee for the payment of gratuity under the agreement dated 14-2-1956, was in the nature of a revenue expenditure in respect of the assessment years under reference.

17. Accordingly, a deduction was claimed in respect of provision for pension liability based on the principle laid down by the Courts, as discussed above. The claim was further supported by the Accounting Standard 1 notified by the Central Government in terms of section 145(2) of the Act, which mandates the adoption of a policy of prudence pursuant to which a provision is to be made for every known liability even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. But, the Revenue before the Tribunal has emphasised on the following contentions:

a. expenditure does not relate to the year under consideration;

b. Specific provision of sections 36(1)(iv)/36(1)(v) and 40A(7)/40A(9) of the Act are applicable to the pension liability. Further, the same should only be allowed on payment basis as per section 43B of the Act. Hence, a general provision like section 37(1) of the Act cannot apply.

18. We noted that, in the present case, the provision of Rs. 3,724 crore relates to the transitional liability and has arisen on account of adoption of Revised AS-15 relating to employee benefits issued by the ICAI. The allowability of such transitional provision has been upheld by the Hyderabad Bench of the Tribunal in the case of NMDC Ltd. vs JCIT (2015) 56 taxmann.com 396 (Hyderabad – Trib.) and Chandigarh Bench of the Tribunal in the case of Glaxo Smithkline Consumer Healthcare Ltd. vs ACIT being order dated 2.04.2013 (ITA no. 1148/Chd/2011). Both the aforesaid cases were specifically concerned with similar provision created towards post retirement employee benefits on account of revision of AS-15. In both the cases the Tribunal has allowed a deduction for a liability which the revenue alleged did not pertain to the year, created as in consequence of an adoption of the revised accounting standard.

19. The fact that in year of change of accounting method there may be a distortion was accepted by the Bombay High Court in CIT vs. West Coast Paper Mills Ltd. [1992] 193 ITR 349 (Bombay). The Court was concerned with a case where the assessee changed its method of accounting for claiming deduction of bonus payments to employees from cash to mercantile. Consequently, in the year of change it claimed such deduction in respect of the cash payment for the past year accounts as well as for the provision made for the current year’s liability. The High Court held that whenever there is a change in the method of accounting, something of this kind is bound to happen. In the present case also, liability has arisen on account of change in the policy that was thrust on the assessee as a consequence of the revised accounting standard that was mandated to adopt by the Reserve Bank of India. Therefore, no disallowance could be made on this ground.

20. The assessee is under an obligation to pay pension to their employees as per the agreed terms. With the rise in salary levels and reduction in interest rates and the fact that pension payments will have to be made, based on the salary last drawn before retirement, a huge gap existed between the amount funded to the approved scheme and the actuarial valuation of such liability. With a view to bridge the gap a provision of Rs. 3,724 crores have been made during the year. The basis of arriving at this amount is referred by the AO at pages 22 and 23 of his assessment order. The provision in the present case is not for making contribution to any Fund, but for payment of pension to employees on their retirement over and above what they will be entitled to claim from the approved scheme. A bare perusal of sections 36(1)(iv)/36(1)(v) of the Act shows that, they would apply when deduction is claimed of any sum paid by an assessee as an employer towards a recognised provident fund or an approved superannuation fund or an approved gratuity fund. The amount of Rs. 3,724 crores are clearly not a contribution towards any recognised provident fund or approved superannuation fund or approved gratuity fund. Similarly sections 40A(7)/40A(9) of the Act would apply to provision made as an employer towards contribution to fund or trust or any other entity. We also noted that the amount of Rs. 3,724 crores is not a provision made for contribution to any fund or trust or any other entity.

Similarly, section 43B of the Act deals with contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees. The amount of Rs. 3,724 crores are not a contribution to a pension fund and is a provision towards pension liability. We are of the view that only the prescribed items can be disallowed in terms of section 43B of the Act. Therefore, the above provisions are clearly not applicable in the present case.

21. It also requires consideration that this aspect of the matter has not been controverted by the Revenue in their submissions before the Tribunal. The aforesaid provision represents the liability arising on account of availing of services during the tenure of the employment recognised as a consequence of the transitional provisions of AS-15. The aforesaid provision does not represent contribution to any pension fund, and hence, the provisions of sections 36(1)(iv)/36(1)(v) or 40A(7)/40A(9) or 43B of the Act are not applicable.

22. In CIT vs. Ranbaxy Laboratories Ltd. [2011] 334 ITR 341 (Delhi), the Delhi High Court was concerned with a case where the assessee had introduced a pension scheme for its managerial employees which was over and above the benefits available under the superannuation scheme of the company. The Delhi High Court held that the pension scheme of the assessee does not envisage any regular contribution to any fund or trust or any other entity and, therefore, allowed the deduction on the basis that liability in this regard accrues year on year. Further, reliance is placed on the decision of Mumbai Bench of the Tribunal in the case of Hindustan Unilever Ltd. vs. ACIT [2013] 22 ITR(T) 737 (Mumbai), wherein the issue of allowability of pension payable to employees over and above the amount payable under the LIC scheme was restored to the file of the AO since additional evidence was filed by the assessee. However, in a subsequent decision by an order dated 30.10.2014 in ITA no. 4449/Mum/1999, the Tribunal has allowed the deduction after noting that the deduction was allowed by the AO while giving effect to the earlier year’s order wherein the matter was restored back.

23. The issue is also squarely covered by the decision of the Hon’ble Bench of the Mumbai Tribunal in the case of erstwhile State Bank of Saurashtra (which has merged with the Assessee) vs. DCIT in ITA no. 4502/Mum/2013 dated 23.12.2016. The findings of the Tribunal are reproduced below:

“It is not disputed that the assessee has made the provision on the basis of actuarial valuation towards the pension of the employees in accordance with Accounting Standard 15, which was applicable from the impugned assessment year. The liability has therefore, definitely arisen during the impugned assessment year although it has to be discharged on a future date. The case of the assessee, in our view, is duly covered by the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] (245 ITR 428) in which it was held as under:

……………………….

The provision of section 43B will not apply to the same as this does not represent the sum payable by the assessee as an employer by way of contribution to pension fund. We, therefore, respectfully following the decision of Hon’ble Supreme Court delete the disallowance.”

Hence, this issue is also covered by the Tribunal decision in the case of State Bank of Saurashtra (supra), which has merged with the Assessee.

24. The reliance placed by the learned Departmental Representative at the time of the hearing on the decision of the Madras High Court in the case of Pricol Limited is completely misplaced since the same deals with a case of disallowance of provision towards gratuity which was squarely covered by the provision of section 40A(7) of the Act. Further, it is clarified that section 40A(9) of the Act will not be applicable since the provision is not towards contribution to any pension fund. We are of the view that sections 36(1)(iv) and 36(1)(v) of the Act specifically deal with contribution to a recognized provident fund or an approved superannuation fund or an approved gratuity fund. The said sections do not deal with providing for a liability vis-à-vis pension or any other retirement benefits. Thus, the aforesaid provision for pension made on the basis of an actuarial valuation ought to be allowed as a deduction under section 37(1) of the Act. Since there are specific provisions dealing with contribution to pension fund/ gratuity fund, etc., the provision for pension (which doesn’t represent any contribution to fund) falls under the purview of section 37(1) of the Act and ought to be allowed as deduction. Reliance in this regard is placed on the decision of the Supreme Court in the case of CIT vs. Kalyanji Mavji & Co. [1980] 122 ITR 49 (SC), wherein it was held that if expenditure incurred by the assessee was not covered by the specific provision under section 10(2)(v) of the Act, then, benefit should be given to the assessee under the residuary clause i.e. section 10(2)(xv) of the Act. Moreover, Instruction no. 17/2008 dated 26.11.2008, relied upon by the CIT DR is also not applicable to the facts of the case. As regards, para ix of the aforesaid instruction, it is applicable to deduction towards contribution to provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees. Whereas the provision for pension of Rs. 3,724 crore is not towards contribution to any fund, but it is payable to the employees directly. Also, Sr. no. xi of the aforesaid instruction states that contingent liability cannot constitute deductible expenditure. As elaborated above, provision towards pension of Rs. 3,724 crore is not a contingent liability. It is an ascertained liability and has been provided for in the books of account on a scientific basis, as per the actuarial valuation. Further, it would also be contrary to the judgement of the Supreme Court in the case of Metal Box Co. of India (supra) where the Supreme Court observed that contingent liabilities properly discounted were to be allowed as a deduction. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee is allowable and hence, allowed. This issue of assessee’s appeal is allowed.”

7.17. We find that the Ld. DR has not been able to point out any distinguishing feature in the facts or in law for the year under consideration vis-à-vis the earlier assessment years, wherein identical issues have been examined and decided by the co-ordinate benches of this Tribunal in the assessee’s own case. In the absence of any material change in facts, statutory provisions, or binding judicial precedent, there is no justification for the Revenue to seek a departure from the consistent view already taken.

7.18. It is well settled that while the principle of res judicata may not strictly apply to income-tax proceedings, the doctrine of consistency and judicial discipline mandates that a view consistently taken on identical facts should not be disturbed without cogent reasons. Permitting the Revenue to re-agitate the same issue year after year, without bringing on record any new facts or legal developments, would lead to uncertainty in tax administration and multiplicity of litigation, which cannot be countenanced.

7.19. Respectfully following the consistent view adopted by this Tribunal in the assessee’s own case for earlier years, and in the absence of any justifiable reason to deviate therefrom, we see no reason to interfere with the findings rendered therein.

Accordingly, the claim of the assessee is upheld, and the Ld. AO is directed to allow the provision for pension in accordance with the earlier orders of the Tribunal.

Accordingly Ground no. 1 raised by assessee stands allowed.

8. Ground No.2 raised by assessee is against the disallowance of depreciation on matured securities amounting to Rs.13,90,80,321/-

During the year under consideration, the assessee recognized a loss on account of depreciation in respect of certain securities which had matured during the year but in respect of which the redemption proceeds were not received on the due dates. The assessee submitted that, in accordance with the prudential norms prescribed by the Reserve Bank of India, such non-receipt of redemption proceeds renders the asset non-performing, and consequently, a provision is required to be made by applying the norms applicable to Non-Performing Assets (NPAs). It was thus contended that the said provision represents diminution in the realisable value of the asset and is in the nature of a business loss allowable under law.

8.1. The reliance placed by the assessee on judicial precedents is well founded. Hon’ble Bombay High Court in case of CIT v. Bank of Baroda reported in 262 ITR 334 held that diminution in the value of securities, recognized in accordance with banking norms, is allowable as a deduction, being in the nature of a trading loss. Similarly, Hon’ble Karnataka High Court in case of Corporation Bank v. ACIT reported in 174 ITR 616 has recognized that securities held by banks constitute stock-in-trade and any loss arising on account of their valuation is allowable as business loss. This position also finds support in the decision of Hon’ble Kerala High Court in CIT v. Bank of Cochin Ltd. reported in 94 ITR 93 and Hon’ble Madras High Court in case of Indo-Commercial Bank Ltd. v. CIT,reported in 44 ITR 22, wherein it has been consistently held that investments held by banks are in the nature of stock-in-trade and any depreciation or loss arising therefrom is allowable as a deduction.

8.2. The Ld.AO however rejected the submissions of the assessee and held as under:

“10.4 In the earlier assessments, the assessee’s explanation has not been accepted on reasoning that the bank has certain securities which have fallen due for redemption during the previous year. These securities include debentures, bonds etc. In some cases, the company or the State Government which had issued the bonds is not able to pay the amount due on maturity of the security. In such cases, the bank treats the security amount as NPA and thereby, a provision is made of certain percentage of the security as in the case of other NPAs. Although, the bank may be required to do so under the guidelines of RBI, the provision made is not necessarily deductible for Income tax purposes. Under the Income-tax Act, expenditure already incurred is generally allowable. However, there are also specific provisions for allowance of a provision created by the assessee for certain kinds of expenditure. The provision which is made by the assessee is not covered by any specific provision in the I. T. Act. The provision also does not qualify under sec.36(1)(viia) for NPAs. In this case, the securities are due for redemption and the amount payable is also determined according to the face value of the same. The amount determined will be paid subsequently by the issuer. In case, the amounts are not paid, it can be treated as a bad debt and consequently deduction may be claimed under Income tax Act. At this stage however, it can not be said that there is no market value for the security. At the same time, the security is not a debt owed to the assessee and therefore, it can not be treated as NPA. The RBI guidelines are perhaps intended to make the banks follow certain prudential norms of accounting. Such accounting principle based on prudential norms can not be taken as the basis for claiming deduction under Income-Act. This view has been endorsed by the Karnataka High Court in the case of Motor Industries Ltd., (229 ITR 137). The court observed that all liabilities which a businessman might provide for in his books following prudential norms are not necessarily tax deductible. Under the Income-tax Act only a liability in praesenti is allowable as against a liability in future. The provision made by the bank is not an ascertained liability and it also can not be said that there is actual change in the market value of those securities.

10.5 In addition, I would like to add that the finding of Hon’ble Supreme Court in the judgment given in January, 2010 in the case of M/s. Southern Technologies Ltd. vs. JCIT in Civil Appeal No. 1337 / 2003 will also be applicable. In this case, the assessee which is an NBFC created a provision for NPA, which in terms of RBI Guidelines was debited to Profit & Loss Account and was claimed in the Income Tax Return. The Hon’ble Supreme Court has however held that the provision is not allowable despite the fact that the provision was created in accordance to the RBI Guidelines as there was no specific provision to allow the same under the Income Tax Act. It was also held that the purpose of RBI Guidelines is different and protecting the interest of clients / investors is major objective and are not binding on IT authorities (the above decision has been discussed earlier in Para.6 above).”

8.3. On an appeal, the Ld.CIT(A), based on the finding in assessee’s own case by his predecessor for A.Y. 2004-05 and 2005-06 observed and held as under:

“9.3 I have considered the appellant’s submission. The issue has been decided against the Bank for assessment years 2003-04, 2005-06 & 2009­10. The relevant para of the CIT(A) order is as under:

“The CIT(A) in AY 2003-04 in this regard held “this is a recurring issue which has arisen in the case of appellant in AY 2000-01, 2001-02 & 2002-03 wherein my predecessor had the occasion to confirm the addition. While giving the decision, he had the occasion to rely on the decision of his predecessor’s for AY 1996-97 & 1997-98. I have considered the orders and find myself in agreement with the orders of my predecessors. Accordingly following the decisions, I uphold the disallowance.

Since the facts remain the same, following the principle of judicial consistency, disallowance made by the AO is upheld. The ground of appeal is therefore dismissed.”

9.4 In view of the above decision of CIT(A) and ITAT, claim of the appellant is disallowed. This ground of appeal is dismissed.”

8.4. Before this Tribunal, the Ld.AR submitted that, assessee created provision for depreciation on matured securities in line with RBI direction issued in relation with non-performing assets (NPA) which provides that, where interest is not serviced regularly or where the redemption proceeds are not received on due date, a provision is required to be made. The assessee thus, claimed the depreciation as deduction in the computation of income. It was submitted that, such depreciation on securities were computed that were due for redemption during the year ended 31.03.2010, however the redemption proceeds were not received.

8.5. The Ld.AR submitted that, this Tribunal in assessee’s own case for A.Y. 1996-97, vide order dated 26/07/2013 in ITA No. 5470/Mum/2002, had decided identical issue on similar facts by observing as under:-

“38. Additional Ground No. 4 is regarding depreciation on matured securities. The assessee has claimed a sum of Rs. 2,23,86,418/- towards depreciation of investments. The AO disallowed the claim of the assessee and the CIT(A) has confirmed the action of the AO. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The CIT(A) has decided the issue in para 9 as under:

9. The ninth effective ground of appeal is against the disallowance of Rs. 2,23,86,418/- being the provision for diminution in the value of securities which had matured and become due for redemption during the year but were not redeemed. It was contended before the A.O. that in some cases, the companies or the State Governments who had issued the relevant securities were not able to pay the amount due on redemption. The appellant treats these securities as non-performing assets and a provision is made at a certain percentage for diminution in their value as in the case of other non-performing assets. There may be some delay on the part of the companies or the State Governments in paying the redemption amount. But, whenever the payment would be made it cannot be expected to be less than the face value. On the date of maturity, the whole of the amount of redemption money becomes due under the mercantile system of accounting followed by the appellant unless a portion of this amount is written off as bad debt. It is a real income and hence has to be taxed as such under the mercantile system followed by the appellant. Reliance in this regard is placed on State Bank of Travancore vs. CIT 158 ITR 102, 155 (SC) which was followed in Western India Oil Distributing Co. Ltd. Vs. CIT 206 ITR 359 (Bom). It was held in this decision that the concept of real income should not be so read as to defeat the provisions of the Act. Extension of the concept of real income to a field so as to negate accrual after the amount had become receivable is contrary to the postulates of the Act, the Supreme Court held (p. 146 of 158 ITR). Moreover, as held in the case of Navin R. Karnani vs. CIT 185 ITR 408 (Bom), it was not possible to waive any amount of income which had accrued under the mercantile system of accounting on the ground of diminished hope of recovery. Furthermore, any liability de 11stopp is not an ascertained liability in praesenti and cannot be allowed as deduction under the Income-tax Act as held in the case of Indian Molasses Co. Pvt. Ltd. vs. CIT 37 ITR 66 (SC) and Standard Mills Co. Ltd. Vs. CIT 229 ITR 366 (Bom). Hence, no such ad hoc deduction could be allowed against the amount receivable on redemption of securities which had matured and become due for payment before the close of the accounting year. This ground therefore fails.”

39. The findings of the CIT(A) is based the on the various decisions of the Hon’ble Supreme Court as well Jurisdiction High Court. No contrary decisions has been brought before us accordingly we do not find any error or illegality in the impugned order of CIT(A) qua this issue. The same is upheld.”

8.6. He submitted that, the Hon’ble jurisdictional High Court in State Bank of India v/s DCIT, in ITA no. 271 of 2014 vide order dated 23/08/2016 upheld the aforesaid findings of the coordinate bench of the Tribunal. Similar issue has already been decided in assessee’s own case on identical facts for preceding assessment year, therefore, we see no reason to deviate from the view so taken, in the absence of any allegation of change in facts and law. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue.

Accordingly, ground no.2 raised in assessee’s appeal stands dismissed.

9. Ground No.3 raised by assessee is against disallowance computed u/s 14A of the Act amounting to Rs.544,14,14,880/-. The Ld.AR further emphasised that this issue of disallowance u/s.14A is interconnected with Ground Nos. 6 & 7 raised by the revenue in the appeal filed by the Department.

9.1. The Ld.AR submitted that during the year under consideration, assessee had following income as exempt:

• Interest income on foreign currency loans approved by Central Govt. u/s 10(15)(iv) – Rs. 5.82 Crores
• Interest income on tax free bonds u/s 10(15)(iv)(h) – Rs. 31.52 Crores
• Dividend income from domestic companies /mutual funds u/s 10(34) – Rs. 645.40 Crores
• Dividend income from documents companies received from ventured funds exempt u/s 10(34)- Rs. 8 lakhs.

The Ld.AR submitted that the assessee suo moto disallowed expenditure of Rs. 2,74,93,892/- against the total exempt income of Rs. 682.82 Crores.

9.2. The Ld.AO after considering various submissions of the assessee, recomputed the disallowance by invoking provisions of Rule 8D towards interest expenditure of Rs.494,20,79,129/- and administrative expenses of Rs.52,68,29,643/-, aggregating to Rs. 546,89,08,772/-.

9.3. On an appeal before Ld.CIT(A), the Ld.CIT(A) held that no disallowance of interest is to be made under Rule 8D(2)(ii) as assessee has sufficient interest free funds amounting to Rs. 65,949.19 Crores which includes share capital reserve and surplus. In respect of the administrative expenses under Rule 8D(2)(iii), the Ld.CIT(A) held that, stock-in-trade and strategic investments are to be excluded. In respect of the balance, the Ld.CIT(A) held that, 5% of the average investment has to be considered. The Ld.CIT(A) also upheld the disallowance in respect of foreign currency loan/tax free bonds, shares other than strategic investments.

9.4. Before this Tribunal, the Ld.AR emphasised that, the assessee is required to maintain Statutory Liquidity Ratio (‘SLR’) as directed by the RBI from time to time. For complying with the statutory requirements of maintaining the SLR, the assessee inter alia invests in securities and bonds out of which a small percentage of the bonds is tax free. The assessee receives interest income on such tax free bonds which is incidental to the fulfilment of SR norms. It is submitted that the primary intention of the assessee is not to earn tax free income from investment in such bonds but to comply with the SLR requirements. Accordingly, the expense incurred in relation to earning of the interest income should not be disallowed under section 14A.

9.5. It is submitted that, the assessee receives interest on approved foreign currency loan, borrowing of funds/accepting deposits and thereafter granting of loans (including foreign currency loans). The Ld.AR submitted that the foreign currency loans form a small part of the total business of the assessee. Moreover, out of the total foreign currency loans, only some of the loans qualify for exemption under section 10(15)(ii). He submitted that the interest income earned on such foreign currency loans is incidental to the carrying on of the banking business and accordingly the expense incurred in relating to earning of interest income cannot be disallowed under section 14A.

9.6. The Ld.AR relied on the decision of Hon’ble Cochin Tribunal in case of State Bank of Travencore reported in [318 ITR (AT) 171] wherein Hon’ble Tribunal held as under:-

“It has been explained before us that tax-free interest derived to the assessee-bank from bonds and such instruments subscribed for maintain the Statutory Liquidity Ratio (SLR) as prescribed by the Reserve Bank of India (RBI). The assessee bank is statutorily bound to maintain the SLR norms directed by the RBI from time to time. The tax free bonds and instruments subscribed by the assessee-bank also qualified pari passu with cash and bullion for the purpose of acknowledging towards SLR. Therefore, it is to be seen that the assessee loans is incidental to the carrying on of the banking business an income as such but for meeting its statutory obligation of maintain the required SLR. Therefore, any expenditure incurred by the assessee for investing in bonds, even for tax-free, are expenses incurred for the purpose of carrying on of its business. The expenses, if at all were expenses, they were incurred not for earning tax-free income but for maintain the required SLR. The tax-free interest is only an incidence on fulfilment of SLR requirements. Therefore we are of the considered view that section 14A has no application in this case.”

9.7. Ld.AR also submitted that assessee received dividend income during the year from its subsidiaries which was by way of strategic investment. It is submitted that these investments in the subsidiaries are made for maintaining the controlling interest by assessee and that the assessee does not trade in these shares of subsidiaries. The Ld.AR thus submitted that, investment in the subsidiaries are, therefore, to be excluded for the purpose of computing disallowance u/s 14A as they are long term investments which were not made out of borrowed funds but out of assessee’s own funds.

9.8. Ld.AR submitted that, in respect of the other items against which the relief was granted by Ld.CIT(A), the view expressed by Ld.CIT(A) was relied on which is as under:-

“10.3 I have considered the appellant’s submission. During the year appellant had disallowed u/s 14A Rs. 2.75 Crores. However, after considering the above amount AU had recomputed the disallowance u/s 14A applying Rule 8D and balance amount disallowed by the AO is Rs. 544.14/- Crores. During the year appellant earned exempt income of Rs. 682.83/- Crores from foreign currency loans, interest on tax free bonds, dividend income from domestic companies and mutual funds. Here appellant’s share capital is Rs.634.88 crs. and Reserves and Surplus is Rs. 65,314.31crs. Total own fund of the appellant is share capital plus Rs. 65,949.19 ers and investment in earning exempt income is Rs. 11973.60 crs. As here appellant’s own funds are more than appellant’s investment, here there should not be any disallowance of interest u/s 14A r.w.r. 8D(2)(ii)/(iii), in view of Bombay High Court decision in the case of CIT v. HDFC Bank 330 ITR 221. With regard to disallowance under Rule 8D(2)(iii) ie. 0.5% of average investment for disallowance under administrative expenses, here AO has directed to compute ) 0.5% of average investment but from this AO has to exclude stock in trade of the appellant in view of the Bombay High Court decision in the case of CIT v. India Advantage Securities Ltd. I.T. Act, 1961 1131 of 2013. Further investment in subsidiaries which are strategic in nature and also fully owned subsidiaries are to be excluded in view of the Mumbai Tribunal’s decision in the case of Gareware Wall Ropes Ltd. v. ACIT (2014) 46 Taxmann.com 18) and J M Financial Ltd. (I.T. Act, 1961 No. 4521/Mum/2012). So in computation of 0.5% of average investment, AO is directed to exclude the stock in trade of the appellant and strategic investments in subsidiaries and fully owned bank subsidiary and after this AO may recalculate the amount. However, the disallowance shall not be below the amount disallowed by the assesse himself in the computation of total income. This ground is partly allowed.”

9.9. On the contrary, the Ld.DR furnished following written submission in respect of the grounds raised by the revenue against the relief granted by Ld.CIT(A) as well as the disallowance upheld by Ld.CIT(A):-

“(i) The assessee had earned exempt income of Rs. 682.83 crores and had made suo moto disallowance from administrative expenditure of Rs. 2.75 crores u/r 8D(iii). It did not make any disallowance u/r 8D(ii) claiming that the investment was made out of own funds and no disallowance should be made out of interest paid. The AO rejected the claim of investment being made out of own funds because the investment was made out of mixed funds and the assessee could not establish that the tax-free investments were out of own funds. The AO also noted that auditors had advised that the disallowance u/s 14A should be computed by applying Rule 8D. The assessee still did not make any disallowance under Rule 8D(ii). The AO applied Rule 8D and computed the disallowance u/s 14A at Rs. 544.14 crores. In appeal the CIT(A) accepted the claim of the assessee that the investment was out of own funds and deleted the disallowance u/s 8D(ii). He also gave relief to the assessee by directing recomputation of disallowance u/r 8D(iii). So almost all disallowance has been deleted by the CIT(A). Revenue is in appeal against the order of the CIT(A) before the Hon’ble ITAT which has been heard by the Hon’ble ITAT. Revenue has also submitted a written note on the issue. Revenue would rely on that note on the issue of disallowance u/s 14A.

(ii) The assessee has also filed appeal against the order of the CIT(A). A perusal of the grounds of appeal would show that they do not arise out of the order of the CIT(A). However, the comments on the grounds of appeal filed by the assessee are given below.

(iii) The first ground is that the CIT(A) should have specifically directed that the stock in trade should not be reckoned in computing disallowance u/s 14A. This claim is directly against the judgment of the Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC). At page 667, para 39 the Supreme Court has observed:

“In those cases where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘Profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of section 10(34) of the Act, the dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of section 14A of the Act, which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring these shares will have to be apportioned.”

In view of this finding of the Hon’ble Supreme Court, the ground of appeal has no merits.

(iv) The next ground is that CIT(A) should not have directed that the disallowance should not be less than the suo moto disallowance made by the assessee. This is an untenable argument. The disallowance has been made by the assessee itself. It is within the specific knowledge of the assessee. Then it does not stand to reason why the disallowance u/s 14A should be less than what the assessee itself has disallowed.

(v) The next ground is that assets not yielding any dividend income during the year should not be considered for the purpose of computing deduction u/s 14A.

This is patently a wrong appreciation of the provision of section 14A. Earning of dividend is a latter event. Nonetheless, irrespective of the outcome of the investment, expenditure has already been incurred in relation to the exempt income. Under the main provision of section 14A that expenditure has to be disallowed.

(a) CBDT Circular No. 5/2014 clarifies that expenses which are relatable to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not.

(b) Clarificatory Explanation has been inserted in Section 14A of the Act explaining that related expenditure for earning exempt income shall be disallowed even though no exempt income has been earned during the financial year.

(c) This has been succinctly brought out in the decision of the Hon’ble ITAT, Delhi in Everplus Securities and Finance v. Deputy Commissioner of Income-tax dated 17th March 2006, [2006] 101 ITD 151 Delhi.

At para 5.35 it has been observed:

“5.35. The learned counsel for the assessee in the alternative submission submitted that the assessee earned dividend of Rs. 20,03,690 on the investment of Rs. 14,00,58,596, therefore, the relatable interest expenditure comes to Rs. 1,44,74,298 and it will thus be appreciated that out of the total interest expenditure of Rs. 3,93,69,566, interest expenditure at the most of Rs. 1,44,74,298 could be relatable to earning dividend income. We do not agree with the alternative contention of the learned counsel of the assessee. It is established clearly that entire borrowed unsecured loans were invested in purchase of equity shares upon which the assessee paid interest of Rs. 3,93,69,566 on the said loans. It is also established that dividend income of Rs. 20,03,690 was earned by the assessee out of investment in shares. Merely because the assessee did not earn dividend out of the investment in certain shares, by itself would not prove that the provisions of 14A are not applicable in this case. It is not a hard and fast rule that on each and every investment in shares, the assessee would earn dividend. The earning of dividend is not certain unless the concerned company declared or distributed the dividend because it depends on various factors. The established facts are that the entire unsecured borrowed loans have been invested in shares for the purpose of earning dividend. Therefore, once the assessee claims exemption on dividend income under section 10(33) of the IT Act, that such dividend income is directly related to the investment made in the entire shares. As such it is not possible to accept the alternative contention of the learned counsel for the assessee that part of the interest may be disallowed (sic-allowed). This contention of the learned counsel of the assessee is also rejected…”

(d) In a similar case, this principle has been upheld by the Supreme Court in CIT West Bengal III v Rajendra Prasad Moody [1978] 115 ITR 519 concerning deduction of expenditure u/s 57(iii) for earning income from other sources when no income was earned.

The Supreme Court allowed the claim with the following observation: P 522

“What s.57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s.57(iii) and that purpose must be making or earning of income. S. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if the income is made or earned. There is, in fact, nothing in the language of the s. 57(iii) to suggest that purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income.”

In view of the above discussion, the ground of appeal of the assessee should be rejected.”

Submission of Ld.DR in revenue appeal:

“ISSUE NO 5 – DISALLOWANCE U/S 14A

The assessee has earned exempt income of Rs.682,82,99,201 (Rs.682.83 crores) but has disallowed only Rs,2.74 crores being .5% of average investment under Rule 8D (2) (iii). The assessee has contended as under:-

• • Investments in tax free investments have been made out of own fund, No expenditure by way of interest has been incurred by the assessee towards earning exempt income. So, no disallowance is called for u/s 8D(ii)
  • Investment in subsidiaries are strategic investments
  • Investments in subsidiaries are made for maintaining controlling interest of the SBI on the subsidiaries.
  • So, no disallowance need to be made on account of interest.
  • The AO applied Rule 8D and made the disallowance of Rs.546.89 crores.

Auditor’s Report

In column 17(i) of Tax Audit Report furnished in Form No.3 CD. on the issue of disallowance u/s 14A, the auditors have categorically observed: (p 49 of assessment order).

“It is not possible to ascertain the correct amount of expenditure incurred by the assessee directly in relation to income which does not form a part of the total income. As such, the expenditure may be disallowed u/s 14A of the Income-tax Act, 1961, as per Rule 8D of Income-tax Rules 1962.”

The Auditor’s observation would show that not only expenditure has been incurred by the assessee in respect of exempt income, but also, it is not possible, even for the auditors, to ascertain the exact amount of expenditure relatable to exempt income. So the auditors have advised application of Rule 8D for determination of the quantum of disallowance u/s 14A

But, astonishingly, the assessee defied the advice of auditors and claimed that no disallowance be made u/r 8d(ii) as the investments have been made from own funds.

Claim of own funds

When the assessee claims that investments are out of own funds, it is for the assessee to prove so by producing cash flow statement. The bank has a common pool of borrowed and own funds. The reserves and surplus shown in the liability side of the balance sheet are represented by various assets on the asset side. Therefore, from a look at the balance sheet and making total of the liability side would not prove that own fund has been used for tax free investment. These funds could have been used for a variety of assets and would not have been available for tax free investment. Also these assets could have been fixed and not liquid assets and not investible. The utilization of funds was within the special knowledge of the assessee. So the burden was on the assessee to establish that own funds were utilized for tax free- investments. This important factual point has been highlighted with a rare decision of the ITAT D Bench Mumbai dated 31.3 2015 in MA Nos 18 to 20/Mum 2025 arising out of ITA Nos. 375/M/2012, ITA No.3465/M/2012 and ITA No.1795/M/2014. The Hon’ble ITAT has highlighted that the availability of own funds should be checked at the time of making the investment instead of the date of balance sheet. It has observed as under:

“Before parting with the issue we may state that we are of the view that the availability of own funds and interest free funds for making investments should be examined as on the date of making investments, even though the learned AR contended that the said examination should be carried out as on the date of Balance sheet. We may explain our view with an example………………… A comparison of both the tables would show that the comparison of own funds and interest free funds vis-a vis the investment should be made as on the date of investment only and not on the date of Balance Sheet., since the comparison made on the date of Balance Sheet would give misleading results.”

This point has been emphasized by the Supreme Court in the celebrated judgment in the case of Maxopp Investment Ltd v CIT [2018] 402 ITR 640 (SC). Dealing with a challenge to the apportionment of interest income and the burden cast on the assessee to prove the source of investment, at page 662, the Supreme Court approvingly quoted a judgment as under:

“In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new shares have been acquired and thus the loan that was taken and for which the interest was payable by the assessee was not for the acquisition of those old shares and therefore, the authorities below erred in law in giving benefit of proportionate deduction.

In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If these shares were purchased from the amount taken in loan even for instance, five or ten years ago, it is for the assessee to show by production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.”

Similar view has been taken at page 669 of the judgment approving the following order of the Tribunal on apportionment in case of mixed funds:

“……….. The funds utilized by the assessee being mixed funds and in view of the provisions of rule 8D(ii) of the Income-tax Rules, the disallowance is confirmed at Rs.10,49,851. We find no merit in the ad hoc disallowance made by the Commissioner of Income-tax (Appeals) at Rs. 5,00,000……….. ”

Down below, the Supreme Court approvingly observed:

“After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No.1423 of 2015 which is accordingly dismissed.”

In our case, the assessee could not satisfy the auditors that the tax-free investments have been made out of own funds. Because of this, the Auditors made observation and advised computation of disallowance by applying Rule 8D.

As approved by the Supreme Court, in situations like this where tax-free investments are made out of mixed funds consisting of own funds and borrowed funds, then the apportionment is made to compute the disallowance u/s 14A. After AY 2008-09, Rule 8D has been introduced to make the apportionment. The Auditors have rightly advised this. The assessee was unable to discharge its burden to prove that such investments were made out of own funds. So the only option was to apply the rule of apportionment through Rule 8D. There is no excuse why the assessee did not make the disallowance under Rule 8D when specifically advised by the auditors. The assessee may be liable for penalty and prosecution.

Conclusion

The exercise is simple. When there is a common pool of funds, the burden is on the assessee to prove by documentary evidence that the tax-free investments were made out of own funds, If the assessee is unable to discharge this burden, proportionate disallowance will be made under Rule 8D by applying the principle of apportionment.

Strategic Investment, Controlling Interest and dominant purpose.

The CIT (A) erroneously applied this test while talking about excluding the investment in the subsidiaries while computing average investment for disallowance under 8D(2)(iii). The concept of dominant purpose, strategic investment and controlling interest has been rejected by the Supreme Court in Maxopp Investment Ltd,(supra). (p. 665) Hence investment in the subsidiaries and group companies should not be excluded. As is elaborately discussed in this note, securities under HTM category do not constitute stock in trade. The order of the CIT(A) should be reversed.”

We have perused the submissions advance by both sides in light of the record placed before us.

9.10. The Ld.CIT(A) after considering various submissions of assessee, restricted the disallowance u/s 14A at Rs. 31.19 Crores. The Ld.DR emphasised that, assessee has earned exempt income from mixed funds used for investment. It is a case of Ld.DR that, the assessee is engaged in the activity of banking and funds available with the banks belongs to the account holders/customers of the bank and that the bank holds such fund in its fiduciary capacity on behalf of the account holders. Placing heavy reliance on the decision of the Hon’ble Supreme Court in case of Maxopp Investment Ltd. vs. CIT reported in 402 ITR 640, the Ld.DR has submitted that the assessee cannot establish with documentary evidences that, the interest free funds were used to earn exempt income. He emphasised that, a proportionate expenditure is therefore justified to be made u/s 14A whereas the Ld.AR is placing reliance on the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) to submit that any investment made by the assessee would be treated as stock-in-trade under the Income-tax Act. He emphasised that Hon’ble supreme Court in case of Maxopp Investment Ltd. (supra) specifically excludes the shares/ investments held in stock in trade from the ambit of Section 14A. He also placed reliance on the following decisions of Co-ordinate Bench of this Tribunal in assessee’s own case as well as other independent assessees: –

• Hon’ble Supreme Court in the case of South India Bank vs. CIT Civil appeal No. 2963 of 2012
• Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. [2016] 383 ITR 529 (Bom.)
• Assessee’s appeal in A.Y. 2006-07 & 2007-08

9.11. The Ld.DR extensively referred to the decision of Hon’ble Supreme Court in case of Maxopp Investment vs CIT reported in 402 ITR 640, the decision of Hon’ble Punjab and Haryana High Court in case of A- one cycles Ltd vs CIT reported in 53 taxmann.com 297, decision of the HDFC Bank Ltd by coordinate bench in miscellaneous application number 18-20/M/2015 in ITA number 375/M/2012 dated 31/3/2015 and also the decision of the Honourable Supreme Court in case of South Indian bank Ltd versus CIT 130 taxmann.com 178 to support his contention.

9.12. It is admitted position that, assessee does not have separate books of account maintained for the purposes of investment as well as loans granted. It is also noted that assessee has common pool of funds which is utilized for the purposes of making long term advances, foreign exchange financing and investments in tax free bonds and shares.

9.13. It has been submitted that assessee has been always carried out investment and granted loans out of own funds and current account deposits which have no cost to the bank. It is also an admitted position that, assessee has sufficient own funds to make investments as per the balance sheet for the year under consideration, the details of which are as under:-

Share Capital	634.88
Reserves and Surplus	65,314.31
Balance in Current Account of Customers (No Interest Paid)	1,22,579.43
Profit for the Year	9,166.05

9.14. Under such circumstances even though assessee is maintaining mixed funds consisting of own funds and customer funds/borrowed funds, it cannot be assumed that, the money used for the purpose of investment came out of borrowed out funds and not out of own funds. Assessee draw its support for this proposition based on the decision of Hon’ble Bombay High Court in case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom).

9.15. Ld.AR provided the working of estimated tax free income as per Section 14A(2) for the year under consideration:-

Particulars	Investment as on 1.04.2009	Investment as on 31.03.2010	Amount (Rs.)
Total Estimated Tax Free Income	—	—	6,82,82,99,201
Expenditure Disallowable u/s 14A
Under Clause I of Rule 8D (2)	—	—	0
Under Clause II of Rule 8D (2) (Average interest Expenditure)	—	—	0

–

Particulars	Investment as on 1.04.2009	Investment as on 31.03.2010	Amount (Rs.)
Under Clause III of Rule 8D (3) @ 0.5% of average investment	—	—	13,78,14,243
			13,78,14,243
Net Total Tax Free Income as per Income Tax Act	—	—	6,69,04,84,957
WORKING
Interest Income Exempt from Tax
Associates & Sub	21,93,36,97,702	33,19,19,99,686	5,52,92,62,288
Total	21,93,36,97,702	33,19,19,99,686	5,52,92,62,288
Average Investment	—	27,56,28,48,694	—

9.16. The assessee placed reliance on the decision of Hon’ble Delhi High Court in case of CIT vs. Tin Box Co. [2003] 260 ITR 637 wherein the Hon’ble High Court dealt with disallowance of part of interest on borrowed capital as the assessee therein had advanced interest free loans to its sister concern.

9.17. The issue of whether 14A is applicable, to a bank like assessee which has sufficient own interest free funds vis-à-vis the investment against which tax free income is earned by the assessee, has been considered by Hon’ble Supreme Court in case of South Indian Bank Ltd. vs. CIT reported in (2021) 130 taxmann.com 178, wherein, it has been held as under:-

“7. At outset it is clarified that none of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee. In other words, the expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investments in securities, bonds and shares which yielded the tax-free income, cannot conveniently be related to a separate account, maintained for the purpose. The situation is same so far as overheads and other administrative expenditure of the assessee.

8. In absence of separate accounts for investment which earned tax-free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax-free income. The assessees in these appeals had earned substantial tax-free income by way of interest from tax-free bonds and dividend income which also is tax-free. It is manifest that substantial expenditure is incurred for earning tax free income. Since actual expenditure figures are not available for making disallowance under section 14A, the Assessing Officer worked out proportionate disallowance by referring to the average cost of deposit for the relevant year. The CIT (A) had concurred with the view taken by the Assessing Officer.

9. The ITAT in Assessee’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 income not includible in total income – (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure…”

⸻

(Kar.) and CIT v. Max India 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 assessees.

20. Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees 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 in Addl. CIT v. Tulip Star Hotels Ltd. [SLP (C) No. 14729 of 2012, dated 7-2-2019]. The counsel therefore, argues that there is no finality on the issue of disallowance, when mixed funds are used. On this aspect, since the issue is pending before a larger Bench, comments from this Bench may not be appropriate. However, at the same time it is necessary to distinguish the facts of present appeals from those in SA Builder Ltd. Tulip Star Hotels Ltd.’s case (supra). In that case, loans were extended to sister concern while here the Assessee-Banks have invested in bonds/securities. The factual scenario is different and distinguishable and therefore the issue pending before the larger Bench should have no bearing at this stage for the present matters.

22. The High Court herein endorsed the proportionate disallowance made by the Assessing Officer under section 14A of the Income-tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assessee. On this aspect we wanted to know about the law which obligates the assessee to maintain separate accounts. However, the learned ASG could not provide a satisfactory answer and instead relied upon Honda Siel Power Products Ltd. v. Dy. CIT [2012] 20 com 33 (Mag.)/340 ITR 64 (SC), to argue that it is the responsibility of the assessee to fully disclose all material facts. The cited judgment, as can be seen, mainly dealt with reopening of assessment in view of escapement of income. The contention of the department for reopening was that the assessee had earned tax-free dividend and had claimed various administrative expenses for earning such dividend income and those (though not allowable) was allowed as expenditure and therefore the income had escaped assessment. On this, suffice would be to observe that the action in Honda Siel Power Products Ltd. (supra), related to reopening of assessment where full disclosure was not made. An assessee definitely has the obligation to provide full material disclosures at the time of filing of Income-tax Return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. In absence of any statutory provision which compels the assessee to maintain separate accounts for different types of funds, the judgment cited by the learned ASG 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 14­A(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 under this Act”. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.”

Adverting to the law as it stood earlier, this Court rejected the theory of dominant purpose suggested by the Punjab & Haryana High Court and accepted the principle of apportionment of expenditure only when the business was divisible, as was propounded by the Delhi High Court.

Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri:

“50. It is to be kept in mind that in those cases where shares are held as “stock-in-trade”, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. v. CIT 2011 SCC OnLine Del 4855 (2012) 347 ITR 272] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits……….. ”

The learned Judge then considered the implication of Rule 8D of the Rules in the context of Section 14-A(2) of the 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 Mfg. 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 Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi’s judgment reads as follow:

“36. ……..  what cannot be denied is that the requirement for attracting the provisions of section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income……………. ”

25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 2-11­2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable to business of banking. This Circular came to be issued in the aftermath of CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 160 Taxman 48/289 ITR 6 (SC), wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr CIT v. State Bank of Patiala [2017] 88 com 667/393 ITR 476 (Punj. & Har.), while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock-in-trade, and all income received on such shares and securities must be considered to be business income. That is why section 14A would not be attracted to such income.

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 those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.

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 to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a taxpayer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.”

9.18. Thus, there cannot be any iota of doubt that, interest cannot be disallowed u/s 14A r.w.r. 8D(2)(ii) in the hands of an assessee bank which has sufficient own funds more than the amount invested in stock securities that has yielded tax free income even if assessee is not maintaining separate books of account or fails to show direct nexus of the funds.

9.19. We, therefore, do not agree with the disallowance restricted by Ld.CIT(A) in respect of interest income on tax free bond/securities  and interest income on loans in foreign currency to be considered for the purposes of disallowance.

9.20. We further note that, in the case of banking companies, investments are held as part of the banking business in compliance with statutory and regulatory requirements and also for maintaining business and operational control in group concerns and subsidiaries. Such investments, particularly those made in subsidiaries, joint ventures or sponsored entities, are in the nature of strategic investments, undertaken in the course of carrying on banking operations and not with the dominant intention of earning exempt income. In this backdrop, the application of section 14A cannot be invoked in a mechanical manner. Hon’ble Supreme Court in Maxopp Investment Ltd. v. CIT(supra) has held that the dominant purpose of investment is not determinative however, it has equally emphasized that the disallowance under section 14A must be based on the existence of a proximate nexus between the expenditure incurred and the earning of exempt income.

9.21. In the case of a banking assessee, where investments are made as part of its core business operations and for strategic and regulatory purposes, such proximate nexus is absent. The incidental earning of exempt income, if any, cannot be regarded as the basis for attributing expenditure under section 14A. Accordingly, we hold that in respect of strategic investments held by the assessee-bank as part of its banking operations, no disallowance under section 14A is  warranted.

9.22. It is noted that in order to cover the dividend income earned by the assessee from domestic companies assessee already offered Rs. 2.75 Crores to tax u/s 14A being proportionate disallowance. Insofar as the revenue’s ground in respect of average investment is concerned we are of the opinion that the principle laid down by the Hon’ble Delhi Special Bench in case of Vireet Investment (P.) Ltd. reported in [2017] 82 taxmann.com 415 (Delhi – Trib.) (SB), is to be followed. Only those investment are to be considered under the third limb of Rule 8D(2) that has yielded exempt income during the year under consideration.

9.23. We, therefore, remit this issue to the file of the Ld. Assessing Officer only to the limited extent of examining the ground raised by the Revenue, namely, to consider only those investments which have actually yielded exempt income during the year under consideration. The Ld. AO shall recompute the disallowance, if any, in accordance with law, after duly granting credit for the suo motu disallowance already offered by the assessee.

9.24. It is further clarified that the disallowance under section 14A shall be subject to the settled legal position that it cannot, in any case, exceed the quantum of exempt income earned by the assessee during the relevant year, as laid down by the Hon’ble Delhi High Court in case of Cheminvest Ltd. v. CIT reported in (2015) 61 taxmann.com 118

Accordingly, ground no.3 raised by assessee stands allowed and ground raised by revenue stands partly allowed for statistical purposes 3 of assesse and 6 & 7 of revenue’s appeal.

10. Ground No.4 raised by the assessee is against the disallowance of depreciation of Rs.4,02,40,203/- on leased assets upheld by the Ld.CIT(A).

10.1. During the year under consideration assessee entered into Lease agreements with various parties, whereby assets were granted on lease to them. The assessee submitted that in certain cases the transactions were in the nature of sale and lease back and assessee is the owner of the assets given on leased back he is the parties. It is submitted that the assessee has claimed depreciation in respect of such assets given on lease.

10.2. The Ld.AO during the assessment proceedings disallowed the claim on the ground that assessee had not assumed any risk of ownership of the leased assets and therefore it was not the owner’s of these assets.

10.3. On appeal before the Ld.CIT(A) assessee furnished various decisions and submissions. The Ld.CIT(A) has observed that this is a recurring issue and referred to the order passed by the First Appellate Authority in assessee’s own case assessment a 2007-08, 2009-10 and order of the court made of this Tribunal for assessment. 1996-97 wherein this issue has been considered against the assessee. The relevant extract by the Ld. CIT(A) is reproduced as under:

“11.3. I have considered the appellant’s submissions. This is a recurring issue and this issue was considered by CIT(A) in appellant’s own case for A.Y. 2007-08, 2009-10 and by ITAT for A.Y. 1996-97 which are reproduced as under:

“It is noted that identical issue had arisen in earlier years. On the issue, in AY 2006-07, the relevant part of the observation finding of my predecessor CIT(A), as contained in order dated 30.03.2013 in appeal no IT-241/09-10, is reproduced hereunder:

“No new leases have been entered during the year. Some of the leases have expired during the year and some of the leases have been renewed on the same terms and conditions. In r/o the leases which have expired the appellant has stated that the same have been transferred to the lessee on residual value. During the course of appeal proceedings, the appellant was required to produce any documentary evidence of the Registered Valuer to show the market value of the underlying assets at the time of expiry of the lease/renewal of the lease. No such documentary evidence of the Registered Valuer to show the market value of the alleged leased assets on the date of expiry of the lease/renewal of the lease could be produced by the appellant during the appellate proceedings. It is thus clear that the lessor had no intention to recover and repossess the assets after the end of the lease period. The assets were never re possessed. The lease was certainly not an operating lease, As held in the case of Asea BrownBover Ltd V/s Industrial Finance Corporation of India (2006) 154 Taxman 512 (Supreme Court) and confirmed in Indus Ind Bank 135 ITD 165 (Special Bench) – in the appellant’s case, the assets were user specific/ risk and rewards incident to ownership were passed on to the lessee. The lessee bore the risk of obsolescence. The lessor was interested only in his rentals not in the asset. The lease was non-cancellable. The lessor entered into the transaction only as a financier. He did not bear the cost of repairs/ maintenance or operations. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.

A perusal of the aforesaid facts and the earlier year’s assessment The lessee is the actual or real owner, the lessor assessee is only nominal or symbolic or the so called perceived owner. The law permits tax planning and not tax avoidance. If within the four corners of law a person arranges its affair in such a way that his overall tax liability is reduced, there cannot be any embargo on such tax planning. If however dubious means are adopted to reduce the incidence of tax by artificially inflating expenses or reducing income, it cannot be described as anything other than tax avoidance. The law permits only tax planning and not tax avoidance. When we consider the reality of the situation in the present case, it becomes abundantly manifest that a simple loan transaction as made to adorn the garb of lease to avoid the rightful tax due to the exchequer. Therefore, genuineness of the so called lease agreement itself is not proved and was a sham agreement to give the colour of finance lease. In the appellant’s case it was not even a case of finance lease. The facts and circumstances of the case show that it was a case of mere advancing of loan by the assessee. As such under the present facts and circumstances of the case, when the genuineness of the lease agreement itself is not proved and was a sham agreement to give the colour of finance lease to mere advancing of loans by the assessee – the ratio laid down and relied upon by the appellant in the case of M/s I CDS Ltd. V/s CIT Mysore Et Another Civil Appeal No 3282 of 2008 (Supreme Court) shall not apply to the facts of the case. was no genuine leasing. Accordingly, no depreciation is admissible to the assessee lessor.”

The issue has been decided against the assessee by CIT(A) in assessment years AY 1999-2000 to 2006-07. Disallowances were confirmed even in the years prior to that. The decision of Hon’ble ITAT for AY 1996-97 in ITA no 5470/ Mum/2002 (order dated 26.07.2013] on the issue is also against the assessee. Following that, the disallowance of Rs +++/- on account of depreciation on leased assets is confirmed. This ground of appeal is therefore dismissed.

11.4 In view of the above decisions of CIT(A) and ITAT, claim of the appellant is disallowed. This ground of appeal is dismissed.”

10.4. On an appeal before this Tribunal the Ld.AR submitted that this issue is decided against assessee by coordinate bench of this Tribunal in assessee for preceding assessment years on identical facts by following orders:

• 11 October 2024 for AY 2006-07 and AY 2007-08 (Refer Para Now. 106 to 111)
• 06 June 2023 for AY 2009-10 (refer para Nos. 14 to 17)
• 22 March 2022 for the AY 2005-06 (refer para No. 19 to 21)
• 30 September 2021 for the AY 2003-04 (refer para No. 7.1 & 7.2) and AY 2004-05 (refer para No. 30)
• 12 July 2021 for the AY 2001-02 and 2002-03 (refer para No. 21, para No. 65 & 66)
• 03 February 2020 for the AY 2008-09 (refer para No. 50 to 53)
• 06 March 2020 for the AY 2000-01 (refer para No. 13 & 14)
• 26 July 2013 for the AY 1996-97 (refer para No. 15 to 28)
• 29 April 2016 for AYs 1997-98 and 1998-99 (refer para No. 6 )
• 31 January 2018 for AY 1999-00 (refer para Nos. 16 to 18)

10.5. Admittedly the issue has been decided against assessee by various decisions as noted herein above for the preceding assessment years. The facts and circumstances of the case shows that assessee was merely advancing loan which was made to adorn in the garb of yeast to avoid the rightful tax due to the exchequer. This Tribunal has recorded a clear finding of fact that the lessee’s are the actual and the real owner and the lessor who is assessee is only a nominal or symbolic and so-called perceived owner.

10.6. Facts being identical with the year under consideration we do not find any reason to deviate from the view taken by this tribunal in the preceding assessment years. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is apparent. Accordingly ground number 4 raised by the assessee stands dismissed.

11. Ground No.5 raised by the assessee is against upholding the disallowance of deduction under section 36(1)(viia) of the act for ₹15,57,54,51,504/-, being the non-rural advances.

11.1. During the year under consideration the assessee claimed provision for bad debts of ₹1557,54,51,504/- under section 36(1)(viia) of the act in the return of income wide Note 18. It is submitted that the assessee claimed any amount as a deduction by way of note to the return of income. It was submitted that the said claim was made in view of the Full Bench decision of Hon’ble Kerala High Court in case of South Indian bank reported 262 ITR 579, wherein Hon’ble Court took a view that if the amount of bad debts actually written of in the books of the assessee represents only debts arising out of non-rural (urban) advances, the elements thereof in the assessment is not effected, controlled, or limited in any way by the proviso to section 36 (i) (vii).

11.2. The assessee submitted that though the claim was made by way of Note No.18 to the return of income it was fully supported by the law as it then stood. Based on the ratio that arose out of the decisions relied hereinabove, the assessee submitted that the deduction contemplated under section 36(1)(viia) was not to be confined in a narrow manner only to rural advances, and that the statutory formula, insofar as it referred to a percentage of the total income in addition to the component linked with aggregate average rural advances, indicated that the provision operated on a broader footing for banking entities.

11.3. The Ld.AO however did not agree with the submissions of the assessee and was of the opinion that, proviso to clause (vii) sub­section 1 of section 36 lay down that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof, shall be limited to an amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. The Ld.AO was also of the opinion that, as per section 36(1)(viia), the deduction available is an amount not exceeding 10% of the aggregate average advances made by the rural banks and an amount not exceeding 5% of the total income.

11.4. On an appeal before the Ld.CIT(A), the disallowance was upheld by following the order of first appellate authority for assessment year 2007-08 and 2008-09 by observing as under:

13.3 I have considered the appellant’s submissions. This is a recurring issue and this issue was considered by CIT(A) in appellant’s own case for A.Y. 200 08 and 2009-10 which are reproduced as under:

“3.11.1 This is also a recurring issue and has been decided by the CIT(A) AY 2002-03 to 2006-07 against the assessee. The decision dated 30.03.2013 of CIT(A) for AY 2006-07 in appeal no IT-241/09­10 is placed record. As discussed therein, the Finance Act, 2013 has insert explanation-2 to Sec 36(1) which reads as under: the removal of doubts it hereby clarified that for the purposes of the proviso to clause (vii) of this s section of clause (v) of sub-section 2 the account referred to therein shall only one account in r/o provision of bad and doubtful debts under clause (viiia) and such account shall relate to all types of advances including advances made by rural branches”. This explanation, thou inserted w.e.f. 01.04.2014, is “clarificatory” in nature. It states that proviso to clause (vii) and clause(v) of sub-section2 shall relate to all types advances including advances made by rural branches. The proviso to clause (vii) of Sec.36(1) therefore shall limit the application to both rural advances and non-rural advances. Therefore, there cannot be double deduction i.e. on provision basis and then again on actual write-off basis separately independently. The disallowance is accordingly confirmed. This ground appeal is dismissed.”

13.4 In view of the above decision of CIT(A), claim of the appellant disallowed. This ground of appeal is dismissed.”

11.5. Before this Tribunal the Ld.AR submitted that this issue stands squarely covered by various decisions of coordinate bench of this Tribunal in assessee’s own case, the details of which are as under:

• “06 June 2023 for the AY 2009-10 (refer Para Nos. 18 to 21)
• 22 March 2022 for the AY 2005-06 (refer the Order) para No. 22 to 25)
• 30 September 2021 for the AY 2003-04 (refer para No. 9.1 to 9.2) and AY 2004-05 (refer para No. 32)
• 03 February 2020 for the AY 2008-09 (refer para No. 54 to 59)
• Order dated 12 July 2021, r.w. MA Order dated 24 June 2022 for the AY 2001-02 (refer para Nos. 30 & 31 and para No. 07 of the MA Order).
• Order dated 12 July 2021 for the 2002-03 (refer para No. 69 to 71)

11.6. The Ld.AR further submitted that, in the recent decisions the issue has been restored back to the Ld.AO in following orders passed by coordinate bench of this Tribunal for assessment year 2006-07 and 2000-01, the details of which are as under:

• 11 October 2024 for the AY 2006-07 and AY 2007-08 (refer para Nos. 112 to 123)
• 06 March 2020 for the AY 2000-01 (refer para No. 18 to 20)

11.7. The Ld.AR submitted that the assessee claimed deduction under section 36(1)(viia) of the Act in respect of provision for bad and doubtful debts by way of Note No. 18 appended to the return of income. He submitted that such claim, though relating to non-rural advances, was raised on the basis of the interpretation placed on section 36(1)(viia) by the Hon’ble Kerala High Court Full Bench decision in the case of South Indian Bank Ltd. (supra), wherein the provision was understood by the assessee as not being confined in an absolute manner only to rural advances. According to the Ld. AR, since one limb of the statutory formula refers to a percentage of total income and the other to aggregate average rural advances, the claim was bona fide and required due examination on merits. He submitted that the assessee had thus specifically disclosed the claim in the return by way of a note and the same could not have been rejected without proper adjudication in accordance with law.

11.8. The Ld.DR on the contrary submitted as under:

“The assessee claimed the deduction of write-off of non rural branch advances vide a note attached to the return. It is not clear how a deduction can be claimed by a note. From the explanation given to the AO which has been reproduced in the assessment order, it is not clear what the assessee wants to say. It is also not clear how the figure of Rs. 1557,54,51,504 has been arrived at. The assessee simply relies on some ITAT order, Cochin Bench. The assessee goes on to say that they have not claimed deduction on account of bad debts. Yet it claims that the deduction should be allowed. It is elementary how can a deduction be allowed when the assessee does not claim in the return. No deduction can be allowed on the basis of a note. It is relevant to note that in several instances, the assessee does not claim a deduction in the return but mentions of the deduction in a note. The AO should outright reject the claim through a note but through a practice, the AO takes cognizance of the note and upon disallowance the assessee goes in appeal. The moot point is that if any claim is not made in the return or revised return but claimed through a note, it should be ignored and no appeal should be entertained. So the first contention of the Revenue is that this ground of appeal should be rejected on this account alone.

On merits also the AO has correctly noted that the decisions relied on by the assessee have been overruled by the Full Bench of the Kerala High Court.

The CIT(A) has also dealt with the merits and dismissed the appeal considering the clarificatory Explanation 2 inserted to section 36(1)(vii)., Hence this ground of appeal should be dismissed.”

We have perused the submissions advanced by both sides in the light of the records placed before us.

11.9. We have considered the submissions of the Ld. DR. The primary objection of the Revenue is that the assessee has sought to claim deduction of write-off of non-rural advances by way of a note appended to the return of income and not through the return or a revised return, and therefore, such claim is not maintainable.

11.10. At the cost of repitation, we are unable to accept the said objection in the absolute terms canvassed by the Revenue. It is now a settled position of law that while the Assessing Officer may be constrained in entertaining a fresh claim otherwise than by way of a revised return in view of the decision of Hon’ble Supreme Court in Goetze (India) Ltd. v. CIT (supra), such restriction does not apply to appellate authorities. The appellate fora are duty-bound to determine the correct tax liability of the assessee and are empowered to entertain a legal claim arising from facts already on record. Therefore, the contention that a claim made by way of a note must be outrightly ignored and no appeal should be entertained is contrary to the settled legal position and is rejected.

11.11. Further, the objection of the Ld.DR regarding lack of clarity in quantification of the claim also cannot be a ground to reject the claim at threshold. At best, it may warrant verification. The material on record indicates that the assessee has placed reliance on judicial precedents and has sought to raise a legal claim regarding allowability of bad debts in respect of non-rural advances. The absence of a claim in the return does not denude the appellate authorities of jurisdiction to examine the issue on merits.

11.1.2. On merits, the Revenue has contended that the decisions relied upon by the assessee stand overruled and that Explanation 2 to section 36(1)(vii) disentitles the claim. In this regard, we note that the allowability of deduction under section 36(1)(vii) is governed by the requirement of actual write-off in the books of account and is subject to the conditions laid down in section 36(2). Further, the interplay between sections 36(1)(vii) and 36(1)(viia), particularly in the case of banking companies, has been explained by the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. v. CIT, wherein it has been held that both provisions operate in distinct fields and deduction under section 36(1)(vii) in respect of non-rural advances is not barred, subject to statutory conditions.

11.13. We have perused the decision of Hon’ble Supreme Court in case of Catholic Syrian Bank Ltd vs CIT reported (2012) 343 ITR 270 which is subsequent decision to the Full bench of Hon’ble Kerala High Court in case of South Indian Bank (supra).

11.14. It is relevant to note that the later decision of the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. v. CIT (supra) explained the scope and interplay of sections 36(1)(vii) and 36(1)(viia) by holding that the two deductions operate in distinct fields and that the statutory restriction is to be understood in the context of avoiding double deduction. Thus, the earlier decision relied upon by the Ld.AR cannot be read divorced from the subsequent exposition of law by the Hon’ble Supreme Court. It further held that the proviso to section 36(1)(vii), which restricts the write-off claim by reference to the credit balance in the provision account, is aimed at preventing double deduction in respect of the class of debts for which the statutory provision under section 36(1)(viia) is made essentially the rural-advance segment and does not automatically wipe out an otherwise valid write-off claim relating to non-rural advances.

11.15. The effect of the aforesaid decision, was to shift the focus away from a broad proposition that banks could generally treat section 36(1)(viia) as extending on an expansive footing to non-rural advances merely because one limb of the formula is linked to a percentage of total income. Hon’ble Supreme Court emphasized the structural distinction between the two clauses: section 36(1)(viia) grants a deduction for a provision, while section 36(1)(vii) deals with actual write-off; and the coexistence of the two provisions must be understood in a way that avoids duplication while preserving the separate field of operation of each. In that sense, later law did not simply repeat the broader understanding sometimes drawn from South Indian Bank (supra). It systematized the scheme more tightly and treated the provision under section 36(1)(viia) in the context of its legislative purpose, especially for scheduled banks and rural advances.

11.16. The rejection of the claim appears to have been influenced substantially by procedural objections rather than a complete factual and legal analysis. In these circumstances, while rejecting the preliminary objection of the Revenue regarding maintainability of the claim, we deem it appropriate, in the interest of justice, to restore the matter to the file of the Ld.AO for limited purpose of verification and quantification of the claim. Thus, in our considered view, the issue requires a fresh examination both on facts and in law, particularly in the light of the later judgment of the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. (supra), which has explained the true scope of sections 36(1)(vii) and 36(1)(viia). We, therefore, set aside the impugned order on this issue and restore the matter to the file of the Ld.AO for necessary verification and adjudicate in accordance with law. The assessee shall be at liberty to place all relevant material in support of its claim, and the Ld.AO shall decide the issue by way of a speaking order after granting adequate opportunity of being heard.

Accordingly, this ground raised by the assessee stands allowed for statistical purposes.

12. Ground No. 6 relates to deduction in respect of provision for employee benefits amounting to Rs. 47,04,00,000/-.

“The Bank has claimed provision of Rs. 43.70 crore towards long-term employee benefits such as leave travel concession, silver jubilee awards, etc. as a deduction in the computation of income as under; the details are as under:

Sr. No.	Employee benefit	Amount (Rs. crore)
1	Leave Travel and Home Travel Concession (Encashment / Availment)	29.14
2	Silver Jubilee Award	2.47
3	Resettlement Allowance	-7.99
4	Sick Leave	12.84
5	Retirement Award	2.18
6	Casual Leave	5.06
	Total	43.70

12.1. The Ld.AO denied the claim by observing as under:

“Further vide note 7 filed with revised return of income, the assessee has claimed a provision of Rs.43.70 Crore on account of leave travel concession, silver jubilee awards etc. the amount is hereby allowed u/s 43B of the Income Tax Act, 1961.”

12.2. On an appeal, the Ld.CIT(A), dismissed the claim of the assessee by observing as under:

“14.3 I have considered the appellant’s submissions. This is a recurring issue and this issue was considered by CIT(A) in appellant’s own case for A.Y. 2008-09 which is reproduced as under:

“On a perusal of the above table, appellant had himself disallowed privilege leave encashment of Rs. 88 crs. LTC, sick leave and casual leave also come under purview of section 43B. Hence this claim is disallowed.”

12.3. The Ld.AR submitted that the assessee created provision towards leave travel concession, sick leave and casual leave based on accrued liability arising out of services rendered by employees during the year. It was submitted that the liability is scientific and ascertained in nature and has been debited to the Profit & Loss Account without any separate adjustment in computation of income. The Ld. AR further submitted that such employee benefit obligations accrue year after year and are integral to banking operations and therefore allowable u/s 37(1).

12.4. The Ld.AR further submitted that the first appellate authority for assessment year 2008-09 and DRP for assessment year 2012-13 allowed the claim of the assessee in respect of Silver Jubilee award, resettlement expenses on superannuation and retirement award. 12.5. The Ld.DR on the contrary submitted that, the assessee has not clearly demonstrated the basis of computation of the provision and the same represents contingent liability as actual expenditure would arise only if employees avail such benefits. It was further submitted that the claim has been made through a Note and lacks clarity and therefore should not be allowed. Ld.DR submitted as under:

“The submissions of the assessee before the AO and the CIT(A) are not clear to find out how the figure of the amount of Rs.47,04,00,000 was arrived at.

However, on close examination of the submissions and the Table in CIT(A)’s order, it is found that the figure of Rs. 47,04,00,000 is a provision and is arrived at as under:

(i) Leave Travel & Home Travel	29.14
(ii) Sick Leave	12.84
(iii) Casual Leave	5.06
Total	Total Rs. 47.04 crore

So the issue is whether these three items of provision can be allowed as deduction. A look at these items would instantly show that they are contingent liabilities. They cannot be encashed by the employee. Even no notional expenditure will be incurred if the employee does not avail LTC/HTC, does not fall sick and does not take casual leave. It is not clear why the assessee has made such a provision in the first place and why it has claimed it as a deduction.

The only point made is that they should not have been disallowed u/s 43 B (f). It is a settled position of law that not mentioning the correct section in the order while making the disallowance does not make a disallowable item allowable. Here, by any consideration, these three provisions are disallowable items. The confusion has been created by the assessee because of lack of clarity in its submissions. It is making a hair-splitting submission that they are not disallowable u/s 43B. But it is not categorically saying that they are allowable.

Moreover, as mentioned in the assessment and appellate orders, the assessee is making this claim by a Note. As discussed earlier, the Note has no relevance. Any claim has to be made only in the return of income. The assessee cannot make a claim through as separate note and set the assessment and appellate machinery in motion on the basis of a note which has no legal status. So the claim may be outright rejected.”

We have perused the submission advanced by both sides in light of records placed before us.

12.6. We have considered the submissions of the Ld. DR and perused the material on record. The objection of the Revenue is that the provisions created towards Leave Travel/Home Travel, Sick Leave and Casual Leave aggregating to ₹47.04 crores are in the nature of contingent liabilities and hence not allowable as deduction.

12.7. At the outset, we are unable to accept the sweeping contention of the Ld. DR that the said liabilities are contingent merely because the actual outflow would arise only upon the happening of certain events such as availing of leave or falling sick. The determinative test for allowability is not whether the liability is to be discharged in future, but whether the liability has accrued during the year with reasonable certainty. In the present case, the liability arises out of services already rendered by the employees and represents an obligation of the employer in respect of earned benefits. The fact that such benefits may be availed or encashed at a later point of time does not render the liability contingent.

12.8. We note that such employee benefit obligations are required to be recognised in accordance with Accounting Standard–15 (Employee Benefits) issued by the Institute of Chartered Accountants of India, which mandates that liabilities towards accumulated leave and similar benefits be determined on actuarial basis. Where such liability is computed on scientific principles and reflects a present obligation arising from past service, the same assumes the character of an ascertained liability.

12.9. The contention of the Ld. DR that no expenditure would be incurred if the employees do not avail the leave is, in our view, misplaced. The obligation of the employer arises the moment the employees earn such leave in accordance with the service conditions, and the liability thus accrues with the rendering of services. Insofar as Leave Travel Concession/Home Travel Concession is concerned, the provision represents the estimated liability towards actual reimbursement of travel costs such as rail or air fare to which the employees become entitled upon availing such leave. The same is not in the nature of leave encashment so as to fall within the ambit of section 43B(f) of the Act.

12.10. Similarly, the provision towards casual leave and sick leave represents the obligation arising on account of services already rendered by the employees, being in the nature of compensation for loss of services during the period of leave that the employees are entitled to avail. Such leave is not encashable and can only be availed in future. Therefore, these provisions do not partake the character of contingent liabilities, but represent present obligations arising from past services, reasonably estimated on scientific basis, and hence constitute allowable business expenditure.

12.11. We further note that the disallowance sought to be justified by reference to section 43B(f) is not sustainable inasmuch as the said provision specifically deals with leave encashment and its applicability would depend upon the nature of liability claimed.

12.12. As regards the argument that the claim has been made by way of a note and therefore deserves to be rejected, we find the same to be untenable in view of the settled legal position that appellate authorities are empowered to consider a legitimate claim arising from facts already on record, even if not specifically made in the return of income. The requirement of making a claim through a revised return is confined to the powers of the Assessing Officer and does not fetter the jurisdiction of appellate authorities.

12.13. In view of the aforesaid discussion, we hold that the liability towards employee benefits, being an accrued and reasonably ascertainable obligation arising from services already rendered, cannot be regarded as contingent in nature.

12.14. Further, similar employee-related expenditure has been allowed by the Coordinate Bench in State Bank of India vs. ACIT in ITA No. 3644 & 4563/Mum/2016 for A.Y. 2008-09, order dated 03/02/2020, has decided the issued by observing as under:

“29. We have gone through the facts and noted that assessee has also made provisions for various long term employee benefits, which were debited to the profit and loss account – the details whereof are given hereunder [see page 33 of the assessment order]:

30. The assessee claimed a deduction for the items mentioned at Sr. Nos. 2,3,4 and 5 above in the computation of total income and offered to tax the write back for items at Sr. Nos. 6 and 7. The assessee filed the details vide note No. 9 to the revised return of income on page 7 of the Paper Book – I. The AO disallowed these provisions on the basis that the same cannot be allowed under section 37(1) of the Act and the provisions of section 43B of the Act are applicable.

31. Out of the above, the CIT(A) allowed items mentioned at Sr. Nos. 4, 5 & 7 aggregating Rs. 3.90 crore and upheld the disallowance of items mentioned at Sr. Nos. 2, 3 & 6 aggregating Rs. 41.50 crore. With respect to item mentioned at Sr. No. 1, a separate ground of appeal viz. ground of appeal No. 3 has been raised in the captioned appeal, whereas ground of appeal No. 2.2 has been raised with respect to items mentioned at Sr. Nos. 2, 3 & 6 aggregating Rs. 41.50 crore.

32. Provision for Leave Travel and Home Travel Concession represents provision towards actual payments to be made by the assessee to its employees for the travel costs incurred by them such as rail fare, air fare, etc. on availment of the leave the employees are entitled to. It is not towards any encashment of leave at the credit of the employee so as to fall within the scope of section 43B(f) of the Act. Further, provision for casual leave and sick leave represents provision for the loss of services of the employees for the period of such leave which the employees of the assessee are entitled to, but not availed during the year. The above category of leave can only be availed by them and cannot be encashed. Therefore, these provisions are also not in lieu of any leave, but in respect of services of the employees utilised in respect of the leave not availed by the employees and which leave will be availed in future.

33. With respect to ground of appeal No. 2.1, the arguments put forth for ground of appeal No. 1 shall apply mutatis mutandis since the AO has disallowed Rs. 471.13 crore arising on account of transitional provisions of AS-15 in respect of other employee benefits on the same basis as for provision for pension. The CIT(A) however, has upheld the aforesaid disallowance by holding that provisions of section 43B(f) of the Act applies.

34. We noted that Section 43B(f) of the Act seeks to allow on cash basis any sum payable by an assessee as an employer in lieu of any leave at the credit of his employee i.e. it covers a provision for leave salary which is only encashable by the employees. Hence, we are of the view that the provision for leave can be discharged in two manners i.e. one by availing the leave and other by way of encashment. In so far as availment of leave is concerned, the salary paid to the employee is known as leave with pay and it does not amounts to salary paid in lieu of leave and, hence, the provisions of section 43B(f) of the Act to that extent do not apply. Leave fare concession/Leave travel concession is in respect of actual payment made to the employees for the travel cost incurred by them on availment of the leave entitled to employees. The same is not towards any leave encashment, and hence it cannot be considered as a sum payable in lieu of any leave to which alone section 43B(f) of the Act applies. As stated above, the provision in respect of unavailed casual leave and sick leave is not encashable and, hence, is not covered by section 43B(f) of the Act. Reliance in this regard is placed by the assessee on the decision of the Bangalore Bench of the Tribunal in the case of Robert Bosch Engineering & Business Solutions Ltd. v/s. DCIT [ITA No. 336/Bang/2014 dated 21.04.2017. Further, the provision made is for an ascertained liability based on an actuarial valuation and is to be allowed as a deduction under section 37(1) of the Act while computing the total income. It is provided towards an ascertained liability, based on actuarial valuation, on a scientific basis and is not contingent in nature. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee allowable and hence, allowed. This issue of assessee’s appeal allowed and that of the revenue is dismissed.”

Accordingly, Ground No. 6 raised by the assessee stands allowed. 13. Ground No.7 relates to provision for leave encashment amounting to Rs. 1,07,54,00,000/-.

The Ld.AR submitted that the liability represents accrued employee entitlement and has been claimed based on judicial precedents including decisions of Hon’ble High Courts. It was submitted that the provision is based on scientific estimation and is not contingent in nature.

13.1. The Ld.DR submitted that no such claim was made in the return and no addition has been made by the Ld.AO and therefore the issue lacks clarity and requires proper substantiation. The Ld.DR emphasised that the claim has not arisen out of the order passed by the Ld.CIT(A). It is submitted that no addition has been made in the assessment order.

We have perused the submission advanced by both sides in light of records placed before u/s.

13.2. It is noted that assesse raised this claim based on the decision of Hon’ble Calcutta High Court in case of Exide Industries Ltd. vs. UOI reported in (2007) 292 ITR 470. The revenue challenged the said decision before Hon’ble Supreme Court wherein the constitutional validity of Section 43B(f) was upheld in [2020] 425 ITR 1.

13.3. In any event, it is noted that the Hon’ble Supreme Court has held that the deduction in respect of such liability is allowable only on actual payment basis. Accordingly, the provision shall be allowed on payment basis in terms of section 43B, i.e., where the payment is made on or before the due date of filing the return of income. We, therefore, direct the Ld.AO to grant deduction of the said amount to the assessee in the year of actual payment in accordance with the ratio laid down by the Hon’ble Supreme Court.

Accordingly, Ground No.7 is partly allowed.

14. Ground No.8 relates to depreciation on securities.

From Financial Year 2004-05 assessee has been valuing investments under two categories being available for sale (AFS) and held for trading (HFT) in its books after netting off classification wise depreciation and appreciation which is computed scrip-wise and providing for net depreciation in each classification by ignoring net appreciation. It was submitted that such kind of valuation of securities was as per the RBI Guidelines in the books of the assessee vide its master circular no. RBI/2007-2008/49, DBOD No. FYD.FIC.3/01/02.00/2007-08 dt. 02/07/2007 on prudential norms for classification, valuation and operation of investment portfolio by financial institutions. Thus, the assessee, valued its investments under AFS and HFT categories scrip-wise on which depreciation if any was provided scrip wise by ignoring appreciation. It is submitted that, it is a consistent method adopted by the assessee even for tax purposes in the earlier years.

14.1. It is submitted that, for the purposes of taxation, valuation was done on the basis of lower of cost or market value computed scrip wise and providing for depreciation in each classification by ignoring appreciation if any. The assessee had thus claimed deduction vide note 24 to the statement of income, however, no adjustment to this effect was made in the statement of taxable income. The assessee also drew supporting the decision of the Hon’ble Supreme Court in the case of Chainrup Sampatram vs. CIT reported in (1953) 24 ITR 49, wherein the Hon’ble Supreme Court observed as under:-

“…As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year’s account in a business that is continuing are not brought into the charge as a matter of practice, though as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realised…

14.2. The assessee also relied on the decision of Hon’ble Supreme Court in the case of Sanjeev Woollen Mills vs. Commissioner of Income Tax (2005) 297 ITR 434 (SC), wherein it was held as under:—

“On no principle can one justify the valuation of closing stock at a market rate higher than the cost. Permissibility of valuation of stock at market value would arise only if the market value of the stock is lower than the cost of the stock.”

14.3. The assessee also relied on the decision of the Hon’ble Supreme Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), wherein it has been held as under:—

“…That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; “

“…In the balance-sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose; to value stock-in-trade either at cost or market price. “

“…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 accounts or of valuation.”

14.4. Assessee also placed reliance on following decisions wherein it was held that a bank was entitled to claim depreciation on securities by following the principle of lower of cost or market price :-

“i. CIT v. Bank of Baroda (Bom) 262 ITR 334;

ii. CIT v. Corporation Bank Ltd (Kar) 174 ITR 616;

iii. Bank of Cochin Ltd v. CIT (Ker) 94 ITR 93; and

iv. Indo- Commercial Bank Ltd. v. CIT (44 ITR 22) (Mad).”

14.5. The Ld.AO rejected the submissions of the assessee by observing as under:

“It was also clarified that there was a write back of Rs. 88.68 crores in respect of investment depreciation which has been offered for tax by bank.

17.3 The submission of the assessee is not accepted on the following grounds:

(a) The assessee maintains securities in three categories. The securities in AFS and HFT categories are held with intention for short term trading which is by its nature readily realisable. As per the method of valuation adopted by the Bank in books of account, which is in accordance with the RBI Guidelines, the investment in AFS & HFT is done after netting off classification-wise depreciation and appreciation, computed scrip-wise. In each category, net depreciation in each classification is provided for, while ignoring the appreciation. This is akin to making bunches of each category of closing stock and finding market value or cost of each bunch. This is perfectly an acceptable way of value in closing stock. If the assessee follows this method consistently in books of account, there is no reason as to why for tax purposes, different valuation should be adopted.

(b) It may again be highlighted that the system of value in securities category-wise is in accordance with RBI Guidelines. The basic foundation of RBI Guidelines is prudence and to ensure that the balance sheets of banks are not unnecessarily bloated. Under these circumstances, assessee’s insistence on offering valuation of closing stock on individual scrip method which will result into lesser valuation of stock for taxation purpose is not acceptable.

(c) In the assessment order for A.Y. 2007-08, the reliance was placed on the decision of Hon’ble ITAT Mumbai ‘G’ Bench in the case of Deutsche Bank A.G. vs. Deputy Commissioner of Income Tax in the Appeal No. 1401 and 1726(BOM) of 1993 dated 17.6.2002 wherein the Hon’ble Tribunal made following observation:

i. The Supreme Court in their decision in the case of British Paints Ltd (1991) 188 ITR 44 held that the method of accounting followed by the assessee can be disturbed if it is found that the income cannot be correctly determined on the basis of the accounting policy being followed by the assessee.

ii. Profit and loss should be treated in a like manner.

iii. As per the provisions of Banking Regulation Act, the holding of securities by a bank is obligatory and that a substantial portion of the assets of the banking company must be held in securities and further that the business of a banking institution will include dealing in such securities. Such transaction by banking institution will be in the nature of business. Therefore securities held by the assessee bank is the commodity in which the assessee bank is actually dealing with. The nature of the security is the same. Hence, there cannot be two different methods for valuing the closing stock of such securities which are of similar nature. As a normal rule, the profit should be ascertained by valuing the stock in trade at the beginning and at the end of the accounting year. It is a settled law that the true trading result of a business for an accounting period cannot be ascertained without taking into account the value of the stock in trade remaining at the end of the period. In the present case, the assessee is valuing part of its stock at cost and the remaining stock at market value. Therefore the true trading result of the business of the assessee for the accounting period under consideration cannot be determined. The Bombay High Court in the case of Harinagar Sugar Mills v. CIT (1994) 207 ITR 901 has held that “the assessee is entitled to value the closing stock at cost or market price whichever is lower but that has to be applied to the entire closing stock. There is no justification in bifurcating the closing stock on the assumption that some of this would have to be surrendered as levy. If the assessee wants to take the sale price for part of the stock, then the entire stock have to be worked out on the basis of sale price”. The above Bombay High Court decision makes it abundantly clear that all the securities held by the bank have to be valued either at cost or at market price whichever is lower. All the securities are of similar nature, hence, to apply two different methods for valuing them, would be against the recognised method of principles.

iv. The method employed by the assessee is as such that the taxable income of the assessee cannot be properly determined. Therefore, the ld. DR rightly pointed that the method of the valuation of closing stock of securities is defective. The assessee has to follow one method of valuation of the entire stock of the securities. In the present case, the assessee has not taken into consideration the anticipated/contingent profit from the contracts to the extent not settled as on the last day of the accounting year, but at the same time, the assessee has taken into account the anticipated/contingent loss for computing the taxable income which gives a distorted figure of the taxable income. The method of the valuation must be fair to the taxpayer and also fair to the revenue. The assessees are allowed to value their unsold stock and work-in-progress either at cost or at market price, whichever is lower. It is, however, a shorthand way of expression; it is not a rule of law. It is a workable method recognized in tax laws. It must be adopted in the commercial sense in consonance with accounting practice.

Anticipated losses and profits for the aforesaid purpose are permissible provided, however, there is a market in the ordinary sense and the anticipation is backed by the consistency of the method followed and the method followed is supported by recognized accounting principles. The Hon’ble Supreme Court in the case of British Paints India Ltd. (supra) has laid down that “it is not only the right but the duty of the AO to consider whether or not the books disclosed a true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. In the present case, the assessee did not disclose the true state of accounts because the assessee has applied two different methods of valuing the closing stock of securities. Part of the securities has been valued at market price which resulted into loss and the remaining part of the securities has been valued at cost. If the same could have also been valued at market price, it could have resulted into a profit.

The assessee has taken into consideration the loss for computing the taxable income, but has completely ignored the profit. Therefore, it is not possible to deduce the correct taxable income. Under these circumstances, the AO was not bound to accept this defective system of accounting, though the same was regularly employed by the assessee, the correctness of which has not been questioned in the past.

Though in the case of present assessee, the method of valuation adopted in books of account is acceptable but on the method of valuation offered for taxation purpose (that too only in the notes not in computation of income) is not acceptable in view of above decision. 17.4 The observations made by the Hon’ble Tribunal in the case of Deutsche Bank A.G. (supra) are very much applicable in the case of the assessee. Though the assessee has not violated the RBI guidelines as well as CBDT circular No. 665 in books of account, for offering income for taxation purposes, the assessee wants to go against above guidelines. The assessee’s claim is therefore denied. It may be mentioned that otherwise also the assessee has not furnished any details for effect of individual scrip-wise method on the computation of income. As the assessee has already included income computed on the basis of valuation of stock in accordance with RBI and CBDT Guidelines, in its statement of income filed with the return of income, no fresh addition is called for in this order. However, the assessee’s claim that such income is not to be included in the Total Income, is rejected.”

14.6. The Ld.CIT(A), while deciding this issue has observed as under:-

“In view of the above, the same basis of valuation for tax purposes as was done in earlier years, should be followed in assessment year 2008-09. 15.3 I have considered the appellant’s submissions. This is a recurring issue and this issue was considered by CIT(A) in appellant’s own case for A.Y. 2007-08 and 2009-10 which are reproduced as under:

“This is also a recurring issue. The CIT(A) has decided the issue against the assessee. The decision dated 30.03.2013 of CIT(A) for AY 2006-07 in appeal no IT- 241/09-10 is placed on record. The relevant part of that order on the issue is reproduced here under:

There are different categories of securities held by banks i.e. HTM (Held to Maturity), AFS (Acquired for Sales) and HFT (Held for Trading). As per the latest Master Circular on Prudential norms for classification, valuation and operations of investment portfolio by banks dated July 12, 2005, (‘the Master Circular’), banks must classify their investments into three categories, viz: “Held To Maturity” (“HTM”), “Available For Sale” (“AFS”) and “Held For Trading” (“HFT”). However, in the balance sheet, the investments shall continue to be classified as per the existing six classifications, viz:

(i) Government Securities;

(ii) Other approved securities;

(iii) Shares;

(iv) Debentures and Bonds;

(v) Subsidiaries, Joint Ventures; and

(vi) Others (Commercial Paper, Mutual Fund Units, etc.)

Under the Master Circular, the banks must decide the category of securities at the time of acquisition and must classify them as under:

HTM: Securities acquired with the intention to hold them up to maturity will be classified as HTM. Securities in this category need not be marked to market and will be carried at acquisition cost unless it is more than the face value in which case the premium should be amortised over the period remaining to maturity. In case there is any diminution, other than temporary, in the value of their investments in subsidiaries/joint ventures which are included under the HTM category the banks should recognise such diminution.

HFT: Securities acquired by the banks with the intention to trade in them by taking advantage of the short term price/ interest movements will be classified under the HFT. The securities classified under this category are principally those which the bank intends to resell within 90 days and from which the bank expects to make a gain by the movement in the interest rates/market rates. Profit/loss on sale of investments in this category is taken to the Profit & Loss Account. The individual scrips under the HFT category are marked to market and net depreciation for each classification (i.e. Government Securities, Shares, Bonds, Mutual Fund units, etc.) shall be provided for but net appreciation is ignored. However, the book value of the individual securities would not undergo any change after marking to market.

AFS: Securities which do not fall within the above categories will be classified as AFS. Hence, this category includes securities which a bank intends to re-sell after 90 days but before their maturity. Profit/loss on sale on investments in this category is taken to the Profit & Loss Account. The securities under the AFS category are valued as per the provisions of the Master Circular applicable to the HFT.

As per the RBI guidelines on valuation of securities and recognition of income and loss, which stipulate that the depreciation / appreciation in individual scrips is required to be aggregated for each category of classification and thereafter only net depreciation is required to be recognized in the P&L A/c and net appreciation, if any is required to be ignored.

Market value of securities held by banks i.e Govt. Securities, Bonds and debentures/ swaps where the govt’ securities have been used as a benchmark, are not exactly as per the prevalent Market Rates but are done as per RBI Circular No. DBOD No. BP.BC.15/21.04.141/2007-08 dated 02.07.2007. FIMMDA [Fixed Income Money Market and Derivatives Association of India] jointly with PDAI has been publishing rates for valuation of these securities based on the RBI guidelines / clarifications for valuation at periodical intervals. When the Market Valuation of the securities held by Banks are based on special norms prescribed by RBI, then the RBI guidelines on valuation of securities and recognition of income and loss (which stipulate that the depreciation / appreciation in individual scrips is required to be aggregated for each category of classification and thereafter only net depreciation is required to be recognized in the P&L A/c and net appreciation, if any is required to be ignored) will have to be followed in Toto and not in parts. The assessee can’t say that valuation of securities shall be done as per RBI guidelines but recognition of income or loss will be done individual scrip wise. The issue before the Hon’ble SC in UCO Bank 240 ITR 355 (Supreme Court) and Southern Technologies Ltd. 320 ITR 577 (Supreme Court) was not exactly the same as discussed aforesaid.

Therefore stand of the AO that depreciation / appreciation in individual scrips shall be aggregated for each category of classification and thereafter only net depreciation shall be allowed in the P&L A/c as per the RBI guidelines on valuation of securities and recognition of income and loss is upheld. Following the decision of my predecessor on the issue, the disallowance of assessee’s claim [by way of note to the computation of income] for deduction of depreciation on securities is confirmed. This ground is therefore dismissed.”

15.4 In view of the above decision of CIT(A), claim of the appellant is disallowed. This ground of appeal is dismissed.”

14.8. On an appeal before this Tribunal, the Ld.AR, assailing the findings of the Ld. CIT(A), submitted that the approach adopted by the Ld. CIT(A) is fundamentally flawed both on facts as well as in law. It was contended that the Ld.CIT(A), while placing reliance on the orders for earlier years, has merely reiterated the reasoning without independently examining the legal position governing the issue, particularly the settled principle that income for tax purposes has to be computed in accordance with the concept of real income and recognized methods of accounting.

14.9. The Ld. AR submitted that the Ld. CIT(A) erred in holding that once RBI guidelines are followed for valuation, the same must be followed in toto even for the purpose of recognition of income and loss. It was argued that RBI guidelines are primarily prudential norms meant for regulatory purposes and cannot override or restrict the computation of taxable income under the Income-tax Act. While such guidelines may be relevant in understanding the nature and method of valuation, the ultimate test for taxability remains the determination of real income in accordance with established legal principles.

14.10. It was further submitted that the method adopted by the assessee, i.e., valuation of investments at the lower of cost or market value on a scrip-wise basis is a well-recognized and judicially approved method for determining taxable income. The Ld. AR emphasized that the assessee has consistently followed this method for tax purposes, irrespective of the presentation in the books as per RBI norms, and such method has been accepted in various judicial precedents.

14.11. The Ld. AR contended that the insistence of the Ld. CIT(A) on aggregation at category level, thereby allowing only net depreciation and ignoring scrip-wise valuation, results in taxation of notional or unrealized gains, which is impermissible in law. It was submitted that unrealized appreciation cannot be brought to tax, and correspondingly, diminution in value, when determined on a reasonable and scientific basis, ought to be allowed. Thus, the scrip-wise application of lower of cost or market value alone reflects the correct income.

14.12. It was further argued that the reliance placed by the Ld. CIT(A) on earlier orders without examining whether such view is legally sustainable in light of binding judicial precedents renders the finding unsustainable. The Ld. AR submitted that consistency cannot be invoked to perpetuate an incorrect view, and where the method adopted by the assessee is in accordance with settled legal principles, the same deserves to be accepted.

14.13. Accordingly, the Ld.AR prayed that the disallowance sustained by the Ld. CIT(A) be deleted and the claim of the assessee be allowed, being in consonance with the principle of taxation of real income and the accepted method of valuation at lower of cost or market value on a scrip-wise basis.

14.14. On the contrary, Ld.DR submitted as under:-

• As mentioned in the assessment order, the assessee speaks of two different methods for valuing AFS and HFT investments. First Method – As per RBI Guidelines, for maintaining accounts and for computing book profit and for filing return
• by first computing depreciation and appreciation scrip-wise, then
• computing and netting off classification-wise depreciation and appreciation,
• and providing for net depreciation in each classification but ignoring the appreciation.
• This is in accordance with RBI guidelines.
• Book profit is determined in this manner
• They are audited.
• Return is filed on this basis Second Method – Claims in para 21 to notes to Revised return, that AFS and HFT investments should be valued in this method for tax purposes
• first computing scrip-wise, then
• providing for depreciation and ignoring the appreciation
• They are apparently not audited.
• There is no quantification.
• No claim has been made in this regard in the return of income. The assessee has observed (vide page 71 of assessment order) “A deduction on this account has been sought by us in Note 24 to the Statement of Income , however no adjustment to this effect has been made in the Statement of Taxable Income.”.
• The AO (page 76 para 17.4), while denying the claim, has observed “,,,It may be mentioned that , otherwise also the assessee has not furnished any details for effect of individual scrip-wise method on the computation of income. As the assessee has already included income computed on the basis of valuation of stock in accordance with RBI and CBDT guidelines, in its statement of income filed with the return of income, no fresh addition is called for in this order. However, the assessee’s claim that such income should not be included in the Total income is rejected. “
• It may be observed that when no addition has been by the AO, the assessee has filed an appeal before the CIT(A). There is no provision for advance ruling by the AO/CIT(A)/ITAT
• The CIT(A) has also noted that the assessee has made the claim through a note and yet has adjudicated and through a reasoned order rejected the ground of appeal.

Revenue’s submission

• The assessee bank has prepared the accounts according to RBI Guidelines which has been audited.
• The return of income has been filed on the basis of these accounts.
• No deduction has been claimed on the account of valuation of AFS and HFT securities in the return of income.
• There is no quantification, no audited statement
• Only a bald hypothetical claim is made in a Note.
• Even if he wanted, the AO could not have given any relief
• No addition has been made.
• And a note has set in motion the entire assessment and appellate machinery.
• The appeal may be rejected with heavy cost.

We have perused the submission advanced by both sides in light of records placed before us.

14.15. It is an admitted position that no specific claim was made by the assessee in the return of income and the claim was raised by way of a letter before the Ld. AO, which came to be rejected. However, this fact alone cannot be a ground to reject the assessee’s claim, since the issue arises from material already on record and concerns the correct computation of taxable income. It is well settled that while the Assessing Officer may be constrained in entertaining a fresh claim otherwise than by way of a revised return, the appellate authorities are vested with wide powers to examine such claims so as to determine the correct tax liability in accordance with law.

14.1.6. We further note that the Ld.CIT(A) merely followed his own orders in the assessee’s case for A.Ys. 2007–08 and 2009–10 to disallow the claim, without independently examining the legal tenability of the issue in the light of settled principles governing valuation of securities and computation of real income. At the same time, it is not in dispute that the consistent method of valuation of investments under the AFS and HFT categories, as adopted by the assessee, stands acknowledged in the impugned order.

14.17. In this background, the rejection of the claim solely on the ground that it was not made in the return of income, coupled with mechanical reliance on earlier orders, cannot be sustained in law. What is required is an examination of the claim on merits in the light of the recognized principle of valuation at lower of cost or market value and the concept of real income, rather than its dismissal on technical considerations.

14.18. At the outset, the contention of the Revenue that the assessee is following two different methods is misplaced. The record clearly shows that the assessee has followed RBI-prescribed prudential norms for the purpose of preparation of books of account, which is mandatory for a banking entity. However, for the purposes of computation of taxable income, the assessee has consistently asserted that valuation ought to be made on the well-recognized principle of lower of cost or market value on a scrip-wise basis. This distinction between book profits and taxable income is well accepted in law, and mere adoption of a particular method for regulatory accounting cannot preclude the assessee from computing income in accordance with the provisions of the Income-tax Act.

14.19. The objection of the Ld. DR that the claim is not audited or quantified is also not sufficient to reject the claim at the threshold. The claim of the assessee arises from the material already on record, i.e., the investment portfolio and its valuation, and is capable of verification. The absence of a specific quantification in the return does not render the claim non est, particularly when the issue has been duly raised before the appellate authorities. It is trite law that appellate authorities are empowered to consider a legitimate claim arising from facts already on record, even if not claimed in the return of income.

14.20. We are also unable to accept the contention of Ld.DR that since no addition has been made by the Ld.AO, the assessee cannot raise the issue in appeal. The right of appeal is not confined only to cases where an addition is made, but extends to situations where a lawful claim of the assessee has not been granted or has been effectively rejected. The denial of the assessee’s claim, as evident from the assessment order, clearly gives rise to a cause of grievance, entitling the assessee to seek adjudication.

14.21. The further objection of Ld.DR that the claim was made by way of a note and therefore deserves to be rejected is untenable in view of the settled legal position that a note forming part of the return or accompanying computation constitutes part of the record and cannot be disregarded. Even otherwise, once the issue is before the appellate authorities, the technical limitation applicable to the Assessing Officer does not operate.

14.22. On merits, the Revenue’s insistence that valuation must strictly follow RBI guidelines even for tax purposes, cannot be accepted. While RBI norms govern the preparation of accounts, the computation of taxable income has to be in accordance with the provisions of the Act and the principle of real income. The method of valuing investments at lower of cost or market value on a scrip-wise basis is a recognized and judicially accepted method, which ensures that only real income is brought to tax by excluding notional gains.

14.23. The objection that the claim is hypothetical is also without merit. The assessee is not seeking any notional deduction but is only seeking to exclude unrealized appreciation and recognize diminution in value in accordance with settled accounting and tax principles. Such a claim, being rooted in the concept of real income, cannot be brushed aside merely on technical grounds.

14.24. We also find it necessary to clarify the basis on which investments under the AFS and HFT categories are valued in the books of account. As per the prudential norms prescribed by the Reserve Bank of India, the assessee is required to compute depreciation and appreciation on a scrip-wise basis and thereafter aggregate the same at the classification level, recognizing only the net depreciation while ignoring net appreciation. This method is mandated for regulatory and financial reporting purposes, keeping in view the need for prudence and stability in the banking system.

14.25. Therefore, while the assessee has rightly followed RBI guidelines for the purpose of books of account, for tax purposes it is entitled to adopt a method which reflects true income, i.e., valuation at lower of cost or market value on a scrip-wise basis. This ensures that only real income is brought to tax and not notional gains arising on aggregation. The distinction between the two methods is thus not contradictory but arises from the difference in objectives of regulatory accounting and computation of taxable income.

14.26. We find that this valuation of securities at lower of cost or market value is a recognized method and consistently followed by banks. The method adopted by the assessee is in accordance with accepted principles and judicial precedents in assessee’s own case as under:-

• for the AY 2006-07 and AY 2007-08 vide Order dated 11 October 2024 (ITA Nos. 3868/Mum/2013 & 4952/Mum/2013) (Para Nos. 124 to 131)
• for the AY 2009-10 vide Order dated 06 June 2023 (ITA Nos. 3645/Mum/2016 and 4564/Mum/2016) (Para Nos. 22 to 25)
• for the AY 2005-06 vide Order dated 22 March 2022 [ITA No. (refer para No. 26 to 29)
• for the AY 2004-05 vide Order dated 30 September 2021 [ITA No.3780/Mum/2012] (refer para Nos. 33.1 to 33.2)
• for the A.Y. 2008-09 vide Order dated 03 February 2020 (ITA No. 3644/Mum/2016) (para Nos. 60 to 68)

14.27. This Tribunal in the assessee’s own case for A.Y. 2008-09 in ITA Nos. 3644 & 4563/Mum/2015, vide order dated 03/02/2020, decided an identical issue on similar facts by observing as under:-

“62. Before us it was argued that from the financial year 2004-05, the assessee has been valuing investments in ‘Available for Sale’ (AFS) and ‘Held for Trading’ (HFT) in books after netting off classification-wise depreciation and appreciation, computed scrip-wise and providing for net depreciation in each classification while ignoring net appreciation, as required by RBI guidelines. However, for tax purposes, investments in AFS and HFT categories are being consistently valued scrip wise and depreciation, if any, was provided scrip wise while ignoring appreciation. Valuation of investments in AFS and HFT categories has consistently been done scrip-wise for tax purposes in earlier years. The same has also been accepted by the AO upto assessment year 2004-05 i.e. prior to the change in the treatment given in books of account. Therefore, for tax purposes valuation is done on the basis of lower of cost or market value computed scrip-wise and providing for depreciation in each of the scrip, while ignoring any appreciation. The assessee has claimed a deduction on this account vide note 24 to the revised return of income.

63. We noted that revenue rejected the claim of the assessee following the decision of the Mumbai Tribunal in the case of Deutsche Bank AG. The CIT(A) upheld the disallowance made by the AO following the earlier years order of CIT(A) for assessment year 2007-08. The Revenue before the Tribunal has emphasised on the applicability of Mumbai Tribunal’s decision in the case of Deutsche Bank AG and that the valuation is as per RBI guidelines. It was contended by the assessee that it is a well settled principle of law that unrealised gains on stock are not to be brought to the tax net. Reliance in this regard is placed on the decision of the Supreme Court in the case of Chainrup Sampatram vs. CIT [1953] 24 ITR 481 (SC), wherein it is held that profit cannot “arise out of the valuation of the closing stock”. The relevant extract of the judgment of the Supreme Court is reproduced below:

“While we agree with the conclusion that no part of the profits of the firm in the accounting year can be said to have accrued or arisen at Bikaner, the reasoning by which the learned Judges arrived at that conclusion seems to us, with all respect, to proceed on a misconception. It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually 25stoppel on the year’s trading.

……  While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year’s account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually 26stoppel.

…… Again, it is a misconception to think that any profit “arises out of the valuation of the closing stock” and the sites of its arising or accrual is where the valuation is made. As already stated, valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the “source” of such profits.”

64. The Supreme Court in the case of A.L.A. Firm vs. CIT (1991) (189 ITR 285) (SC) has observed that closing stock cannot be valued at a market value higher than the cost as that will result in taxation of the notional profits which the assessee has not realised. The relevant extract of the judgment of the Supreme Court is reproduced below:

“The valuation of the closing stock at market value invariably will create a problem. For if the market value is higher than cost, the accounts will reflect notional profits not actually 26stoppel. On the other hand, if the market value is less, the assessee will get the benefit of a notional loss he has not incurred. Nevertheless, as mentioned earlier, the ordinary principles of commercial accounting permit valuation ‘at cost or market price, whichever is the lower’. [para 27]

The proper practice is to value the closing stock at cost. That will eliminate entries relating to the same stock from both sides of the account. To this rule custom recognises only one exemption and that is to value the stock at market value if that is lower. But on no principle can one justify the valuation of the closing stock at a market value higher than cost as that will result in the taxation of notional profits the assessee has not 26stoppel. [para 28]”

65. In Sanjeev Woollen Mills vs. CIT [2005] 279 ITR 434 (SC), the Supreme Court was concerned with a case where the assessee had valued its finished goods at market value. For assessment year 1992-93, the opening stock was valued at Rs.90 per kg (market price as on 1.4.1991 was Rs.98 per kg) and the closing stock at Rs. 130 per kg. For assessment year 1993­94, the opening stock was valued at Rs.130 per kg and there was no closing stock. The assessee returned a loss of Rs.54,420 for the second year. The AO held that the profits were artificially inflated in assessment year 1992­93 to claim higher deduction under section 80HHC of the Act. The Supreme Court held that the profit earned by valuing finished goods at market value is notional imaginary profit which could not be taxed. In view of the above, it is argued that appreciation in value of investments cannot be taken into account. The netting off of appreciation against the depreciation within a classification is therefore contrary to the principle laid down by the Supreme Court in the aforementioned judgements.

66. In context of netting off depreciation against appreciation, the Madras High Court in the case of CIT vs. Chari & Ram [1949] 17 ITR 1 (Madras) has held that there would be no assurance that there would be a market for the entire stock of articles of which the market value is higher and therefore, it would be hazardous to assume that the entire stock could be sold at the prevailing market rate and necessarily bring in a profit. The High Court also held that there is no provision of law or principle according to which the assessee could be compelled to adopt either the average cost for all the items or the market rate for all the items. Further, the Supreme Court in the case of United Commercial Bank vs. CIT [1999] 240 ITR 355 (SC) has held that there is no such question of following two different methods for valuing its stock-in-trade (investments) because bank was required to prepare balance sheet in the prescribed form and it had no option to change it and for the purpose of income-tax, what is taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee. In view of the above, it was claimed that the assessee be allowed a deduction in respect of depreciation on each securities, scrip wise, while ignoring the appreciation.

67. Further, the assessee claimed that it has consistently been following the method of valuation of lower of cost or market price in respect of securities. Accordingly, the method of valuation followed by the assessee is required to be accepted. Reliance in this regard is placed on the following decisions:

• • CIT vs. Bank of Baroda [2003] 262 ITR 334 (Bombay)
  • CIT vs. Corpn. Bank Ltd. [1988] 174 ITR 616 (Karnataka)

Further, the issue was not disputed upto financial year 2003-04 and hence, the AO is not justified in taking a different view.

68. The assessee also relied on the judgment of the Bombay High Court in the case of Union Bank of India dated 08.02.2016 in ITA 1977 of 2013. The assessee in this case for the purpose of its books was netting off the depreciation in its securities against appreciation in other securities while for tax purpose, the assessee has been claiming gross depreciation that is without netting of the appreciation in other securities held as a part of investment. The Bombay High Court has dismissed the appeal of the Revenue and has decided the issue in favour of the assessee. It is argued that the facts of the present case are exactly same as in the aforesaid case of Union Bank of India. This issue stands covered by the judgment of the jurisdictional High Court. The facts of the assessee’s case and the facts in the decision of the Bombay High Court in the case of Harinagar Sugar Mills Ltd. vs. CIT [1994] 207 ITR 901 (Bombay), relied by the AO are different. In the aforesaid decision, the assessee had changed the method of valuation of stock in the year under consideration, whereas in the assessee’s case, there is no change in the method of valuation. Also, in that case, sugar was valued differently by bifurcating the stock into ‘levy sugar’ and ‘free sugar’. The Court’s conclusion is based on the fact that there was no justification for bifurcation of sugar between free and levy sugar. The Mumbai Tribunal in the case of DCIT vs. Majestic Holdings And Finvest (P.) Ltd. [2010] 2 ITR(T) 407 (Mumbai) has noted that the reliance of the Departmental Representative on the judgement of the Bombay High Court in the case of Harinagar Sugar Mills Ltd. is misconceived inasmuch as in that case there was nothing to show the bifurcation of the closing stock of sugar into levy sugar and free sugar and hence, the assessee was obligated to value the entire stock at one value. In the assessee’s case as well, each scrip is different and therefore requires independent valuation. The CIT DR placed reliance on the decision of the Mumbai Tribunal in the case of JCIT vs. Dena Bank [2012] 20 taxmann.com 278 (Mumbai). In the aforementioned case, the security was purchased in year 1 at Rs. 100 and the market price at the end of the year was Rs. 90. Accordingly, the stock was valued at market price of Rs. 90 being lower than the cost. In year 2, the market price went upto Rs. 95. Accordingly, the stock was valued at market price of Rs. 95 being lower than the cost. However, suppose in year 3, the market value rises to Rs. 120, in such a situation, the stock would be valued at cost i.e. Rs. 100, being lower than the market price. The Mumbai Tribunal held that excess of appreciation over the cost price would not be considered for valuing the closing stock. In the present case, we are not concerned with a scenario where in the later year the depreciation provided in earlier years is reduced. Further, the decision of the Mumbai Tribunal in the case of Deutsche Bank A.G vs. DCIT [2003] 86 ITD 431 (Mumbai), relied by the AO is in connection with valuation of foreign exchange forward contracts. In this case the assessee did not account for in the financial statement the anticipated/contingent profits from the contracts to the extent not settled as on the last day of the accounting year whereas any loss on such contracts was provided for by a charge in the profit and loss account on the best estimates. The Department brought to tax the profit on such forward exchange contracts and stated that one method for valuation of the entire stock of securities should be followed. This resulted in a situation of taxing appreciation of stock, which goes against the general and settled principle of non-taxation of notional income, as laid by the Supreme Court in the case of Sanjeev Woollen Mills vs. CIT [2005] 279 ITR 434 (SC) and others discussed supra. Hence, we are of the view that this disallowance of depreciation/ reducing of depreciation on appreciation in the value of securities held as available for sale and held for trading category are allowable. We direct the AO accordingly.”

14.28. The Ld. DR could not show any reason to deviate from the aforesaid view taken in the assessee’s own case. The Ld. DR could not bring out any legal or factual distinctions in support of the contentions raised hereinabove.

14.29. Respectfully following the consistent approach, which is in line with the view taken by the Hon’ble Supreme Court as well as the Hon’ble Bombay High Court and Hon’ble Karnataka High Court, we are of the view that the method of valuation followed by the assessee is required to be accepted. Emphasis is placed on the decision of the Hon’ble Supreme Court in the case of UCO Bank vs. CIT (supra).

Accordingly, this ground raised by the assessee is allowed.

15. Ground No.9: The assessee claimed deduction under section 36(1)(viia) of INR 5227,91,03,071, being the lower of the (i) amount of provision created and (ii) 7.5% of total income, and 10% of aggregate rural advances:

SL.NO.	PARTICULARS	AMOUNT RS.	AMOUNT RS.
1(a)	Total income as per this Return – (A)		1,40,30,59,55,984
	Add:
	i)  Provision for bad and doubtful debts claimed under this Section	52,27,91,03,071
	ii)Chapter VI-A Deductions	13,86,39,993
	Sub-Total (B)	52,41,77,43,065
	Total (A + B)		1,92,72,36,99,049
	7.5% Thereof		14,45,42,77,429
1(b)	10% of Aggregate average advances made by rural Branches
	Aggregate average advances during F.Y.2009-10	4,10,51,27,87,925
	10% Thereof		41,05,12,78,793
	TOTAL		55,50,55,56,221
2	Provision actually made in the accounts by debit to P&L A/c
i	Prov made
	In India O/A Indian Offices	41,12,91,77,854
	In India O/A Foreign Offices	-415
	At Foreign Offices	5,09,40,96,941
ii	Provision on Std Assets (Global Loan portfolio)
	Global Provision in India	47,57,57,328
	At Foreign Offices	32,48,17,492
iii	Provision on Restructured Assets (including for Diminution in the Fair Value)	5,25,52,53,872
			52,27,91,03,071
3	Provision claimed in the return		52,27,91,03,071

15.1. It is submitted that this provision inter alia includes Rs.80,05,74,820/- pertaining to provision made for standard assets, which too has been considered for the purposes of working out the deduction under section 36(1)(viia). He drew our attention to page 89 of paper book, which is reproduced below:-

Particulars	Current Year	Previous Year
Provision for Taxation
– Current Tax	6166.62	5971.52
– Fringe Benefit Tax	0.00	142.00
– Deferred Tax	-1407.75	-1055.10
– Other Tax	1.16	1.00
Provision for Depreciation on Investments	-987.99	707.16
Provision on Non-Performing Assets	4622.33	2474.96
Provision on Restructured Assets	525.53	0.00
Provision for Agricultural Debt Waiver & Relief Scheme	0.00	140.00
Provision on Standard Assets	80.06	234.82
Provision for Other Assets	154.90	177.64
Total	9154.86	8794.00

15.2. It is submitted that this has been done on the basis that provisions for bad and doubtful debts as stipulated in section 36(1)(viia) includes provisions on standard assets. The assessee submitted that it is required to make general provisions for standard assets at following rates for the fund outstanding on global loan portfolio basis:-

• Direct advances to agricultural and SME section at 0.25%
• Residential housing loan beyond Rs.200000 at 1%.
• Advances to specific sectors that is personal loan including credit card receivables, loans and advances qualifying, commercial real estate loans and loans and advances to non-deposits taking systematically important NBFCs at 2%.
• All other advances not included in any of the above categories at 0.40%.

15.2.1. The assessee is also required to make a general provision for loans and advances to asset finance companies (as defined by DNBF, RBI) from time to time which are also categorized as standard asset at 0.40%.

15.2.2. In respect of sub-standard assets, a general provision of 10% on the total outstanding is required to be made without making any allowance for Export Credit Guarantee Corporation (ECGC) cover or the value of securities available.

15.2.3. In respect of doubtful assets, 100% of the extent to which the advances is not covered by realisable value of the security to which the bank has a valid recourse and realisable value is estimated on a realistic basis.

15.2.4. As regards to the secured doubtful debts provision is to be made based on percentage basis at the rates ranging from 20%-100% of such secured portion depending upon the period for which the assets remained doubtful.

The assessee thus submitted that, as per RBI Guidelines, depending upon the categorization of the loans banks are required to make a provision on all its debts ranging from 0.25 to 100%.

15.3. The assessee submitted that such kind of categorization of provisions for standard assets is not specified u/s 36(1)(viia). It is submitted that Section 36(1)(vii) allows actual write off of loan as an expenditure to the assessee was already in existence prior to introduction of Section 36(1)(viia). Section 36(1)(viia) allows the provision made for bad and doubtful debts as business expenditure and was introduced specifically considering banking sector as they are exposed to inherent risk of losses due to write off of debt due to their basic business activity of lending. The assessee relied on CBDT Circular No. 258 dated 14/06/1979, that recognises this fact and clarified that, the provisions of section were introduced in order to allow the commercials banks to make adequate provision for the risk they undertake in relation to rural advances. The assessee thus submitted that, it is eligible to claim deduction u/s 36(1)(viia) in respect of the provision made for standard assets.

15.4. The Ld.AO rejected the assessee’s contention because assessee had made the provision for NPAs in accordance with RBI guidelines was Rs.5147.86 Crores, whereas the provision for standard assets was Rs. 80.06 Crores. Placing emphasis on the note the Ld.AO observed that provisions for NPAs were made on outstanding non­performing advances as sub-standard assets and doubtful assets in respect of the Indian office clearly indicating that no provision is required for standard assets as the standard asset is not included in the category of sub-standard and doubtful assets. The Ld.AO thus came to conclusion that provision made on loss of assets, sub­standard assets and doubtful assets can only be taken as provisions for bad and doubtful debts. He thus negated the argument of the assessee that provision of bad and doubtful debts include provision for standard assets. The Ld.AO was also of the view that provisions for standard asset cannot be held to be in the nature of provisions for bad and doubtful debts within the meaning of Section 36(1)(viia) and the same has to be excluded.

15.5. On an appeal before Ld.CIT(A) it was observed that this being a recurring issue his predecessor had disallowed the claim for A.Y. 2007-08 to 2009-10 by observing as under:-

“16.3 I have considered the appellant’s submissions. This is a recurring issue and this issue was considered by CIT(A) in appellant’s own case for A.Y. 2007-08 which are reproduced as under:

“The issue is considered. The arguments and the plea so raised by the assessee is misplaced. The section 36(1)(viia) is for providing provision in respect of bad and doubtful debts only and not in respect of the standard assets. In view thereof, it is held that the AO has rightly excluded the amount of provision of Rs. 589,18,98,060 onto standard assets out of the claim made by the assessee under section 36(1)(viia). The addition is accordingly confirmed.”

The issue is decided against the bank by the CIT(A) in the A.Yr. 2007-08 to 2009-10.

16.4 In view of the above decision of CIT(A), claim of the appellant is disallowed. This ground of appeal is dismissed.”

15.6. Before this Tribunal, the Ld.AR submitted that, the assessee claimed deduction in respect of provision for bad and doubtful debts including provision for rural advances and standard assets in accordance with statutory limits prescribed under section 36(1)(viia). It was submitted that the claim is computed as per law and supported by Notes to computation.

15.7. Section 36(1)(viia) provides for a deduction to the Bank in respect of ‘any provision made for Bad and Doubtful debts’ subject to certain ceiling. It does not specify the methodology for calculation of provision for Bad and Doubtful debts. The Banks are required to make provision for Bad and Doubtful debts in accordance with the RBI guidelines.

15.8. The amount of provision to be made on a particular category of loan asset is a depiction of the probability of loan asset in a particular loan category becoming bad and requiring to be actually written off by the Bank in subsequent years. All the loan assets are initially classified as ‘Standard’. Latter on depending upon the problems arising, if any, and symptoms of sickness shown including delays in the repayment of the principal and interest, deterioration of security etc. they may be shifted to other categories. A provision made on any loan assets is a provision for ‘Bad and Doubtful Debts’ irrespective of the category in which the loan falls, to provide for the inherent risk of loan losses which the bank may be required to suffer in subsequent years.

15.9. The Ld.AR submitted that section 36(1)(viia) allows deduction to Banks in respect of any Provision made ‘for’ Bad and Doubtful debts. It does not restrict the allowance to provision made ‘on’ Bad and Doubtful debts. It is submitted that the deduction under section 36(1)(viia) is linked to the rural advances made by a bank – the linkage is with all rural advances made by the bank and not merely rural advances classified as NPAs.

15.10. It is further submitted that by the very nature of business of the Bank, there are bound to be some bad or doubtful debts in respect of its entire portfolio of loans and advances – this is an inherent risk of the business of banking. In other words, even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery. It is pertinent to note that the fact that a provision is made for standard assets by itself indicates that a part of the standard assets are doubtful of recovery. Accordingly, the entire provision made by the Bank, including in respect of standard assets, is for bad and doubtful debts as envisaged by section 36(1)(viia).

15.11. On the contrary, the Ld.DR submitted that standard assets cannot be included within bad and doubtful debts as per RBI classification and therefore the claim is excessive and not allowable. It was further submitted that deduction cannot exceed provision actually made. He submitted that the assessee claimed provision for bad and doubtful debts which include standard assets. He submitted that, as discussed by the AO, standard assets cannot be included in bad and doubtful debts. Bad and doubtful debts are NPAs. Standard assets are not NPAs. He further submitted as under:

Para 3(x) of RBI Notification No DNBS.2/CGM(CSMI)-2003, April 2023 defines standard assets as under:

“3. (x) Standard asset means an asset which is not an NPA.”

Para 12 of the said Notification makes the asset classification as under:

(a) Standard assets

(b) Non- Performing assets

The Non-Performing assets are further classified as under:

(a) Sub-standard asset

(b) Doubtful asset

(c) Loss asset

Characteristics of Standard Asset.

As per the RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and provisioning updated as on 2024 and 2025, standard assets are defined and classified as follows:

Definition

A Standard Asset is a performing asset that does not disclose any problem and does not carry more than the normal risk attached to the business.

Crucially, a standard asset must not be a Non-performing Asset (NPA).

Key Characteristics

• • Timely repayment. All interest and principal instalments are paid on or before their respective due dates.
  • Normal Risk Level. The account carries only the standard business risk and shows no sign of credit weakness.
  • Performing Status. It is actively generating income for the bank unlike NPAs which cease to do so

According to another definition of Standard asset:

Standard Assets- These are performing assets where the borrower is servicing the debt on time and there is no risk of default. These asset do not disclose any problem nor carry more than the normal risk attached to the business,

From the above discussion, by no stretch of imagination standard assets can be included in bad and doubtful debts envisaged in section 36(1)(viia).

We have perused the submissions advance by both the sides in light of the record placed before us.

15.12. We have considered the submissions of the Ld. DR and perused the material on record. The core objection of the Revenue is that the provision created by the assessee includes amounts relatable to “standard assets”, which, as per the prudential norms prescribed by the Reserve Bank of India, are not Non-Performing Assets (NPAs), and therefore, according to the Revenue, cannot form part of “bad and doubtful debts” within the meaning of section 36(1)(viia).

15.13. At the outset, we are unable to accept the contention of the Ld.DR that the scope of deduction under section 36(1)(viia) is to be restricted only to NPAs as per RBI classification. The Income-tax Act and the RBI prudential norms operate in distinct fields. While the RBI guidelines govern asset classification and provisioning requirements for regulatory and financial reporting purposes, the allowability of deduction under the Act is governed by the statutory language of section 36(1)(viia), which permits deduction in respect of “any provision for bad and doubtful debts” subject to the prescribed limits. The section does not mandate that such provision must be confined strictly to NPAs alone.

15.14. It is well settled that RBI norms, though relevant for understanding the nature of provisioning, cannot control or restrict the scope of deduction expressly granted under the Act. In the banking business, such provisioning is made on a scientific and actuarial basis, considering the overall risk profile, and cannot be equated with a purely contingent or ad hoc reserve. Further, the expression “bad and doubtful debts” used in section 36(1)(viia) is of wider import and is not synonymous with the RBI concept of NPAs. A debt may be considered doubtful from a provisioning perspective even before it formally slips into the NPA category. Therefore, the legislative intent behind section 36(1)(viia), which is to provide a measure of relief to banking companies in respect of anticipated credit losses, cannot be curtailed by importing restrictive definitions from RBI guidelines.

15.16. It is noted that, identical issues has been considered on similar facts and circumstances in assessee’s own case for A.Y. 2009­10 in ITA No. 3645 & 4564/Mum/2016 vide order dated 06/06/2023 by observing as under:-

“29. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee’s own case in State Bank of India (supra) for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under:-

“71. We have noted the facts that the assessee has claimed that provision for standard assets should be taken into consideration for computing the deduction under section 36(1)(viia) of the Act. The assessee has also filed the details vide note 17 and Annexure 6 to the revised return of income on pages 8, 9 and 20 of Paper Book – 1 filed by assessee. As per the provisions of section 36(1)(viia) of the Act, a bank is eligible to avail deduction in respect of provision made for bad and doubtful debts, of an amount not exceeding 7.5% of total income and 10% of the aggregate average advances made by the rural branches of the bank. The provision is created by the assessee on the basis of RBI Guidelines. The assessee is required to create provision on non-performing assets on the basis of the classification of assets into the four prescribed categories i.e. loss assets, doubtful assets, substandard assets and standard assets [refer para 5.1.2 of the RBI Guidelines].

72. The Revenue before us emphasized that the provision for standard assets is not same as provision for bad and doubtful debts and the same is contingent in nature, since it is created only out of abundant caution. We noted from the provisions that the assessee is required to make a provision on all its debts ranging from 0.25% to 100% depending upon the categorization of loan in terms of the guidelines issued by RBI. The provision on debts made by the assessee is in line with the RBI guidelines and section 36(1)(viia) of the Act does not have a requirement that the provision for debts should be in respect of specified debts only. Section 36(1)(viia) of the Act provides for a deduction to the bank in respect of ‘any provision made for bad and doubtful debts’ subject to certain ceiling. It does not specify the methodology for calculation of provision for bad and doubtful debts. The banks are required to make provision for bad and doubtful debts in accordance with the RBI guidelines. All the loan assets are initially classified as ‘Standard’. Later on depending upon the problems arising, if any, and symptoms of sickness shown including delays in the repayment of the principal and interest, deterioration of security, etc., they may be shifted to other categories. A provision made on any loan assets is a provision for ‘bad and doubtful debts’ irrespective of the category in which the loan falls. This is to provide for the inherent risk of loan losses which the bank may suffer in subsequent years.

73. We noted from the provision of Section 36(1)(viia) of the Act that the same allows a deduction to banks in respect of any provision made ‘for’ bad and doubtful debts. It does not restrict the allowance to provision made ‘on’ bad and doubtful debts. Even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery. The fact that a provision is made for standard assets by itself indicates that a part of the standard assets are doubtful of recovery. Accordingly, the entire provision made by the assessee, including in respect of standard assets, is for bad and doubtful debts as envisaged by section 36(1)(viia) of the Act. Thus, in light of above, the assessee is eligible to claim deduction under section 36(1)(viia) of the Act even in respect of the provision made for standard assets. This issue was considered by the ITAT in assessee’s own case for the assessment year 2006-07 in ITA 3145/Mum/2009 dated 6.09.2016, in an appeal against the revision order of the CIT passed under section 263 of the Act, wherein it is held as under:

“So, however, we may also clarify that we are in principle in agreement that a provision for bad and doubtful debts cannot include that against standard assets i.e. which the bank (assessee) itself regards as good for receipt and, therefore with the decision by the tribunal in Bharat Overseas Bank Ltd. (supra) relied upon by the Revenue. A provision by definition a charge against profits, while that in respect of an asset, considered good, would be more in the nature of an appropriation of profit i.e. a reserve. This is precisely what the Tribunal in Bharat Overseas Bank Ltd. (supra) means when it states of the deduction being not in the nature of a standard allowance. No contrary judgement by the Tribunal or a higher court has even otherwise been brought to our notice. At the same time, the provision as per RBI guidelines – which are contended to have been followed / adopted, provide for minimum provision, and the bank is free to make a higher provision, i.e., than that prescribed by the RBI norms. Provisioning, it may be noted, is a management function, made reflecting its risk assessment qua different assets. If therefore, the assessee-bank is able to satisfy the assessing authority that the provision as made is justified with reference to the debts considered by it as bad and doubtful, we see no reason as to why the same cannot be allowed. The matter is accordingly restored back to the file of the Assessing Officer for fresh determination by issuing definite findings of fact. Even as the primary onus would be on the assessee, the Assessing Officer cannot substitute his own judgment with regard to the risk assessment qua a particular asset and, correspondingly, the provision in its respect. His purview would be to examine the reasonableness of the assessee’s claim in light of the facts and circumstances qua each asset/s in respect of which provision is made. In arriving at our decision, we have taken a holistic view of the matter, placing due emphasis on the words ‘provision’ preceding the words ‘for bad and doubtful debts’ as well as the words ‘not exceeding’ occurring in the section, and which stand highlighted for the purpose. We decide accordingly.”

74. In view of the above discussion, arguments of both the sides, we are of the view that the assessee is eligible for claim of deduction u/s 36(1)(viia) of the Act on standard assets and this issue is covered by Tribunal’s decision in assessee’s own case for AY 2006-07 in ITA no.3145/Mum/2004 vide order dated 06.09.2016. Hence, we allow this issue of assessee’s appeal.”

30. The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedents in assessee’s own case cited supra, we uphold the plea of the assessee and allow the claim of deduction on provisions for standard assets under section 36(1)(viia) of the Act. Accordingly, ground no.7, raised in assessee’s appeal is allowed.

31. The issue arising in ground no.8, raised in assessee’s appeal, is pertaining to the taxation of interest income from Non-Performing Assets (“NPA”).”

15.16. While we have held hereinabove that the mere inclusion of standard assets in the provisioning base does not, by itself, render the claim under section 36(1)(viia) inadmissible, and that the scope of deduction cannot be restricted solely by reference to the prudential classification norms prescribed by the Reserve Bank of India, we find that the aspect of quantification of the eligible deduction requires fresh verification.

15.17. It is noted that the issues arising in the subsequent grounds relating to sections 36(1)(vii) and 36(1)(viia), particularly the reconciliation between provision created, write-offs effected, and the statutory limits prescribed, have already been restored to the file of the Assessing Officer. The correct quantification of deduction under section 36(1)(viia), including the extent to which the provision (comprising standard as well as non-performing assets) falls within the permissible limits, is intrinsically linked with such verification.

15.18. Accordingly, while upholding the principle of allowability, we set aside the impugned order only for the limited purpose of quantification of the deduction under section 36(1)(viia). The Ld.AO shall re-compute the allowable deduction in accordance with law, having regard to the provision actually created, the statutory ceilings, and the findings rendered in respect of related grounds, after affording adequate opportunity of being heard to the assessee. It is clarified that the issue on merits stands decided in favour of the assessee, and the remand is confined strictly to the arithmetical and factual determination of the quantum.

Accordingly, Ground No. 9 raised by assessee stands allowed.

16. Ground No. 10 relates to taxation of interest on non-performing assets amounting to Rs.24,35,22,037/-.

Assesse submitted that, as per RBI guidelines for non-recognition of interest on advances classified as NPA, it did not recognise such interest as bad and doubtful debts and, therefore, it was submitted that, such amount is not taxable u/s.43D of the Act. Assessee submitted that 43D was inserted by Finance Act (No. 2), 1991. The CBDT vide circular no.621 dated 19/12/1991 explained the intention behind insertion of Section 43D as under:-

“22. The Reserve Bank of India has classified advances given by banks into eight categories called Health codes 1 to 8. Sticky advances which are doubtful of realisation fall under Health codes 4 to 8. The banks and financial institutions normally credit interest from such sticky advances to the “Interest Suspense Account” and not to the “Profit and Loss Account”. The issue whether interest on such bad and doubtful advances should be taxed in the year of accrual or of receipt has been a matter of controversy for a long time.

22.1 In view of the fact that interest from bad and doubtful debts in the case of banks and financial institutions are normally very difficult to recover, taxing such income on accrual basis reduces the liquidity of the bank without any actual generation of income.

22.2 With a view to improving the viability of banks, public financial institutions, State financial corporations and State industrial investment corporations, the Income-tax Act has been amended by inserting a new section 43D, so as to provide that interest on sticky loans shall be charged to tax only in the year in which the interest is actually received or is credited to the “Profits and Loss Account”, whichever is earlier. The category of bad and doubtful debt in respect of which the interest will qualify for this exemption, will be prescribed by the Central Board of Direct Taxes, keeping in view the guidelines issued by the Reserve Bank of India in relation to such debts.

22.3. This amendment will take effect from the 1st day of April, 1991 and will accordingly, apply in relation to the assessment year 1991-92 and subsequent years.”

The assessee thus submitted that Rule 6E was inserted by Income-tax (Tenth Amendment) Rules, 1992 to provide that criteria for determining prescribed categories of bad and doubtful debts u/s 43D.

16.1. Thus, it was indicated that the provisions of Section 43D provides that, categories of bad or doubtful debts would be prescribed having regard to the guidelines issued by the RBI in relation to such debts. In other words, the legislature envisaged that, RBI guidelines are the primary criteria for determining whether a debt is bad or doubtful and the categories prescribed under Rule 6E of Income-tax Rules, 1962, will necessarily have to follow the RBI guidelines. Assessee in support of this, relied on following decisions:-

1. VasistthChay Vyapar Ltd v CIT (2010-TIOL-781-HC-DEL-IT) (Del)

2. Indian Express Newspapers (Bombay) P. Ltd. and others v. Union of India and others (159 ITR 856) (Supreme Court)

3. CIT v. New Citizen Bank of India Limited and another (58 ITR 468) (Bom)

4. CIT v. Central Popular Assurance Co. Ltd. (7 ITR 293) (Sind)

5. Bimal Chandra Banerjee v. State of Madhya Pradesh and others (81 ITR 105) (Supreme Court)

6. Kusumben D. Mahadevia v. CWT (124 ITR 799) (Bom)

16.2. The assessee submitted that Rule 6E has to be interpreted in line with Section 43D which cannot override the RBI guidelines. The Ld.AO rejected the contentions of assessee by observing that assessee was maintaining its books of accounts on accrual basis. Therefore, merely because interest on NPA is not accounted based on RBI guidelines, it cannot come out of the ambit of Income-tax. The Ld.AO was of the opinion RBI guidelines do not override Income-tax provisions and Rule 6E cannot be overlooked.

16.3. On an appeal before the Ld.CIT(A) he followed the observations of DRP in assessee’s own case for A.Y. 2012-13 which is reproduced as under:-

“17.3 I have considered the appellant’s submissions. Similar issue was decided against the Bank by the DRP for AY 2012-13. The key observations of the DRP are reproduced as under:

“6.12.3 We have carefully considered this issue. It is noted that section 43D was introduced by Finance Act 1991 with a view to improve the viability of the banks, public financial institutions; and as per that section the interest on sticky loans has to be charged only in the year in which interest is actually received or charged to profit and loss account, whichever is earlier. As per that section the category of bad or doubtful debts (stick loans) were to be prescribed in the IT Rules having regard to the guidelines issued by the RBI in relation to such debts. In 1992, the Rule 6EA was framed wherein the norms for six months was provided. In that year as per the RBI guidelines, the norms for categorizing NPA were more than 6 months. In 1993 the specified period was two years. In 1994 it was 1.5 years; from 1995 till 31.03.2004 it remained 6 months. Thus it is very clear the norms of 6 months provided in Rule 6EA was not equal to the period provided in RBI guidelines from when the rule was framed till 2004. The section 43D provided from the norms by framing the rules in view the RBI guidelines but does not mean that the norms were to be adopted. Admittedly, the norms as per RBI guidelines have been further reduced to ninety days. But the Rule 6EA still continues with the norms of 6 months. Thus the benefit of section 43D would be available to the assessee bank only in those cases in which interest or principal remained unpaid for the period of 6 months or more. The assessee bank had not recognized the interest in respect of the default acceding ninety days and therefore the AO has rightly added the interest on that category of loans were default period was between ninety days to six months. After having considered the facts of the case, the addition made by the AO is confirmed.”

16.4. The Ld.AR submitted that such interest has not been recognized as income in view of RBI prudential norms and uncertainty of recovery and, therefore, does not constitute real income. It was submitted that recognition of such income would be contrary to settled principles of real income. It was further submitted that RBI Guidelines provide for a longer period for treating a debt as bad and doubtful and thus interest was offered to tax on a longer basis than envisaged by Rule 6EA. The Ld.AR relied upon assessment year 1992-93 wherein the RBI guidelines provided for delinquency norm of four quarter i.e., one year vis-à-vis Rule 6EA that provided for a period of six months. He submitted that for A.Y. 1993-94 assessee continued to treat the debts as bad and doubtful b following the RBI guidelines and did not claim a benefit in that year by following Rule 6EA as it was not in accordance with RBI guidelines r.w.s.43D. He submitted that the assessee consistently has been following the practice of recognising income on bad and doubtful debts in accordance with Section 43D read with RBI guidelines which is line with the legislative intent. He also referred to clause (e) of Rule 6EA and submitted that, the policy adopted by assessee is in line with this provision.

16.5. The Ld.DR on the contrary submitted that the claim has been made through a Note and not through return of income and therefore cannot be entertained in view of decision of Hon’ble Supreme Court in Goetze (India) Ltd.(supra), and further that the issue has not been examined by the Ld.CIT(A)/AO. The Ld.DR further submitted that, this issue of recognition of income and consequent tax treatment to be given to interest accruing on sticky advances has been elaborately discussed by the Ld.AO and the Ld.CIT(A). The dispute arises whether the Rule 6EA r.w.s 43D providing a period of delinquency of 180 days or the RBI Guidelines providing the period of delinquency of 90 days should be followed. He submitted that the assessee followed RBI Guidelines and Ld.AO followed Rule 6EA and made addition in the hands of the assessee. As discussed earlier, as held by Hon’ble Supreme Court in the case of Southern Technologies Ltd. v. JCIT reported in 320 ITR 577, Income-tax Act and Rules will prevail and hence there is no merit in the ground of the assessee.

We have perused the submission advanced by both sides in light of records placed before us.

16.6. We have considered the submissions of the Ld. DR and perused the material on record. The first objection of the Revenue is that the claim has been made by the assessee through a note and not by way of a revised return, and therefore, the same ought not to be entertained. In this regard, we find that it is now well settled that while the Assessing Officer may be constrained by the ratio of Goetze (India) Ltd. v. CIT, the appellate authorities are not so fettered and are empowered to entertain a legitimate claim arising from facts already on record. In the present case, the issue pertains to the correct recognition of income from sticky advances based on the method consistently followed by the assessee and duly disclosed in the accounts. Therefore, the objection of the Ld. DR on this count is rejected.

16.7. On merits, the contention of the Revenue is that the assessee has followed the prudential norms prescribed by the Reserve Bank of India, which recognize income on NPAs only upon actual realization (with a 90-day delinquency norm), whereas the Assessing Officer has applied Rule 6EA read with section 43D, which contemplates a 180-day period, and that the provisions of the Income-tax Act must prevail in view of the decision of the Hon’ble Supreme Court in Southern Technologies Ltd. v. JCIT.

16.8. We are unable to accept the sweeping proposition canvassed by the Revenue. The decision in Southern Technologies Ltd. itself recognizes that while RBI norms do not override the provisions of the Income-tax Act, they are relevant in determining the real income of the assessee, particularly in the context of income recognition. In the case of banking entities, section 43D is a beneficial provision intended to align taxability of interest on sticky advances with commercial reality by deferring taxation until realization. The provision cannot be interpreted in a manner that compels taxation of hypothetical income which, in terms of binding regulatory norms, has not accrued in real terms.

16.9. In the present case, the assessee followed RBI-mandated prudential norms, under which income on NPAs is not recognized unless actually realized. The difference between the 90-day norm (RBI) and 180-day norm (Rule 6EA) is thus only in the threshold of classification, and not in the fundamental principle of taxing real income. Where, on facts, the asset has already become non­performing under RBI norms and income is not recognized in the books, bringing such notional income to tax would run contrary to the settled principle that only real income can be taxed.

16.10. Similar issue has been decided in favour of assessee in State Bank of India v/s DCIT, in ITAs no. 3644 and 4563/Mum./2016, for the assessment year 2008-09, vide order dated 03/02/2020 by observing as under:-

“34. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee’s own case in State Bank of India (supra) for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under:-

“78. We noted that the assessee does not offer to tax, the interest income on NPAs, classified in terms of RBI guidelines, on accrual basis. The same is offered to tax in the year in which the same is received and credited to the profit and loss account in terms of the RBI guidelines. Presently, the period to recognise an advance as a NPA as per RBI guidelines is where interest and/ or instalment of principal remained overdue for 90 days whereas as per Rule 6EA, the same is 180 days. The AO has brought to tax the notional interest on sticky advances having irregularities for the period between 90 days to 180 days on accrual basis, relying on section 43D of the Act and rule 6EA of the Rules. The CIT(A) has upheld the disallowance made by the Assessing Officer following the directions of the DRP for the assessment year 2012-13.

79. The Revenue before the Tribunal has emphasized on the applicability of the criteria prescribed as per rule 6EA and that the interest on NPAs cannot fall under the exception provided in clause (e) of rule 6EA. But, the assessee argued that the action of the lower authorities cannot be sustained due to the following three reasons viz.,

a. section 43D of the Act would not apply in cases where interest is neither received nor credited to the profit and loss account;

b. RBI guidelines are the primary criteria for determining whether a debt is bad or doubtful and the rule should be framed having regard to the guidelines;

c. without prejudice, a deduction should be allowed of such interest as bad debts.

80. In relation to the above, it was argued that the provisions of section 43D of the Act provide that the categories of bad or doubtful debts would be prescribed having regard to the guidelines issued by the RBI in relation to such debts. In other words, the Legislature envisages that the RBI guidelines are the primary criteria for determining whether a debt is bad or doubtful and the categories prescribed in rule 6EA necessarily have to follow the RBI guidelines. Accordingly, rule 6EA operates in a very narrow scope and has to be read in conjunction with RBI guidelines.

81. We have gone through the case law in American Express Bank Ltd. vs. Addl. CIT [2012] 25 taxmann.com 572 (Mumbai), wherein the Mumbai Tribunal was considering a case where the loans on which interest/principal remained unpaid for 90 days were classified as non-accrual loans. The unpaid interest in respect of such loans was reversed to an account called Reserve for Doubtful Interest (RFDI) account. All subsequent interest accruals of such loans were credited to RFDI account and not to the profit and loss account. The assessee offered to tax the net amount credited to the RFDI account i.e. the interest accruals in the RFDI account net of recoveries. However, it was argued that such tax treatment leads to offering interest on non-accrual loans to tax on accrual basis, even if the same is not credited to the profit and loss account. The Mumbai Tribunal held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. The aforesaid decision has been affirmed by the Bombay High Court in the case of DIT vs. American Express Bank Ltd [2015] 235 Taxman 85 (Bombay). In the present case the assessee argued that there is no credit entry in the books of the account in respect of the interest on such NPAs and, accordingly, the addition made cannot be sustained. Hence according to assessee the issue stood covered by the first proposition in terms of the Bombay High Court in assessee’s favour and hence, no further submissions were made on other two propositions.

82. We noted that this issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of American Express Bank Ltd (supra), wherein it is held that there is no credit entry in the books of the account in respect of the interest on such NPAs, no addition can be made. Further, even the Mumbai Tribunal in the case of American Express Bank Ltd (supra) has considered this issue and held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. Hence, we delete the addition of interest income and allow this issue of assessee’s appeal.”

35. The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedents in assessee’s own case cited supra, we uphold the plea of the assessee, and the addition made by the AO on this issue is hereby deleted. Thus, ground no.8, raised in assessee’s appeal is allowed.”

16.11. The Ld.DR could not demonstrate any cogent reason to depart from the consistent view taken by the coordinate Bench of this Tribunal in the assessee’s own case, nor could he point out any distinguishing feature, either on facts or in law, to support the contentions raised hereinabove.

16.12. Accordingly, we hold that the action of Ld.AO in taxing interest on sticky advances merely by applying Rule 6EA, without appreciating the binding nature of RBI norms on income recognition and the concept of real income, is not sustainable. The addition made on this account is therefore directed to be deleted.

Accordingly, Ground No.10 raised by assessee stands allowed.

17. Ground No.11 relates to taxation of income on non­performing investments amounting to Rs.3,42,54,400/-.

Interest on performing investments is booked on accrual basis and is recognized as income at the time it becomes due. In case the interest is not received within 30 days from the date on which it becomes due the same is treated as overdue interest. Overdue interest on investments which become Non-performing as per the RBI guidelines in this regard is not recognized. Therefore, while the overdue interest on performing investments is recognized on accrual basis in the books and is offered to tax, the same is recognized on realization basis in respect of Non-performing investments as there is no certainty regarding receipt of such income.

17.1. The Ld.AO rejected the assessee’s contention by observing that books of account are maintained on accrual basis and merely because NPI is not accounted on the basis of RBI guidelines it cannot fall outside the ambit of Income-tax. It was also held that, provisions of RBI guidelines are prudent and conservative and mechanically treats investments as NPI even if there is a reasonable possibility of receiving the interest. The Ld.AO thus rejected the argument of assessee by holding that RBI guidelines do not override Income-tax provisions.

17.2. On an appeal before the Ld.CIT(A) he followed the observations of DRP in assessee’s own case for A.Y. 2012-13 which is reproduced as under:-

“18.3 I have considered the appellant’s submissions. Similar issue was decided against the Bank by the DRP for AY 2012-13. The observations of the DRP are reproduced as under:

“For the reasons as stated by the DRP in para 6.12.3, we confirm the action of the AO”.

The said para 6.12.3 is as follows:

“We have carefully considered this issue. It is noted that section 43D was introduced by Finance Act 1991 with a view to improve the viability of the banks, public financial institutions; and as per that section the interest on sticky loans has to be charged only in the year in which interest is actually received or charged to profit and loss account, whichever is earlier. As per that section the category of bad or doubtful debts (stick loans) were to be prescribed in the IT Rules having regard to the guidelines issued by the RBI in relation to such debts. In 1992, the Rule 6EA was framed wherein the norms for six months was provided. In that year as per the RBI guidelines, the norms for categorizing NPA were more than 6 months. In 1993 the specified period was two years. In 1994 it was 1.5 years; from 1995 till 31.03.2004 it remained 6 months. Thus it is very clear the norms of 6 months provided in Rule 6EA was not equal to the period provided in RBI guidelines from when the rule was framed till 2004. The section 43D provided from the norms by framing the rules in view the RBI guidelines but does not mean that the norms were to be adopted.

Admittedly, the norms as per RBI guidelines have been further reduced to ninety days. But the Rule 6EA still continues with the norms of 6 months. Thus the benefit of section 43D would be available to the assessee bank only in those cases in which interest or principal remained unpaid for the period of 6 months or more. The assessee bank had not recognized the interest in respect of the default acceding ninety days and therefore the AO has rightly added the interest on that category of loans were default period was between ninety days to six months. After having considered the facts of the case, the addition made by the AO is confirmed.”

18.4 In view of the above decision of DRP, claim of the appellant is disallowed. This ground of appeal is dismissed.”

17.3. On an appeal before this Tribunal, the Ld.AR submitted that the assessee, being a banking company, follows RBI prudential norms for recognition of income and classification of assets. It was submitted that income on non-performing investments has not been recognized as income in view of uncertainty of realization and such treatment is consistent with real income theory. The Ld.AR further submitted that the method of accounting is consistently followed and accepted in earlier years and any deviation would result in taxation of hypothetical income.

17.4. The Ld.DR on the contrary, reiterated his submission advanced for Ground No.10 regarding NPA.

We have perused submissions advanced by both sides in light of records placed before us.

17.5. We have considered the rival submissions and perused the material on record. The issue relates to the taxability of interest on investments which have become non-performing in terms of the prudential norms prescribed by the Reserve Bank of India. The Assessing Officer has proceeded on the footing that since the assessee follows mercantile system of accounting, interest must be taxed on accrual basis notwithstanding its non-recognition in the books.

17.6. At the outset, we find that the reasoning adopted by the Ld.AO, as well as the submissions advanced by the Ld.DR, are substantially similar to those considered by us while adjudicating the issue relating to interest on sticky advances (NPAs). The underlying principle governing both situations is identical, namely, whether income can be said to have accrued in real terms when its recovery itself is uncertain.

17.7. It is an undisputed position that, in respect of performing investments, the assessee recognizes interest on accrual basis and offers the same to tax. However, once such investments become non­performing in accordance with RBI norms, the recognition of interest is deferred until actual realization, owing to uncertainty of recovery. This treatment is not a matter of mere accounting choice but is mandated by binding regulatory norms governing banking operations.

17.8. The contention of the Revenue that RBI guidelines are merely prudential and cannot override the provisions of the Income-tax Act is, no doubt, correct as a general proposition. However, it is equally well settled that such guidelines are highly relevant in determining whether income has, in fact, accrued. The concept of accrual under the Act is not divorced from commercial reality. Where the recovery of income is highly uncertain and recognition thereof is prohibited under binding regulatory norms, such income cannot be brought to tax on a hypothetical basis.

17.9. In the present case, once the investment is classified as non­performing, the uncertainty of realization is established. Taxing such interest on accrual basis, despite its non-recognition in the books in accordance with RBI norms, would amount to taxing notional income, which is impermissible in law. We find that the issue of taxation of interest on NPAs is governed by settled law, and such interest cannot be said to have accrued where its recovery is uncertain. The doctrine of real income squarely applies, and accordingly, only income that has truly accrued in a real sense can be brought to tax.

17.10. Similar issue has been decided in favour of assessee in State Bank of India v/s DCIT, in ITAs no. 3644 and 4563/Mum./2016, for the assessment year 2008-09, vide order dated 03/02/2020 by observing as under:-

39. Having considered the submissions of both sides and perused the material available on record, we find that the coordinate bench of the Tribunal in assessee’s own case in State Bank of India (supra) for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under:-

“85. We noted that the RBI guidelines require interest on non performing securities also to be reckoned as income on realisation basis and the same has regularly been recognised in the books of account accordingly. The case law cited by the learned Counsel for the assessee before us in the case of CIT vs. Vasisth Chay Vyapar Ltd. [2011] 330 ITR 440 (Delhi), the Delhi High Court had to consider a case where the assessee, being a NBFC, treated the inter corporate deposits as an NPA, in terms of the directions of the RBI and, hence, did not recognise interest income in respect of the same. The Delhi High Court has recognised the real income theory and this was approved by the Supreme Court in the case of Southern Technologies and held that provisions of other enactment which contain a non obstante clause, would override the provisions of the Act. In view of the above, the Delhi High Court held that the interest on inter corporate deposits recognised as NPA, in terms of the directions of RBI was not taxable. The aforesaid decision of Hon’ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra) has been affirmed by Hon’ble Supreme Court in the case of CIT vs. Vasisth Chay Vyapar Ltd. [2019] 410 ITR 244 (SC).

86. In view of the above decision of Hon’ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. (supra), which was affirmed by Hon’ble Supreme Court, the facts and circumstances are exactly identical in the present case before us and hence, respectfully following the same, we delete the addition of interest income from non-performing investments made by the AO. This issue of assessee’s appeal is allowed.”

40. The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedents in assessee’s own case cited supra, we uphold the plea of the assessee and delete the addition of interest income from NPIs. Accordingly, ground no.9, raised in assessee’s appeal is allowed.”

17.11. The Ld.DR could not demonstrate any cogent reason to depart from the consistent view taken by the coordinate Bench of this Tribunal in the assessee’s own case, nor could he point out any distinguishing feature, either on facts or in law, to support the contentions raised hereinabove.

Accordingly, Ground No. 11 raised by assessee stands allowed.

18. Ground No.12 relates to contribution to Retired Employees Medical Benefit Scheme amounting to Rs.92,00,00,000/-.

During the year under consideration assessee provided sum of Rs.93 Crores towards contribution to retired employees benefits scheme. The said sum was also paid by the bank to the fund during the year under consideration and accordingly assessee claimed deduction of Rs. 92,00,00,000/- in its return of income. During the assessment proceedings assessee relied o the decision of Hon’ble Cochin Tribunal in case of State Bank of Travancore reported in 306 ITR (AT) 128 wherein assessee therein had claimed similar deduction in respect of sums contributed to its retired employees medical benefit scheme which was disallowed by Ld.AO under u/s 40A(9) of the Act. The Tribunal while considering this issue held that, a bonafide contribution made by assessee as an employer to the fund setup as a part of the settlement between assessee and its executive employees will not fall within the ambit of 40A(9) of the Act.

18.1. The Ld.AO rejected the submissions of assessee by holding that there does not exist employee-employer relationship once a person retires and, therefore, the assessee was not under any statutory obligation to make such contribution towards the retired employee medical scheme.

18.2. On an appeal before Ld.CIT(A), followed his predecessor’s observation in the DRP directions for AY 2011-12 by observing as under:-

“We have carefully considered the matter. This is a contribution to retired employees medical benefit scheme. We concur with the decision of the AO that no deduction is allowable in respect of any sum paid to any sum paid other than which is set up under section 36(1)(iv) or 36(1)(v) or any other law for the time being in force. The disallowance is confirmed. Further, the without prejudice ground that a sum of 17.40 crores relating to earlier years may be allowed on account of disallowance in earlier years cannot be acceded to for the reason that the said contribution are not allowable as per existing provisions of law”

18.3. On an appeal before this Tribunal, the Ld.AR submitted that, during the year the sum was actually paid to the said fund and thereafter claimed deduction. The Ld. AR submitted that the contribution has been made towards a scheme formulated for the benefit of employees, including retired employees, and represents expenditure incurred wholly and exclusively for the purposes of business. It was submitted that such schemes are part of long-term employee welfare policies of the bank and ensure industrial harmony and efficiency.

18.4. The Ld. DR on the contrary submitted that, the payment is hit by provisions of section 40A(9) as it is not a statutory fund and further that retired employees do not fall within the ambit of employer-employee relationship and therefore such expenditure cannot be allowed.

We have perused the submissions advance by both sides in light of the records placed before this Tribunal.

18.5. We have considered the rival submissions and perused the material on record. The issue for consideration is whether the contribution made by the assessee to a fund for the benefit of retired employees is allowable as deduction or is hit by the provisions of section 40A(9) of the Act. It is an undisputed fact that the assessee actually paid the sum during the year under consideration to a fund constituted for the benefit of employees, including retired employees, pursuant to a scheme formulated as part of its employee welfare policy. The claim is thus not a mere provision but represents actual outgo.

18.6. The objection of the Revenue is two-fold: firstly, that such contribution is not to a statutory or approved fund and is therefore hit by section 40A(9); and secondly, that upon retirement, the employer–employee relationship ceases and hence the expenditure cannot be said to be incurred for the purposes of business.

18.7. We are unable to accept the above contentions of the Ld. DR in their entirety. Section 40A(9) seeks to disallow contributions made to funds, trusts, etc., unless the same fall within the specified exceptions or are mandated by law. However, judicial precedents have consistently held that where the contribution is made bona fide, pursuant to a binding settlement or scheme, and is intrinsically linked with business considerations such as employee welfare, industrial harmony, and smooth functioning of the organisation, the same cannot be disallowed merely on technical grounds.

18.8. In the present case, the contribution is part of a structured employee welfare scheme covering both serving and retired employees. The benefit to retired employees is not in isolation but forms part of the overall employment framework, fostering confidence among existing employees and contributing to industrial peace and efficiency. Such expenditure, therefore, has a clear nexus with the business of the assessee.

18.9. The contention that the employer–employee relationship ceases upon retirement, and therefore no deduction can be allowed, is too narrow a view. Business expediency under section 37(1) is not confined to immediate contractual obligations but extends to measures taken by a prudent employer to maintain morale, goodwill, and continuity in workforce relations. Expenditure incurred in furtherance of such objectives cannot be said to be unrelated to business. We also find merit in the reliance placed by the assessee on the decision of the Tribunal in the case of State Bank of Travancore (supra), wherein on similar facts, such contribution was held to be allowable and not hit by section 40A(9).

18.10. It is noted that, this issue was considered by Co-ordinate Bench of this Tribunal in assessee’s own case in ITA No. 3645 & 4564/Mum/2016 vide order dt. 06/06/2023 for AY 2009-10 by observing as under:-

“44. Having heard the submissions of both the sides and perused the material on record, we find that co-ordinate bench of the Tribunal in assessee’s own case for assessment years 1997-98 and 1998-99 in ITA No. 3823-3824/Mum/2005, vide order dated 29/04/2016, while deciding similar issue observed as under:-

“We have heard the rival submissions and perused the materials before us. We find that in the case of State Bank of Travancore(supra), the AO had disallowed the claim of the Bank in respect of the contribution to medical benefit scheme, amounting to RS.50.00 lakhs. The AO. Was of the opinion that the provision of section 40A(9) of the Act were applicable and the assessee was not entitled to claim the expenditure as an allowable item Matter travelled upto the Tribunal and it deliberated upon the provisions of Section 40A(9)of the Act at length, The Tribunal held that the basic intention of the legislature for insertion of sub section 9 of section 40A was to discourage the practice of creation of camouflage Trust funds, ostensibly for the welfare of the employees and transferring huge funds to such Trusts by way of contribution, that in those cases the investment of the trust corpus was also left to the complete discretion of the Trustees, that to avoid hardship in the case where Trust/Funds had been set up wholly and exclusively for the welfare of the employees prior to 1.4.1984 sub section (10) was also inserted to section 40A. The Tribunal was of the opinion that provisions of section 40A(9) should not make any harm to the expenditure incurred bonafide, that the contribution by the assessee bank was not disputed by the AO, stating that the same was not bonafide, that the funds were not controlled by the assessee banks, that the bonafide contribution made by the assessee as an employer was not hit by section 9 of section 40A of the Act.In the case under consideration, there is no doubt genuineness of payment nor it is the case of the AO or FAA that Trust was not bonafide incurred wholly employees. Considering these facts of the case and following the judgment of State Bank of Travancore (supra),Ground No.9 is decided in favour of the assessee. “

45. We further find that the Hon’ble jurisdictional High Court, vide order dated 18/06/2019, dismissed the appeal filed by the Revenue on this issue in PCIT v/s State Bank of India, ITA no.718 of 2017. The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we uphold the plea of the assessee and allow the contribution made to the Retired Employees Medical Benefit Scheme. Accordingly, ground no.10, raised in assessee’s appeal is allowed.”

18.11. It is further noted from herein above that Hon’ble High Court dismissed revenue’s ground on this issue as noted hereinabove by the Co-ordinate Bench. Thus this issue has attained finality. We further note that where the assessee has claimed deduction under section 36(1)(viia) in respect of provision for bad and doubtful debts, any subsequent recovery is adjusted against such provision, and the Legislature itself has recognized this position by excluding the applicability of section 41 to such recoveries.

18.12. The Ld.DR could not demonstrate any cogent reason to depart from the consistent view taken by the coordinate Bench of this Tribunal in the assessee’s own case, nor could he point out any distinguishing feature, either on facts or in law, to support the contentions raised hereinabove. In view of the above, we hold that the contribution made by the assessee to the retired employees benefit scheme, being a bona fide business expenditure incurred wholly and exclusively for the purposes of business, is allowable as deduction. The disallowance made by the Ld.AO is thus directed to be deleted.

Accordingly this grounds raised by assesse stands allowed.

19. Ground No.13 relates to disallowance of recovery of bad debts written off in earlier years amounting to Rs.931,60,69,980/-.

During FY 2009-10, assessee recovered bad debts written off in earlier year amounting to Rs.999,22,08,693/-, out of which Rs.62,61,38,713/- pertains to loans written off before 31/03/20224 and recovery of Rs.931,60,69,980/- pertains to loans written off after 01/04/2004. It was submitted by the assessee that it had written off what was claimed by the assessee during assessment year 2003-04 and 2004-05.

19.1. It was submitted that, as per Section 41(1) if deduction is allowed in respect of bad debts, under u/s 36(1)(vii), any subsequent recovery of the same is deemed to be profits and gains of business and accordingly chargeable to tax. The assessee has submitted that accordingly recovery of loan written off amounting to Rs. 62,61,38,713/- written off upto 31/03/2004 was offered to tax during the year under consideration. The assesse also submitted that it did not claim any deduction to this etent u/s 36(1)(vii) in respect of bad debts after FY 2003-04. It was submitted that the entire bad debts recovered amounting to Rs. 931,60,61,980/- relates to write-off made in the FY 2004-05 or thereafter and submitted that such recovery of bad debts which was not claimed as deduction u/s 36(1)(vii) from FY 2004-05 is not liable to be taxed.

18.2. The Ld.AO rejected the submission of the assessee by observing that no materials were furnished in order to substantiate the same and also observed as under:-

“The reply of the assessee was perused however it is not found to be acceptable. The assessee has objected to assessing of the said amount on the grounds that no claim under section 36(1)(vii) was ever made by it. But, the fact of the issue is that the assessee has been claiming deduction of provision made for bad and doubtful debts under section 36(1)(viia) out of which such bad debts would have been written off in the books. As so written off bad debts were recovered the same partakes the character of deemed income of the year of receipt in this case the period relevant to the assessment year 2010-11, and, accordingly, chargeable to income-tax. Therefore, no deduction were claimed under section 36(1)(viia) would not be a material consideration in treating the same as income of the appellant. In that. view of the matter, the recovery of bad debts written off of Rs.931,60,69,980 is added in the total income of the assessee.”

18.3. On appeal before Ld.CIT(A), the view adopted by his predecessor for AY 2009-10 was followed by observing as under:-

“21.3 I have considered the appellant’s submissions. This issue was considered by CIT(A) in appellant’s own case in A.Y. 2009-10, where it is held as under:

28.1.3 I have considered the appellant’s submissions. Here the additional ground filed by the appellant is considered in view of decision of Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (2012) 349 IR 336. In the above case, it is clearly held that if the facts are verified by the AO, this legal claim may be considered in the appellant’s case. Regarding this issue the appellant had not submitted any facts and quantified the amount which falls under this category and what is the amount received by the appellant and this amount was neither verified by the AO during the assessment proceedings nor the facts are not placed before me, claim of the appellant cannot be allowed. Similar issue was decided against the Bank by the CIT(A) for AY 2007-08.

28.1.4 In view of the above decision of CIT(A) and also the facts of this issue are not verified neither during the assessment proceedings nor during the appellate proceedings, nor appellant had forwarded any facts, the disallowance made by the AO is upheld. This ground of appeal is dismissed.”

18.4. Before this Tribunal, the Ld.AR submitted that the recovery pertains to advances written off in earlier years and such recovery cannot be brought to tax u/s 41(4) unless corresponding deduction was allowed in earlier years. It was submitted that assessee had not claimed a deduction u/s 36(1)(vii) in the earlier year and therefore is not hit by the provisions of Section 41(4) of the Act.

18.5. On the contrary, the Ld.DR submitted that the assessee has not placed any material on record to demonstrate that deduction was not allowed earlier and no verification has been carried out and therefore the claim should not be entertained.

We have perused the submission advanced by both sides in light of the records placed before us.

18.6. The issue for consideration is whether the recovery of bad debts written off in earlier years is liable to be taxed under section 41(4) of the Act. It is an undisputed legal position that the provisions of section 41(4) are attracted only where a deduction has been allowed in respect of bad debts under section 36(1)(vii) in an earlier year. The condition precedent for invoking section 41(4) is thus the prior allowance of deduction; in the absence of such allowance, the recovery cannot be brought to tax.

18.7. In the present case, the assessee offered to tax recovery of ₹62.61 crores pertaining to loans written off up to 31.03.2004, in respect of which deduction was admittedly claimed and allowed. However, in respect of the balance recovery of ₹931.60 crores relating to write-offs made after 01.04.2004, the assessee contended that no deduction under section 36(1)(vii) was claimed in those years, and therefore, recovery thereafter does not fall within the ambit of section 41(4).

18.8. The Ld.DR objected to the claim on the ground that the assessee did not substantiate, with supporting material, that no deduction was allowed in earlier years and that no verification has been carried out at the assessment stage.

18.9. We find merit in the contention of the Ld.DR to the limited extent that the factual assertion of the assessee, namely, non-allowance of deduction in earlier years, requires verification from the assessment records. It is noted that on identical facts a similar disallowance was made in the hands of assessee for AY 2009-10. This Tribunal while considering this issue in ITA No. 3645 & 4564/Mum/2016 vide order dated 06/06/2023 observed and held as under:-

Having considered the submissions of both sides and perused the material available on record, we find that the Co-ordinate Bench of the Tribunal in assessee’s own case in State Bank of India (supra) for the assessment year 2008-09, vide order dated 03/02/2020, while deciding similar issue observed as under:-

“88. Brief facts are that during the year under consideration the assessee has recovered bad debts written off in earlier years, in respect of which no claim for deduction was made under section 36(1)(vii) of the Act in the past. The assessee raised an additional ground before the CIT(A) in this regard. But, the CIT(A) has dismissed the additional ground raised on the basis that a similar issue was decided against the assessee by the CIT(A) in assessment year 2007­08 and that the facts of this issue are not verified during the assessment proceedings and appellate proceedings.

89. The Revenue before the Tribunal has emphasized that the claim made for deduction under section 36(1)(viia) of the Act and also under section 36(1)(vii) of the Act, to the extent the write off exceeds the opening credit balance for the provision made for bad and doubtful debts and that even if the assessee has not claimed deduction under section 36(1)(vii) of the Act, but has claimed a deduction under section 36(1)(viia) of the Act, the same will be hit by the provisions of section 41(1) or 41(4) of the Act. In relation to the above, the assessee argued that the provisions of section 41(4) of the Act are applicable only when the recovery of bad debts are in relation to a debt for which a deduction under section 36(1)(vii) of the Act is allowed. The assessee has been allowed a deduction in relation to provision made for bad debts under section 36(1)(viia) of the Act in the earlier years. This provision, as if by a fiction deems something to be income, has to be strictly construed. Therefore, the provisions of section 41(4) of the Act, do not apply.

90. We noted from the above arguments of both the sides and case law cited by the parties, that the issue is squarely covered by a decision of the Bangalore Bench of the Tribunal in the case of State Bank of Mysore Vs. DCIT [2009] 33 SOT 7 (Bangalore), now merged with assessee. We noted that the Tribunal in the case of State Bank of Mysore (supra) narrated the facts and the facts in the present case are exactly the same as in the case of State Bank of Mysore. In the case of State Bank of Mysore (supra), the assessee had claimed deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act. Accordingly, the Bangalore Tribunal has held that section 41(4) of the Act cannot be invoked. Sections 41(1), 41(2), 41(3) and 41(4) of the Act operate in different spheres. Each of the sub­sections to section 41 of the Act deals with different and distinct circumstances. Each of the sub-sections deals with different and distinct topics and one cannot read recoupment under one sub-section into another. We have considered the decision relied on in this regard of Supreme Court in the case of Nectar Beverages (P.) Ltd. vs. DCIT [2009] 314 ITR 314 (SC) wherein the Supreme Court has dealt with the specific section 41(2) of the Act for taxing balancing charge versus taxing the same under section 41(1) of the Act and has concluded that section 41(1) of the Act shall not be applicable.

91. As the aspects of bad and doubtful debts is dealt with specifically under section 41(4) of the Act, as laid down by the Supreme court in Nectar Beverages (supra), section 41(1) of the Act is not applicable in case of the assessee. Further, the primary condition to be satisfied for taxing an amount as deemed income under section 41(1) of the Act is that a deduction/allowance should have been claimed by the assessee in respect of a loss, expenditure or trading liability. A deduction under section 36(1)(viia) of the Act is not for a loss, expenditure or trading liability, but for a provision for bad and doubtful debts. We noted that the learned CIT Departmental Representative had raised a contention that the CIT(A) and AO have not perused the details and, hence, the matter may be restored back which was opposed. In relation to the above contention, without prejudice to the assessee’s objection, in the event the matter is proposed to be remanded back to the AO, a direction may be given to the AO to delete the addition, if the recovery of the amount is in respect of a write off claimed and allowed as a deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act in the earlier years.

92. In view of the above discussion, we are of the view that principally the assessee is entitled for claim of deduction under section 36(1)(viia) of the Act, which has rightly been claimed. The assessee has not made claim under section 36(1)(vii) of the Act in this regard. Hence, we allow the claim of assessee but the matter is restored back to the file of the AO for verification purposes. This issue of assessee’s appeal is allowed for statistical purposes.”

53. The learned DR could not show any reason to deviate from the aforesaid decision rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. Therefore, respectfully following the judicial precedent in assessee’s own case cited supra, we uphold the plea of the assessee that provisions of section 41(4) of the Act is applicable only when recovery of bad debts are in relation to debts for which a deduction under section 36(1)(vii) is allowed. However, this issue is restored to the file of the AO to verify if the recovery of the amount, in the present case, is in respect of a write-off of the claim allowed as a deduction under section 36(1)(viia) or under section 36(1)(vii) of the Act in earlier years. Accordingly, ground no.13, raised in assessee’s appeal is allowed for statistical purposes.

18.10. The applicability of section 41(4) hinges entirely on this factual aspect. Accordingly, while we accept the legal proposition advanced by the assessee that recovery of bad debts is taxable only where corresponding deduction has been allowed earlier, we deem it appropriate to restore this issue to the file of the Ld.AO for limited verification. The Ld.AO shall examine whether deduction under section 36(1)(vii) was in fact allowed in respect of the debts written off in the relevant earlier years. To the extent such deduction was allowed, the corresponding recovery shall be brought to tax under section 41(4); and to the extent no such deduction was allowed, the recovery shall not be taxed.

18.11. We find that the taxability of such recovery is contingent upon verification of whether deduction was allowed in earlier years. In absence of such verification, no conclusive finding can be recorded. The Ld.AO shall afford adequate opportunity of being heard to the assessee and decide the issue in accordance with law.

Accordingly, Ground No.13 raised by the assessee stands allowed for statistical purposes.

19. Ground No.14 relates to provision for incentive towards meritorious students amounting to Rs. 1,00,00,00,000/-.

During the year under consideration assessee made donation of Rs. 5 Crores towards SBI Officers’ association (SBIOA) Public School, Jaipur and provision of Rs.100,00,00,0000/- towards corpus for giving incentive to meritorious students. The assessee submitted that, the corpus for giving incentive to meritorious student is a business expenditure and should be allowed as deduction.

19.2. Before the Ld.AO, the claim was rejected as it was not raised in the return of income.

19.3. On an appeal , the Ld.CIT(A) considered the claim of assessee in view of decision of Hon’ble Bombay High Court in case of CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (supra) by observing as under:-

“When we examine the details of this ground of appeal, appellant made provision of s.100 crs. during the assessment year towards a corpus for giving incentive to meritorious students. Here it is only a provision made b appellant, no expenditure was incurred by the appellant. This provision is contingent in nature as this expenditure will be incurred for paying incentive to meritorious students. As this year there is no expenditure incurred, s appellant’s claim of deduction based on the provision of Rs.100 crs is disallowed as it is a mere provision without any incurring of expenditure Hence, appellants claim for Rs.100 crs.”

19.4. On appeal before this Tribunal the Ld.AR submitted that, the assessee made provision for incentive schemes for meritorious students as part of its employee welfare and social responsibility initiatives. It was submitted that such expenditure has been claimed based on decision of Hon’ble Cochin Tribunal in case of State Bank of Travencore (supra) and forms part of staff welfare expenditure.

19.5. On the contrary, the Ld.DR submitted that the claim represents mere provision and no actual expenditure has been incurred and therefore the same is contingent in nature. It was further submitted that the claim has been made through a Note and not through return and therefore should not be entertained.

We have perused the submissions advanced by both sides in light of the records placed before us.

19.6. We have considered the submissions advanced by both sides and perused the material on record. The issue relates to the allowability of provision of ₹100 crores created towards a corpus for granting incentives to meritorious students.

19.7. At the outset, we find that the objection of the Revenue regarding the claim being made through a note and not in the return of income is not sustainable, in view of the settled legal position that appellate authorities are empowered to entertain a legitimate claim arising from material already on record. We have dealt with the objection of Ld.AR in great detail in the forgoing paras.

19.8. On merits, it is an admitted position that the assessee has merely created a provision towards a proposed corpus and no actual expenditure has been incurred during the year under consideration. The allowability of deduction under the Act depends upon the existence of an ascertained liability which has crystallized during the year. A mere provision, without any corresponding obligation to incur expenditure during the year, does not qualify for deduction, as it remains contingent in nature.

19.9. In the present case, the provision created for incentivising meritorious students does not represent a liability which has crystallized during the year. The actual outflow is dependent upon future events, namely identification of beneficiaries and disbursement under the scheme. Therefore, the claim cannot be allowed in the year of mere provisioning. However, we find merit in the alternative submission of the Ld.AR that to the extent actual payments have been made out of such corpus during the year, the same would be allowable as business expenditure, subject to verification.

19.10. Accordingly, we direct the Ld.AO to allow deduction to the extent of actual payments made during the year, if any, out of the said corpus. It is further clarified that the balance amount shall be allowable as deduction in the respective years in which such expenditure is actually incurred, in accordance with law.

Accordingly, Ground No. 14 raised by assessee stands partly allowed for statistical purposes.

20. Ground No. 15 relates to non-taxability of income from foreign branches amounting to Rs.1566,35,14,351/-.

The assesse during the year had branches in various foreign countries with which it had entered into Double Taxation Avoidance Agreement (DTAA). Assessee submitted that, in terms of Article 7 of the DTAA, the branches of the assessee form a permanent establishment (PE) in the respective foreign countries. It was submitted that as per Article 7 if an enterprise carries on business through a PE the profits may be taxed in the source state as that are attributable to that PE. It was thus submitted by assessee that income from foreign branches are not liable to be taxed in India. The assessee claimed the benefit under DTAA by excluding such income vide Note 15 to the revised return based on the tax treaty with such foreign countries and India.

20.1. The Ld.AO reject the claim of assessee as it did not arise out of the return of income filed by assessee.

20.2. Before Ld.CIT(A) the claim was considered by following its predecessor’s view in assessee’s own case for A.Y. 2009-10 by observing as under:-

“24.3 I have considered the appellant’s submissions. This issue was considered by CIT(A) in appellant’s own case in the year 2009-10 which is reproduced as under:

28.2.4 I have considered the appellant’s submissions. Here the additional ground filed by the appellant is considered in view of decision of Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336. In the above case, it is clearly held that if the facts are verified by the AO, this legal claim may be considered in the appellant’s case. Regarding this issue the appellant had not submitted any facts and quantified the amount which falls under this category and what is the amount received by the appellant and this amount was neither verified by the AO during the assessment proceedings nor the facts are not placed before me, claim of the appellant cannot be allowed. Similar issue was decided against the Bank by the CIT(A) for AY 2007-08.

28.2.4 In view of the above decision of CIT(A) and also the facts of this issue are not verified neither during the assessment proceedings nor during the appellate proceedings, nor appellant had forwarded any facts, the disallowance made by the AO is upheld. This ground of appeal is dismissed.

24.4 In view of the above decision, this ground of appeal for this year, is dismissed.”

20.3. On an appeal before this Tribunal the Ld.AR submitted that, submitted that the assessee operates branches in various foreign jurisdictions which constitute permanent establishments under applicable DTAA provisions and income earned by such branches is taxable in the respective foreign jurisdictions and not in India. It was submitted that the claim has been made through Notes as part of computation of income.

20.4. On the contrary, the Ld.DR submitted that the assessee has filed vague grounds without furnishing necessary facts and supporting details and has been making such claims repeatedly and, therefore, the claim should be rejected. Identical issue arose before Co-ordinate Bench of this Tribunal in assessee’s own case for AY 2009-10, and the Tribunal observed as under:-

“56. We have considered the submissions of both sides and persused the material available on record. The plea of the assessee is that the income earned by foreign branches of the assessee shall not be liable to tax in India in terms of the relevant tax treaties. In support of its submission, the assessee placed reliance upon the decision of the Hon’ble Jurisdictional High Court in CIT vs. Bank of India, [2015] 64 taxmann.com 215 (Bom.). Reliance was also placed upon the decision of the coordinate bench of the Tribunal rendered in assessee’s own case in State Bank of India (supra), vide order dated 03/02/2020, for the assessment year 2008-09, wherein the coordinate bench observed as under:-

“95. Now before us assessee claimed that income earned by the branches of the assessee located outside India is not to be taxed in India in light of the tax treaties between India and the countries where the branches are located, as the income has been subject to tax in foreign countries. The details of the income earned by foreign branches were submitted to the AO vide Annexure 1 of letter dated 19.02.2010 and now enclosed in assessee paper book 1 at page 325. It was contended that the assessee raised an additional ground before the CIT(A) in this regard. However, the CIT(A) dismissed the additional ground raised by the assessee on the basis that a similar issue was decided against the assessee by the CIT(A) in assessment year 2007-08 and that the facts of this issue are not verified during the assessment proceedings and appellate proceedings.

96. The Revenue before the Tribunal emphasized that no details were filed before the AO in connection with income from foreign branches and that the Notification No. 91/2008 dated 28 August 2008 issued under section 90(3) by the CBDT is clarificatory in nature and applicable to the assessee for the year.

97. During the course of the hearing, it was pointed out that the details of income earned by foreign branches were submitted to the AO vide Annexure 1 of letter dated 19.02.2010. In fact, based on the said details, the AO has allowed relief for the tax credit in respect of taxes paid in the foreign branches as can be verified from the assessment order. The issue is decided in favour of the assessee by the decision of the Mumbai Tribunal in the case of Bank of India vs. ACIT [2012] 27 com 335 (Mumbai.Trib), wherein it has been held that income attributable to foreign branches being permanent establishments outside India cannot be taxed in India having regard to the mandate contained in Article 7(1) of the relevant double taxation avoidance agreements. The aforesaid decision has been affirmed by the Bombay High Court [2015] 64 taxmann.com 215 (Bombay). When under the relevant tax treaty it is provided that tax ‘may be’ charged in a particular State in respect of the specified income, it is implied that tax will not be charged by the other State. Once an income is held to be taxable in a particular jurisdiction under a tax treaty, unless there is a specific mention that it can be taxed in the other jurisdiction, the other jurisdiction is denuded of its powers to tax the same. As regards the learned CIT DR’s reliance on the Notification No. 91/2008 dated 28 August 2008 issued under section 90(3), it is submitted as under:

section 90(3) empowers the Central Government to define any term which is not defined in the Income-tax Act, 1961 or in the relevant tax treaty. The legal meaning of ‘term’ is any expression or phrase which has a fixed or known meaning in art, science, or profession. Accordingly, it is submitted that sale, transfer, gift, etc. could be regarded as terms; however ‘may be taxed’ cannot be regarded as a term. Hence, the said notification is not applicable.

The Notification does not define any ‘term’; it only gives a result / clarification.

Section 90(3) empowers the Central Government to define any term which is not inconsistent with the provisions of the Income-tax Act, 1961 or the tax treaty. As the Supreme Court has already interpreted the meaning of the phrase ‘may be taxed’ in the case of CIT v/s. PAVL Kulandagan Chettiar [267 ITR 654], the notification cannot give a meaning to ‘may be taxed’ which is inconsistent with the views of the Supreme Court.”

98. Without prejudice to the above argument made was that even if it is held that the above notification is applicable, the same can be said to be applicable prospectively (i.e. from assessment 2009-10 onwards) and, hence, is not applicable for the year under consideration. Reliance in this regard is placed on the decision of the Supreme Court in case CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466 (SC), wherein it was held that one established rule for interpretation of legislation is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. Similar view has been taken by the Madras High Court in V.R.S.M Firm [1994] 208 ITR 400 (Madras).

99. We noted from the above discussion that this issue is squarely covered by the decision of Bank of India (supra), wherein the co-ordinate Bench held that income attributable to foreign branches being permanent establishment outside India cannot be taxed in India, having regard to the mandate given in Article 7(1) of the DTAA. This view has been affirmed by Hon’ble Bombay High Court. Since, the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of Bank of India (supra), respectfully following the same, we allow this issue in favour of assessee.

57. Therefore, from the aforesaid decision, it is evident that the coordinate bench in assessee’s own case treated the Notification no. 91 of 2008 dated 28/08/2008 to be having a prospective effect from the assessment year 2009-10 onwards and therefore considered to be not applicable for the assessment year 2008-09, i.e. the year under consideration before the coordinate bench. Further, the coordinate bench placed reliance upon the decision in Bank of India v/s ACIT [2012] 27 com 335 (Mumbai.Trib), for the assessment year 2003-04, wherein it was held that the income attributable to foreign branches being permanent establishment outside India cannot be taxed in India, having regard to the mandate given in Article 7(1) of the tax treaty. The coordinate bench further noted that this decision has further been affirmed by the Hon’ble jurisdictional High Court in CIT v/s Bank of India, [2015] 64 taxmann.com 215 (Bom.).

58. Before proceeding further, it is pertinent to note that the aforesaid Notification no. 91 of 2008 was issued under section 90(3) of the Act, which reads as under:-

“(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.”

59. Further, Notification no. 91 of 2008 dated 20/08/2008 issued by the Central Government as per section 90(3) of the Act, reads as under:-

“In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of a resident of India ‘may be taxed’ in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

60. Therefore, as is evident from section 90(3) of the Act, the same refers to term used but not defined both in the Act as well as in the tax treaty. Thus, we find no basis in the submission made on behalf of the assessee that the aforesaid notification has no applicability to the tax treaty. Further, the word ‘term’ used in section 90(3) of the Act not only means a word but also means a phrase and thus cannot be restricted to words such as salary, dividend, etc. as claimed by the assessee but also includes phrase such as ‘may be taxed’ as used in the tax treaty. 61. We further find that the aforesaid notification as well as the aforesaid decision of the Hon’ble jurisdictional High Court in Bank of India (supra) was considered by the coordinate bench of the Tribunal in Technimont (P.) Ltd. v/s ACIT, [2020] 116 taxmann.com 996 (Mumbai – Trib.). The coordinate bench of the Tribunal, after taking into consideration the change in legal provisions, i.e. amendment to section 90 of the Act w.e.f. 01/04/2004 and also the decisions rendered in the case of Bank of India for subsequent years, observed as under:-

16. None of these judicial precedents take into account the developments with respect to the provisions of Section 90(3) and the notification issued thereunder. The only exception is a coordinate bench decision in the case of Bank of India (supra) wherein the issue of notification was specifically raised but then the coordinate bench, following Hon’ble jurisdictional High Court’s judgment in assessee’s own case for the assessment year 2003-04 and without realizing that the amendment in law was effective 1st April 2004 i.e. assessment year 2004-05, decided the issue in favour of the assessee. The impact of amendment with effect from 1st April 2004 not having been noted or having been brought to the notice of the coordinate bench, this decision is clearly per incuriam and, as such, not a binding judicial precedent. As a matter of fact, when subsequent assessment years of this very assessee came up for consideration of another bench, the said precedent was not followed and, vide order dated 30th November 2018, it was observed that “the decision of the Hon’ble High Court in assessee’s own case pertained to the assessment years 2001-01 and 2003-04 and the Hon’ble High Court never had any occasion to examine the taxability of income of foreign branches in India keeping in view provisions of Section 90(3) read with the Government notification dated 28th August 2008” and that “we are unable to accept the submission of the learned authorised representative that the issue is covered by earlier decisions of the Tribunal”. The assessee, therefore, does not derive any benefit from this legal precedent relied upon. All other judicial precedents hold good in respect of the pre-amendment law, but then the legal position, as analysed above, has changed, and, under the changed legal position, these judicial precedents do not hold good. As regards the DRP decisions for the immediately two preceding assessment years, we have noted that the post amendment legal position was not even brought to the notice of the Dispute Resolution Panel. There is not even a whisper of a suggestion that the amendment in law in Section 90(3) and the post amendment notification was brought to the notice of the DRP. Learned counsel’s arguments before the DRP simply proceeded on the basis that there was no change in statutory provisions after the Kulandagan Chettiar’s judgment. That is simply unacceptable. While we restrain from making any observations on the conduct of the representatives of the assessee, we find it difficult to believe that a big-4 accounting firm, as the assessee’s representative before the DRP, as indeed before us, would really be oblivious of the correct legal position and that it was anything less than a calculated ignorance, before the DRP, on the basic legal position.

Advising the correct legal position and then making whatever aggressive claim one makes is one thing, but not explaining the correct legal position and then hoping to succeed with the claim, by keeping the adjudicator in dark about the statutory developments, is quite another. The path chosen by the assessee could have fallen in the first category if submissions were made before the DRP about the amendment in law by way of Section 90(3) and notification thereunder, and yet the exemption claim was to be justified due to no fresh notification being issued after the substitution of Section 90(3) with effect from 1st October 2009. That is not the case. In any case, the DRP decisions cannot fetter our adjudication.”

62. We further find that the coordinate bench of the Tribunal in Bank of India v/s ACIT, [2020] 122 taxmann.com 247 (Mumbai – Trib.), for the assessment year 2015­16, following the aforesaid decision in Technimont (P.) Ltd. (supra) rejected the similar plea, as raised by the assessee in the present appeal, by observing as under:-

“7. Learned counsel has shown, in accepting the fact that even though the issue is covered in favour of the assessee by earlier decisions of the coordinate benches, these coordinate bench decisions cease to be binding judicial precedents inasmuch as reasoning adopted therein does not hold good any longer in the light of the decision in the case of Technimont (P.) Ltd. (supra), admirable grace. It is not clear to us whether this approach is to preempt a detailed discussion on merits of the matter, or whether this approach is indeed bonafide stand of the assessee. That does not, however, matter much at this stage, as all the facets of this matter are covered above nevertheless. The basis on which the relief was granted in the earlier years has been examined and that basis being ex facie incorrect and even rendered by inadvertence is glaring in the analysis that has been extensively reproduced above. Learned counsel for the assessee, however, does not give up; he has an even more innovative plea now. He submits that above decision is per incuriam for some other reason, which has not been discussed in any judicial precedent so far, inasmuch as it overlooks the fact that the notification dated 28th August 2008 was not issued in the context of the business income and, should accordingly not be applicable so far as business income earned abroad, as in this case, is concerned. We see no substance in this plea either. The notification deals with connotations of the expression “may be taxed”, appearing in the tax treaties entered into by India, and there is absolutely no basis whatsoever to support the proposition that the effect of the notification has to be restricted in its application to non-business income only. No such differentiation in treatment of business and non-business income is envisaged in the said notification, nor do we see any justification for inferring the same. Learned counsel does not have any material whatsoever in support of the proposition canvassed by him, nor does this proposition make any sense on the first principles- inasmuch as once the notification is issued without any such specific restriction for application to business income, we cannot infer a restriction in its application. We, therefore, reject the plea of the assessee, and thus decline to interfere in the matter. We uphold the action of the Assessing Officer including the profits of the assessee’s overseas branches, amounting to Rs. 1,408.32 crores, in its taxable income in India.”

63. Therefore, in view of the above, respectfully following the decisions rendered by the coordinate bench of the Tribunal in Technimont (P.) Ltd. (supra) and Bank of India (supra) for the assessment year 2015-16, we find no merits in the submissions of the assessee. As a result, ground no. 14 raised in assessee’s appeal is dismissed.”

Respectfully following the above view we do not find any merit in the arguments of the Ld.AR.

Accordingly, Ground No. 15 raised by the assessee stands dismissed.

21. Ground No. 16 relates to deduction in respect of provision for bad and doubtful debts.

The assessee had claimed vide Note No. 17 in the revised return of income and submitted that, the eligible amount of deduction u/s 36(1)(viia) on the basis of 7.5% of income and 10% of rural branch advances in accordance with the provisions of Section 36(1)(viia) works out to be Rs. 5,550 Crores, 55,56,221/-. It was submitted that in the return of income assessee had only claimed deduction of Rs. 5227,91,03,071/- and claimed that the balance deduction upto the eligible amount may be granted to the assessee.

21.1. The Ld.AO rejected the claim of assessee and Ld.CIT(A) further upheld the disallowance od assessee’s claim.

21.2. Before us, the assessee has argued that the said amount has been claimed in the revised return by way of a note. As against the original claim of Rs.5227 Crores in the original return of income. He submitted that the issue may be remanded for necessary verification as the deduction u/s 36(1)(v) At the outset, it is an admitted position that the assessee had claimed deduction under section 36(1)(viia) of the Act in the original return of income to the extent of ₹5,227.91 crores. Subsequently, by way of a note appended to the revised return of income, the assessee claimed that the eligible deduction, computed in accordance with the statutory formula prescribed under section 36(1)(viia)—being 7.5% of total income and 10% of rural branch advances—worked out to a higher sum of ₹5,550.56 crores, and accordingly sought allowance of the balance amount.

The claim of the assessee has been rejected by the Assessing Officer as well as upheld by the Ld. CIT(A), primarily on the ground that the same was made by way of a note and not through the computation of income.

In our considered view, the said approach is not sustainable in law. It is well settled that the appellate authorities are vested with plenary powers to entertain a legitimate claim arising from facts already on record, even if such claim was not specifically made in the return of income. Therefore, the mere fact that the claim has been raised by way of a note cannot, by itself, be a ground to deny examination of the claim, particularly when it pertains to correct computation of deduction allowable under the statute.

At the same time, we find merit in the contention of the Revenue that the quantification of the enhanced claim requires proper verification, especially with regard to:

(i) correctness of computation under the statutory formula prescribed in section 36(1)(viia);and

(ii) ensuring that no double deduction is claimed in respect of the same provision.

Accordingly, we remand this issue back to the Ld.AO to verify the additional amount claimed by the assessee in the revised return by way of note. The Ld.AO may verify regarding no double deduction claimed in respect of the amount forming part of the claim.

Accordingly, this Ground no.16 raised by assessee stands partly allowed for statistical purposes.

22. Ground No.17 relates to allowance of one-time insurance premium paid on special home loan scheme amounting to Rs.1,51,37,00,000/-

The Ld.AR submitted that the assessee introduced special home loan scheme under which insurance premium was paid to cover the risk of borrowers over the tenure of home loan agreements. The assessee submitted that total insurance premium paid amounted to Rs.151.37 Crores on account of such scheme which was charge off over average loan period of 15 years and accordingly 1/15^th of the premium amount has been charged off during the year instead of fully charging in the accounts. The assessee submitted that liability to pay the insurance premium arisen during AY 2009-10 was been paid by the assessee during the year being 1/15^th portion of the entire amortised period which is an allowable deduction in the hands of assessee.

22.1. The Ld.AO disallowed the claim as it did not arise out the return of income filed by assessee.

22.1. Before Ld.CIT(A), the claim was considered by placing reliance on the decision of Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. (supra) by observing as under:-

“26.3 I have considered the appellant’s submissions. In this ground of appeal the facts of the case is that bank has implemented Special Home Loan scheme for the period of December 2008 to June 2009 arising out of which one time insurance premium was paid covering the lives of borrowers over the tenure of Home Loan agreements. Here total insurance premium paid amounting to s. 151.37 crores on account of of such scheme and bank has charged this expenditure over the average loan period of 15 years in the books of accounts.

However, appellant had made a claim before the AO regarding deduction of total insurance premium paid in this year for Rs.151.37 Crs. which AO had not considered during the assessment proceedings. However, this claim of the appellant is considered in view of the Bombay High Court decision in the case of CIT v. Pruthvi Brokers & Shareholders(2012) 349 ITR 336. From the above details it is clear that this insurance premium is paid for 15 years and though the amount was paid in this year for Rs.151.37 crs. Here from this Special Home Loan scheme appellant will be receiving income during this duration of 15 yars as interest and other charges. During this 15 years all the income which appellant receives, appellant can claim the expenditure with respect to that income. This insurance premium is also an expenditure which appellant can claim within this 15 years. In view of the matching principle concept, Income and Expenditure has to be matched, if not, it will give a distort figure of the income. Though the appellant had paid at one go, this expenditure pertained to 15 years and appellant receives income for all these 15 years, hence appellant can spend this expenditure over 15 years. Appellant’s claim of total insurance premium for Rs.151,37 crs. for this year is not sustainable in law in view of above discussion. Hence claim of the appellant is disallowed and this ground of appeal is dismissed.”

Aggrieved by the order of Ld.CIT(A) assessee is in appeal before this Tribunal.

22.3. Ld.AR placed reliance on the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT reported in (2015) 372 ITR 605 (SC) and submitted that, the liability of pay the insurance premium arose during the FY 2009-10 and the said amount has been paid by the assessee during the year. it was thus submitted that the entire amount of Rs. 151.37 crores should be allowed as deduction I the current year. The Ld.AR also submitted that this was a business liability which has been quantified as it has not only arisen during the year but also has been paid.

22.4. The Ld.DR relied upon the order of the Ld.CIT(A) and submitted that the assessee has not justified the allowability of the expenditure and the nature of the payment requires closer scrutiny.

We have perused the submissions advance by both sides in light of the records placed before us.

22.5. The assessee claims to have incurred expenditure of ₹151.37 crores towards insurance premium under a Special Home Loan Scheme and has sought deduction of the entire amount during the year. However, we find that no documentary evidence has been placed on record to substantiate that such insurance premium has, in fact, been paid during the year under consideration. In the absence of primary evidence evidencing actual outflow, the very foundation of the claim remains unverified. Even otherwise, the assessee has failed to furnish essential details such as the identity of the loanees covered, the terms of the insurance arrangement, and the nexus of such expenditure with its business operations. Mere assertion of having introduced a scheme, without supporting material, cannot suffice to establish allowability under section 37(1) of the Act.

22.6. Further, it is noted that the assessee itself has amortised the said expenditure over a period of 15 years in its books, thereby indicating that the benefit, if any, accrues over multiple years. This conduct is inconsistent with the claim of full deduction in the year under consideration. The reliance placed on the decision of the Hon’ble Supreme Court in Taparia Tools Ltd(supra) is misplaced, as the said decision does not dispense with the fundamental requirement of establishing that the expenditure has been actually incurred and is otherwise allowable in law.

22.7. In view of the above, and particularly in the absence of any evidence demonstrating actual payment of the insurance premium, we find no merit in the claim of the assessee. The Ld. CIT(A) was justified in rejecting the same.

Accordingly, this Ground raise by assessee stands dismissed.

23. Ground No.18 to 20 relates to disallowance under section 40(a)(ia) in respect of short deduction of TDS amounting to Rs. 68,23,085/-, denial of deduction u/s 80IA and refund of DDT paid in excess by assessee.

23.1. Disallowance under section 40(a)(ia) in respect of short deduction of TDS amounting to Rs. 68,23,085/-:

It was submitted that the claim has been made through revised computation vide Note 33 that no disallowance can be made in respect of short deduction of TDS. Assessee placed reliance on following decisions:

Sandvik Asia Ltd. (ITA No 758/PN/99 & CO No 58/PN/05 and
ITA No 113/PN/98
Chandabhoy & Jassobhoy 17 taxmann.com 158
S.K. Tekriwal 15 taxmann.com 289

23.1.2. Denial of deduction u/s 80IA:

The Bank vide Note 35 to the revised return made a claim that it is entitled to deduction under section 80-IA in relation to income from windmills.

23.1.3. Denial of Refund of DDT paid in excess by assessee.

During the course of the year under consideration, the assessee declared and distributed dividend to the extent of Rs.2476,03,28,658. An amount of Rs.334,28,43,253 was paid by the assessee as tax on distributed profits within the stipulated time period, of which Rs 5,83,05,868/is refundable to the assessee.

23.1. The Ld.AO did not consider the claim of the assessee on all these three issues.

We have considered the submissions of the assessee and perused the material available on record.

23.2. At the outset, it is observed that the claims relating to (i) disallowance under section 40(a)(ia) on account of short deduction of TDS, (ii) deduction under section 80-IA in respect of income from windmills, and (iii) refund of excess Dividend Distribution Tax (DDT), were raised by the assessee by way of notes appended to the revised computation/return of income. It is an admitted position that the Ld. Assessing Officer has not examined these claims on merits.

23.3. Insofar as the objection of the Revenue regarding claims being made through notes is concerned, the same cannot, by itself, be a ground to reject the claims outright. It is well settled that appellate authorities are empowered to entertain and adjudicate a legitimate claim arising from facts already on record in order to determine the correct taxable income. However, we find that all the three claims raised by the assessee require proper verification of facts and examination of supporting material, which has not been carried out at the level of the Assessing Officer.

23.4. In respect of disallowance under section 40(a)(ia), the contention of the assessee that no disallowance is warranted in cases of short deduction of tax at source, as against non-deduction, needs to be examined in light of judicial precedents relied upon by the assessee, after verifying the nature of payments and extent of deduction.

23.5. Similarly, the claim of deduction under section 80-IA in respect of income from windmills necessitates verification of eligibility conditions prescribed under the Act, including the nature of undertaking, generation of power, and computation of eligible profits.

23.6. Further, the claim of refund of excess DDT paid also requires verification of the computation, payment details, and applicability of relevant provisions governing tax on distributed profits. In view of the above, we deem it appropriate to restore all the aforesaid issues to the file of the Ld.AO for fresh examination and adjudication in accordance with law. The Ld.AO shall consider the claims on merits, after affording reasonable opportunity of being heard to the assessee and after verifying the necessary details and evidences.

Accordingly, Ground Nos. 18 to 20 raised by assessee stands partly allowed for statistical purposes.

24. Additional Ground raised by the assessee:

The assessee had raised certain additional grounds regarding deduction in respect of education cess on Income tax and secondary and higher education cess on Income tax while computing total income for the year under consideration.

24.1. This issue is no longer res integra. The Hon’ble Supreme Court in the case of PCIT v. Chambal Fertilisers and Chemicals Ltd. has settled the controversy by holding that education cess and secondary & higher education cess on income-tax are not allowable as deduction while computing business income. In view of the binding precedent of the Hon’ble Supreme Court, the claim of the assessee cannot be sustained.

Accordingly, application seeking admission of additional grounds dt. 19/04/2021 stands dismissed.

25. The assessee has filed the following additional grounds vide application dated 29/09/2018:

“1. The appellant submits that it is entitled to a deduction for write-off of bad debts under section 36 (1)(vii) as per the judgment of the Supreme Court in the case of Vijaya Bank (323 ITR 166).

It is submitted that necessary directions may be given to the Assessing Officer to allow the claim of write-off bad debts.

2. The appellant reserves the right to amend, alter and add to the grounds of appeal.”

25.1. The Ld. AR submitted that the aforesaid additional grounds are purely legal in nature and do not require any fresh investigation of facts. All the relevant facts necessary for adjudication of the issue are already available on record. It was contended that the issue relating to allowability of education cess on income-tax goes to the root of the computation of total income and tax liability of the assessee.

25.2. The Ld.AR further submitted that the assessee could not raise the said ground earlier due to inadvertence and the same is being raised now to ensure correct determination of taxable income in accordance with law. In support of the admissibility of the additional ground, reliance was placed on the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT, reported in (1998) 229 ITR 383, wherein it has been held that the Tribunal has the jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee, even though such a question was not raised before the lower authorities.

25.3. Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of Jute Corporation of India Ltd. v. CIT, (1991) 187 ITR 688, wherein it was held that an appellate authority has wide powers to entertain additional grounds so long as the same are necessary to correctly assess the tax liability. In view of the these judicial precedents, it was prayed that the additional ground being purely legal in nature and going to the root of the matter may kindly be admitted and adjudicated.

25.4. The Ld.DR has filed written submission submitting as under:-

“1. The appellant submits that it is entitled to a deduction for write-off of bad debts under section 36 (1)(vii) as per the judgment of the Supreme Court in the case of Vijaya Bank (323 ITR 166).

It is submitted that necessary directions may be given to the Assessing Officer to allow the claim of write-off bad debts.

2. The appellant reserves the right to amend, alter and add to the grounds of appeal.”

2. During the hearing of the appeal, the Revenue vehemently objected to entertaining this additional ground of appeal. The Hon’ble Bench at the time of hearing on 09.02.2026, directed the assessee to file a note to explain the additional ground of appeal and give a copy of it to the Revenue. Thereafter, the Counsel of the Revenue would submit Revenue’s reply. Thereafter the Bench would decide the matter. If necessary, the Bench may fix the matter again for hearing.

3. In compliance of the direction of the Hon’ble Bench, the assessee has made the following submission.

“Factual Note with respect to the additional ground raised vide letter dated 01 October 2018 filed on 04 October 2018

Re. Write-off of bad debts u/s 36(1)(vii) of Income-tax Act, 1961 (“the Act”)

(i) The appellant made a net provision of INR 5147,85,28,251 (excluding standard assets) by way of debit to the profit and loss accounts [refer note no. 18.7(k) of Annual Report (Rs.4622.33 crores-provision for non-performing assets + Rs.525 crores – provision for restructured assets) on page 89 of part 1 of factual paper book.

(ii) This amount is reduced from the loans and advances in the Balance Sheet and the net amount of loans and advances i.e. after reducing the provision is shown in the balance sheet- refer to page no.54 of part 1 of factual paper book.

(iii) Vide the additional ground of appeal filed before the Hon’ble Tribunal on 04, October, 2018, the Appellant has made a claim for deduction of the entire amount of provision of INR 5147,85,28,251 u/s 36(1)(vii) of the Act in view of the judgment of the Supreme Court in the case of Vijaya Bank Limited v/s CIT (2010), 323 ITR 166 (SC).

(iv) The issue has been remanded back to the Assessing Officer for fresh examination and adjudication by the Hon’ble Tribunal in Appellant’s own case for the earlier years as mentioned at page no 21 and 22 of the chart filed by the Appellant with the Hon’ble Tribunal and the DR.

(v) It is also submitted that this claim is made by the Appellant in alternative to its claim for deduction u/s 36(1)(viia) of the Act. The Appellant submits that if the aforesaid claim for deduction of the entire amount of provision for bad and doubtful debts is allowed u/s 36(1)(vii) of the Act, then it will be not entitled to the claim of deduction of provision u/s 36(1)(viia) for the captioned year.”

COMMENTS OF REVENUE

4. Laches (Delay in filing the additional ground of appeal)

(a) The additional grounds of appeal has been filed after long delay of about one year five months. The original grounds of appeal were filed on 16th May 2017. The additional grounds were filed on 4th October 2018. A routine explanation is given that the counsel advised them to raise the additional ground, but no explanation is given for the cause of delay in filing of appeal.

(b) It is stated that it is entitled deduction u/s 36(1)(vii) in view of the judgment of the Supreme Court in the case of Vijaya Bank Limited, 323 ITR 166 (SC). The judgment of the Supreme Court in the case of Vijaya Bank Ltd, was delivered on April 15, 2010. It was in public domain since 2010. The original grounds of appeal were filed on 16th May 2017, seven years after the judgment of the Supreme Court. There can be no conceivable reason for not taking this ground at the time of filing the original appeal and taking this ground by filing the additional ground of appeal.

(c) For the above reasons, there is no explanation for the delay in filing the additional ground of appeal.

5. Issue Not arising from the orders of the Assessing Officer and the CIT

(a) A perusal of the orders of the Assessing Officer and the CIT(A) shows that the issue raised in the additional ground of appeal about the judgment of the Supreme Court in the case of Vijaya Bank was not raised before them.

(b) In Ground of appeal no.5 before the CIT(A), the assessee admitted that no deduction u/s 36(1)(vii) was claimed in the return of income but in a note deduction was claimed on the basis of a Tribunal decision. The claim was rejected. In ground no 9 before the CIT(A).

(c) The issue of provision of bad and doubtful debts was raised twice. First, at Page 76, 77 of AO’s order the assessee had computed deduction of provision for bad and doubtful debts of Rs.5227,91,03,071 including standard assets of Rs.80,05,74,820. The AO rejected the claim of inclusion of provision for standard assets. The CIT(A) dismissed the appeal of the assessee (P.67). The second reference to provision for bad and doubtful debts was raised before the CIT(A) in Ground No.16 (page 97 of CIT(A)’s order). The contention was that though in the accounts, the assessee has made a claim of provision for bad and doubtful debts of Rs.5227,91,03,071, the assessee is entitled to a higher amount of Rs.5550,55,56,221 as calculated by the formula given in section 36(1)(viia). This claim was rejected by the CIT(A) as the claim should be limited to the provision made.

(d) The above summary would show that the assessee did not claim any deduction of bad debts u/s 36(1)(vii) but claimed deduction for provision for bad and doubtful debts u/s 36(1)(viia) amounting to Rs.5227,91,03,071.

(e) The above discussion would show that what ever was submitted before the AO and the CIT(A) has been adjudicated by them. Nothing has been left out. Hence, the additional ground does not arise from the orders of the AO and CIT(A). On this basis the additional ground of appeal should not be entertained.

6. There is inherent contradictions in the additional ground of appeal and the note submitted by the assessee both of which have been reproduced above.

(a) In the additional ground of appeal it is stated :-

“…it is entitled to a deduction for write-off of bad debts under section 36(1)(vii) as per the judgment of the Supreme Court in the case of Vijaya Bank (323 ITR 166).”

As mentioned in paragraph 5(b) above, no deduction has been claimed u/s 36(1)(vii). Then how can the assessee raise a ground for deduction u/s 36(1)(vii) in the additional ground of appeal?! The judgment in Vijaya Bank’s case would not authorize the assessee to allow deduction u/s 36(1)(vii) when the assessee has not made any claim u/s 36(1)(vii) in the return of income.

(b) In the note submitted by the assessee pursuant to the direction of the Hon’ble Bench reproduced above, in paragraph 3(iii), it is stated:

(vi) Vide the additional ground of appeal filed before the Hon’ble Tribunal on 04, October, 2018, the Appellant has made a claim for deduction of the entire amount of provision of INR 5147,85,28,251 u/s 36(1)(vii) of the Act in view of the judgment of the Supreme Court in the case of Vijaya Bank Limited v/s CIT (2010), 323 ITR 166 (SC).

A reading of the additional ground of appeal would show that nothing is stated therein to suggest that the entire amount of provision of bad and doubtful debts of INR 5147,85,28,251 should be allowed as deduction u/s u/s 36(1)(vii) of the Act.

(c) Thus, the additional ground of appeal and the note lack clarity and coherence and hence the additional ground of appeal should be rejected in limine.

For the above reasons, on preliminary examination, the additional grounds of appeal should not be entertained.

7. Nevertheless, the merits about the applicability of the judgment of the Supreme Court in the case of Vijaya Bank Ltd (supra) are being discussed elaborately below in view of the arguments before the Bench and in order to dispel any doubts and confusion created by the assessee on this issue. The purpose is to show that the said judgment has absolutely no applicability in such cases.

25.5. We have perused the submission advanced by both sides in light of records placed before us. We have carefully considered the preliminary objections raised by the Ld.DR against the admission of the additional ground.

25.6. Primary objection of Ld.DR is that the additional ground has been filed after an inordinate delay and that the issue does not arise from the orders of the lower authorities.

25.6.1. At the outset, it is pertinent to note that under section 254(1) of the Act, the Tribunal is vested with wide appellate powers to pass such orders as it thinks fit, which include the jurisdiction to admit additional grounds raising pure questions of law arising from facts already on record. Hon’ble Supreme Court in the case of NTPC Ltd. v. CIT reported in 229 ITR 383 held that the Tribunal has the discretion to allow a new ground to be raised for the first time, provided it involves a question of law arising from facts already on record. Similarly, in Jute Corporation of India Ltd. v. CIT reported in 187 ITR 688, Hon’ble Supreme Court recognized the powers of appellate authorities to entertain additional grounds in order to correctly determine the tax liability.

25.6.2. Insofar as the objection regarding delay is concerned, we find that a liberal approach is warranted. Hon’ble Supreme Court in the case of Collector, Land Acquisition v. Mst. Katiji reported in 167 ITR 471 held that substantial justice should prevail over technical considerations and that a pragmatic, justice-oriented approach must be adopted while considering procedural delays. Further, the decision of Hon’ble Supreme Court in case of Vijaya Bank Ltd. v. CIT reported in 323 ITR 166 being a declaration of law under Article 141 of the Constitution, is binding and operates retrospectively from the inception of the statutory provision. Therefore, the assessee cannot be precluded from raising a legal claim founded on such binding precedent merely on the ground that the same was not raised earlier, and the delay cannot be viewed in a pedantic manner so as to defeat a legitimate claim.

25.6.3. As regards the contention that the issue does not arise from the orders of the Ld.CIT(A)/AO, we find that the underlying facts relating to the provision for bad and doubtful debts and its treatment in the accounts are already on record and have been examined by the lower authorities, albeit under a different provision. Thus, the issue cannot be said to be entirely new or alien to the proceedings.

In view of the above, and in exercise of our powers under section 254(1) of the Act, read with the ratio laid down by Hon’ble Supreme Court in the aforesaid decisions, we are inclined to admit the additional ground for adjudication on merits. The objections raised by the Revenue are accordingly rejected.

Accordingly the additional grounds raised by the assessee vide application dated 29/09/2018, stands admitted.

On Merits:

26. The Ld.AR submitted that the assessee-bank has created a net provision amounting to ₹5,147.85 crores (excluding provision for standard assets), comprising ₹4,622.33 crores towards non-performing assets and ₹525 crores towards restructured assets, as disclosed in the Profit & Loss Account and reflected in Note No. 18.7(k) of the Annual Report. It was further submitted that the said provision has been reduced from the gross loans and advances in the Balance Sheet and only the net figure is carried forward, thereby evidencing an actual write-off in terms of accounting treatment.

26.1. Relying on the decision of Hon’ble Supreme Court in Vijaya Bank Ltd. v. CIT reported in 323 ITR 166, the assessee has, by way of an additional ground, claimed that such treatment constitutes a valid write-off eligible for deduction under section 36(1)(vii) of the Act. It was pointed by the Ld.DR that an identical issue in the assessee’s own case for earlier years has been restored to the file of the Ld.AO by coordinate bench of this Tribunal for fresh examination in.

26.2. On the contrary, Ld.DR submitted as under:

8. MERITS – THE ASSESSEE HAS WRONGLY RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF VIJAYA BANK LTD [2010] 323 ITR 166 (SC). THE SAID JUDGMENT WAS GIVEN IN A DIFFERENT CONTEXT. THE SAID JUDGMENT IS NOT APPLICABLE HERE.

(a) In this case the assessment and appellate orders were proceeding in the predicted lines and the hearing of the original grounds of appeal were concluded by the Hon’ble ITAT. But suddenly it was discovered that the assessee had filed the captioned additional ground, erroneously citing the judgment of the Supreme Court in the case of Vijaya Bank Ltd. (supra). A reading of the additional grounds along with the notes would show, as stated above, that there is no clarity about the additional ground and the written note. However, from discussion at the hearing, the import of the assessee, subject to correction, seems to be as under,

• • Though it has not originally claimed any deduction of bad debts u/s 36(1)(vii) and only claimed deduction of provision for bad and doubtful debts u/s 36(1)(viia), it can now convert the entire amount of provision for bad and doubtful debts into bad debts and claim the entire amount as deduction u/s 36(1)(vii). because of the judgment in the case of Vijaya Bank Ltd (supra).
  • The effect of this argument is that the distinction between bad debts and provision for bad and doubtful debts is obliterated.

(b) It is respectfully submitted that the reliance on the judgment in the case of Vijaya Bank Ltd. (supra) is wholly misplaced. In the case of Vijaya Bank Ltd.(supra) the issue was entirely different. The issue was concerned with the manner of write off. The issue was whether individual accounts of the borrowers need to be closed to effect write-off envisaged in the section for availing benefit of deduction u/s 36(1) (vii). The Hon’ble Supreme Court held that individual accounts need not be closed. It would be sufficient compliance if the bad debt written off is debited to the profit and loss account and the amount of write-off is reduced from the loans and advances or debtors in the balance sheet. The findings of the Hon’ble Supreme Court in the case of Vijaya Bank Ltd.(supra) are confined to the provisions of sub­section 36(1)(vii). In the said decision the scope and applicability of clause (viia) of section 36(1), clause (v) of clause 36(2) and proviso to subsection 36(1)(vii) have not been examined or considered. Hence that judgment is not applicable to the case under consideration. The assessee is perversely citing this judgment.

(c) The assessee is a scheduled bank and hence the provision of section 36(1)(viia) applies to it. Moreover, the assessee itself had claimed deduction under section 36(1)(viia) in the return of income, but, later on, through this additional ground the claim u/s 36(1)(vii) is being purportedly and erroneously being made in respect of the same provision for bad and doubtful debts. [It is clarified that the assessee had not made any claim of deduction u/s 36(1)(vii) in the return of income]. Hence, the applicability of section 36(1)(viia) is not in dispute Therefore, in order to claim deduction u/s 36(1)(vii), it has to comply with the provision of section 36(2)(v) and the deduction should be limited to the amount prescribed in the proviso to section 36(1)(vii)

(d) It is respectfully submitted that “bad debts” and “provisions for bad and doubtful debts” are two distinct concepts and have entirely different characteristics in the Income tax Act and they cannot be treated interchangeably.

• • Bad debts apply to all assessees while provisions of bad and doubtful tests apply only to banks.
  • Provision for bad and doubtful debts are created on estimates out of NPAs as per the guidelines of RBI; there is no rigid test to determine bad and doubtful debts provided they fall under the parameters of RBI Guidelines. On the other hand bad debts for deduction have to pass a rigorous test of total non-recoverability.
  • Bad debts can be allowed as deduction to the extent it exceeds the amount of provision for bad and doubtful debts,
  • If there is only provision for bad and doubtful debts, and no bad debts, under law, no bad debt can be allowed. The assessee cannot resort to the method of converting provision for bad and doubtful debts into bad debts, make the provision Zero and claim bad debts. Bad debts and provision for bad and doubtful debts are classified at the time of origin. They are like cow and buffalo and cannot be treated interchangeably.
  • Bad debts have to be written off in the books

(e) Over the years a rigorous theory has evolved through a host of case laws for defining bad debts and allowing it as a deduction, For instance in South India Surgical Co. Ltd. v. Assistant Commissioner of Income-tax [2006], 287 ITR 62(Mad.), it has been held that being merely pessimistic about the prospect of recovery of debt in question is not sufficient to claim that the debt became bad and is allowable as deduction. The judgment of the assessee should be an honest judgment and not a convenient judgment. This is a question of fact. There are older judgments which gave stricter definition of bad debt. For example, if there is a ray of hope to recover the debt, however dim it may be and so long as the debt is in the process of realization, it cannot be said that it has become irrecoverable (Travancore Tea Estate Co. Ltd. v. Commissioner of Income-tax [1992], 197 ITR 528 (Ker.). The appeal to the Hon’ble Supreme Court was dismissed. (Travancore Tea Estate Co. Ltd . v. Commissioner of Income-tax [1998], 233 ITR 203 (SC)). The Hon’ble Supreme Court observed that whether a debt has become bad or the point of time when it became bad are pure questions of fact. In Commissioner of Income-tax v. Coates of India Ltd. [1998] 232 ITR 324 (Cal), it was held that the word “bad” used in conjunction with the word debt means worthless. The assessee is required to show that he Here is the continuous verbatim extraction (without page numbers):

⸻

has taken an honest judgment that the said debt has become bad debt. The possible difficulty in realization faced by the assessee is not a ground to hold the debt to be bad. Hon’ble Bombay High Court in Jadavji Narsidas & Co. v. Commissioner of Income-tax, Bombay City [1963] XLVII ITR 411 (Bom.) held that “bad debt” is claimed as an allowance by the assessee and therefore the burden is on him to show that he has no reasonable expectation of recovering at the time he wrote off or there is no ray of hope at all on which he could rely for recovering at the time when he wrote-off. The importance is that it is claimed as a deduction resulting in loss of revenue. Hence, the burden is on the assessee to show that the claim of deduction is in accordance with law.

Hence, the simplistic suggestion purportedly given by the assessee, citing the Vijaya Bank judgment to convert the entire provision for bad and doubtful debts to bad debts without scrutiny is absolutely untenable and a perverse interpretation of the Supreme Court judgment in Vijaya Bank’s case.

(f) As stated above, sections 36(1)(vii) and 36(1)(viia) are distinct provisions and operate in different fields. The conditions of allowability under these two provisions are totally different. This has been explained in the judgment of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. 343 ITR 270 (SC) as under:

“16 Sections 36(1)(vii) and 36(1)(viia) provide for such deductions which are to be permitted in accordance with the language of these provisions. A bare reading of these provisions show that section 36(1)(vii) and section 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled and read into each other. It is a settled canon of interpretation of fiscal statutes that they need to be construed strictly and on their plain reading.

17. The provision of section 36(1)(vii) would come into play in the grant of deduction subject to the limitation contained in section 36(2) of the Act. Any bad debt or part thereof which is written off as irrecoverable in the account of the assessee for the previous year is the deduction which the assessee would be entitled to get provided he satisfies the requirement of section 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of section 36(2).

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Section 36(2)(v) concerns itself as a check for claim of any double deduction and has to be read in conjunction with section 36(1)(viia) of the Act. It requires the assessee to debit the amount of such debt or part thereof in the previous year to the provision made for that purpose.

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25. The language of section 36(1)(vii) is unambiguous and does not admit of two interpretations. It applies to all banks commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to section 36(2) of the Act. It is obligatory upon the assessee to prove to the Assessing Officer that the case satisfies the ingredients of section 36(1)(vii) on one hand and it satisfies the requirements stated in section 36(2) of the Act on the other.

The proviso to section 36(1)(vii) does not, in absolute terms control the application of this provision as it comes into operation only when the case is one which falls squarely under section 36(1)(viia) of the Act. We may also notice that the Explanation to Section 36(1)(vii), introduced by the Finance Act 2001 has to be examined in the context of the principal section. The Explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of any bad debt or part thereof written off as irrecoverable in the accounts of the assessee.’ Thus the concept of making a provision for bad and doubtful debts will fall outside the scope of section 36(1)(vii) of the Act simpliciter. The proviso, as already noticed, has to be read with provisions of section 36(1)(viia) of the Act.

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27. As per this proviso to clause (vii), the bad debts would be limited to excess of the amount written off over the amount of provision which has already been allowed under clause (viia). The proviso by and large protects the interest of Revenue.”

In a separate concurring judgment Hon’ble Mr. Justice Kapadia, CJI has observed:

“2…………. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in computation of taxable profits. In order to promote rural banking and in order to assist scheduled commercial banks in making adequate provision from their current profits to provide for risks in relation to their rural advance, the Finance Act inserted clause (viia) in subsection (1) of section 36 to provide for a deduction in the computation of taxable profits of all scheduled commercial banks in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches provided by the IT Rules 1962.”

(g) It is respectfully submitted that, as explained in the aforesaid judgment of the Hon’ble Supreme Court, the following principles emerge regarding deductions u/s 36(1)(viia) and 36(1)(vii) of the Act.

36(1)(viia):

(i) The assessee being a bank is entitled to create a provision for bad and doubtful debts which is allowable as deduction subject to the percentage limits prescribed under this provision. The provision is created according to the own system adopted by the assessee under the RBI Guidelines.

(ii) Normally provisions are not allowed as deductions. However, considering the risk involved in the business of lending money, a certain percentage of the total income/loans and advances is allowed as deduction under this clause.

36(1)(vii):

(i) Here, deduction is allowed of the bad debts.

(ii) For allowance of bad debt as deduction two conditions have to be fulfilled—(a) each debt has to be examined and in the judgment of the assessee it should be a bad debt. This is the most important and primary condition. This ingredient should be first fulfilled before proceeding further. (b) the bad debt should be written off as irrecoverable in the accounts of the assessee. (c) The bad debt should be quantified after satisfying those ingredients.

(iii) The next exercise to be done is that the bad debt should be debited to the provision for bad doubtful debts as required by the provisions of section 36(2)(v).

(iv) If the amount of bad debt is less that the provision, no bad debt will be allowed as a deduction u/s 36(1)(vii).

(v) If the amount of bad debt is more than the provision only the excess of the amount of bad debts over the credit balance of provision of bad and doubtful debts account will be allowed as a deduction under the proviso to section 36(1)(vii).

(vi) Under Explanation 1 to section 36(1)(vii), no part of provision for bad and doubtful debts will be allowed as deduction u/s 36(1)(vii).

Thus there is absolutely no ambiguity about the operations of the provisions of sections 36(1)(vii) and 36(1)(viia). They are completely distinct and the conditions of their applicability are entirely different. Whether the deduction will fall under section 36(1)(vii) or 36(1)(viia) will be decided at the time of finalizing the accounts in the beginning. Once the category is decided there is absolutely no scope of changing category later on.

Deduction of bad debt is allowed under section 36(1)(vii) when there is no chance of any recovery. Whether the debt is bad or not is a question of fact. On the other hand, deduction u/s 36(1)(viia) is in respect of mere provision created on estimated basis.

So, provisions for bad and doubtful debts cannot be elevated to the status of bad debts.

(h) It is respectfully submitted that the assessee should examine each item of debt and have a bona fide belief that the debt has become bad and write off the same as irrecoverable. The test to hold a debt to be bad is rigid, unlike provision which is based on estimate.

(i) It is respectfully submitted that deduction of bad debts can be allowed only if stringent conditions are met. The AO must examine each debt and satisfy conditions of section 36(2). No such exercise was undertaken.

Thus the basic conditions for allowing deduction u/s 36(1)(vii) have not been fulfilled. The assessee had not claimed any bad debt in the original return. The judgment in Vijaya Bank does not waive these conditions.

Hence, the additional ground of appeal and the claim of bad debt deserve to be rejected ab initio.

(j) It is respectfully submitted that it defies logic how a provision created u/s 36(1)(viia) can later be converted into bad debts.

(k) It is respectfully submitted that such interpretation would lead to a paradoxical situation:

(a) No bad debt claimed originally.

(b) Provision claimed u/s 36(1)(viia).

(c) Later converted into bad debt u/s 36(1)(vii).

(d) Entire amount allowed without checks.

(l) Such argument has no force as it would blur the distinction between provision and bad debts.

(m) It would bypass statutory limits and allow unlimited deduction.

(n) It would render provisions of sections 36(1)(viia), 36(2)(v), proviso and Explanation otiose.

(o) It creates an absurd situation as the amount does not satisfy conditions of bad debt.

(p) The proposition involves:

Step 1- Original provision for bad and doubtful debts and no bad debts.”

Step 2- It would covert provision for bad and doubtful debts to bad debts.

Step 3- It will then write off the converted bad debts in the manner suggested in Vijaya Bank’s decision.

But the real hurdle is in step 2. How will it convert Provision for bad and doubtful debts to bad debts? How will it convert cows to buffalos? At this stage entire process breaks down.

(q) Hence, in view of the above elaborate discussion, on merits also, the additional ground of appeal deserves to be rejected.

9. In passing, without prejudice to the contention of the Revenue that the additional ground of appeal is not maintainable, the exact benefit to the assessee from the additional ground is not discernable. In last paragraph of the note, the assessee has submitted that if the claim of deduction u/s 35(1) (vii) is allowed, the claim of deduction u/s 36 (viia) would be withdrawn, In this case, the amounts are same. As per the ground of appeal 16, it is stated, the claim u/s 36(1)(viia) is less than the limit prescribed in the section 36(1)(viia). If that is the case, the assessee would not get any benefit through the additional ground. The factual position of the purpose of the additional ground needs clarification.

10. It is submitted that in any case, the additional grounds of appeal should be rejected in principle.

We have carefully considered the elaborate submissions of the Ld. DR opposing the assessee’s claim on merits.

26.3. The thrust of the Revenue’s argument is that the assessee is impermissibly seeking to convert a provision for bad and doubtful debts claimed under section 36(1)(viia) into a claim for bad debts under section 36(1)(vii), and that the reliance placed on the decision of Hon’ble Supreme Court in case of Vijaya Bank Ltd.(supra) is misplaced.

26.4. We have carefully considered the rebuttal filed by the assessee to the written submissions of the Ld. DR. At the outset, we find merit in the contention of the assessee that the allegation of the additional ground being “suddenly discovered” is factually incorrect. The record clearly evidences that the additional ground was filed as early as October 2018 and was also brought to the notice of both the Bench and the Ld. DR during the course of hearings from time to time. The objection of the Ld. DR on this count is, therefore, devoid of factual basis and is rejected.

26.5. The Ld.AR also clarified that claim under section 36(1)(vii) is made in the alternative to the claim under section 36(1)(viia), and that it does not seek double deduction. This position adequately addresses the primary apprehension of the Revenue regarding possible duplication of claims. As held by the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. reported in 343 ITR 270, the two provisions operate in distinct fields, and a claim under one does not ipso facto bar a claim under the other, subject to the statutory limitations.

26.6. Ld.AR placed reliance on the decision of the co-ordinate bench of this Tribunal in case of ACIT vs. IDBI Bank in ITA No. 4596/Mum/2019 vide order dated 28/09/2023 supports the proposition that a claim under section 36(1)(vii), even in the case of banks, is admissible subject to verification of actual write-off in accordance with law and in light of the ratio laid down in Vijaya Bank Ltd.(supra). At the same time, we are conscious of the fact that the allowability of such claim is intrinsically linked to verification of factual aspects, including actual write-off and compliance with section 36(2), as rightly contended by the Ld. DR.

26.7. We have carefully perused the submissions advanced by both sides in the light of the material placed on record. The Ld. DR has emphasized that the assessee, being a scheduled bank, had originally claimed deduction only under section 36(1)(viia) in respect of provision for bad and doubtful debts and had not claimed any deduction under section 36(1)(vii). It is contended that the present attempt of the assessee to convert the entire provision into bad debts and claim deduction under section 36(1)(vii) is contrary to the statutory scheme and seeks to obliterate the well-recognized distinction between a ‘provision’ and an ‘actual write-off’.

26.8. The Revenue has further placed reliance on the judgment of the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. v. CIT (supra) to contend that sections 36(1)(vii) and 36(1)(viia) operate in distinct and independent fields, each governed by separate conditions and limitations. It has been argued that while a provision under section 36(1)(viia) is based on estimation in accordance with regulatory guidelines, a claim under section 36(1)(vii) mandates satisfaction of stringent conditions, including actual write-off and compliance with section 36(2), which, according to the Revenue, have not been demonstrated in the present case. The Ld. DR has also expressed apprehension that acceptance of the assessee’s contention would lead to an anomalous situation, enabling conversion of a provision into bad debts without proper factual verification, thereby bypassing statutory safeguards and resulting in unintended double deduction.

26.9. We have also considered the judicial precedents relied upon by the Ld.DR. While the legal propositions laid down therein are not in dispute, it is well settled that the applicability of a precedent depends upon the issue involved and the factual matrix of the case. In the present case, the controversy lies in a narrow compass, namely, whether the accounting treatment adopted by the assessee constitutes an actual write-off in terms of section 36(1)(vii), in the light of the law laid down by Hon’ble Supreme Court. Therefore, only such precedents which directly deal with the conditions of allowability under section 36(1)(vii), or the interplay between sections 36(1)(vii) and 36(1)(viia), would have a determinative bearing on the issue.

26.10. On merits, we find that the objection of the Ld. DR proceeds, to some extent, on an incorrect appreciation of the ratio laid down by the Hon’ble Supreme Court in Vijaya Bank Ltd. v. CIT (supra). The said decision clarifies the manner in which a write-off is to be effected for the purposes of section 36(1)(vii), namely, that it would suffice if the bad debts are written off in the books by debiting the Profit & Loss Account and correspondingly reducing the amount from loans and advances/debtors. However, the said judgment does not dilute the statutory conditions prescribed under sections 36(1)(vii) and 36(2), nor does it support a blanket or mechanical conversion of a provision into bad debts.

26.11. At the same time, we are unable to accept the extreme proposition canvassed by the Revenue that the assessee is, as a matter of law, precluded from claiming deduction under section 36(1)(vii) merely because it had originally claimed deduction under section 36(1)(viia). The Hon’ble Supreme Court in Catholic Syrian Bank Ltd. (supra) has categorically held that the two provisions operate in distinct fields and that an assessee may be entitled to claim deduction under both, subject to fulfillment of the respective conditions and the limitation contained in the proviso to section 36(1)(vii) read with section 36(2). Thus, the existence of a claim under section 36(1)(viia) does not, per se, bar a claim under section 36(1)(vii).

26.12. The real controversy, therefore, is not one of legal permissibility in abstract, but whether, on facts, the conditions prescribed under section 36(1)(vii) read with section 36(2) stand satisfied. In this regard, we find considerable force in the submission of the Ld. DR that deduction under section 36(1)(vii) cannot be allowed in a blanket manner without examining whether: (i) the debts have in fact become bad; (ii) the same have been written off as irrecoverable in the books of account; and (iii) the conditions stipulated under section 36(2), including adjustment against the provision for bad and doubtful debts, have been duly complied with. These aspects are essentially factual in nature and require proper verification.

26.12. Further, the contention of the Revenue that a mere provision cannot be equated with an actual write-off is well founded in law, as also clarified by the Hon’ble Supreme Court in Catholic Syrian Bank Ltd. (supra), wherein it has been held that a provision for bad and doubtful debts does not fall within the ambit of “bad debts written off” under section 36(1)(vii). Therefore, unless the assessee is able to demonstrate an actual write-off in accordance with law, the claim cannot be allowed.

26.13. In view of the foregoing, we are of the considered opinion that the issue cannot be adjudicated in a summary manner at this stage. While we reject the broad contention of the Revenue that the claim under section 36(1)(vii) is not maintainable in law, we accept its contention that the allowability of such claim is subject to strict compliance with statutory conditions. Accordingly, the matter is restored to the file of the Ld.AO for limited verification as to whether the assessee has, in substance, effected a valid write-off of identifiable bad debts and has complied with the requirements of sections 36(1)(vii) and 36(2), and for adjudication afresh in accordance with law, keeping in view the principles laid down by the Hon’ble Supreme Court in case of Vijaya Bank Ltd(supra) and Catholic Syrian Bank Ltd.(supra).

Accordingly, additional grounds raised by assessee vide application dated 29/09/2018 stands allowed for statistical purposes.

Revenue’s Appeal:

At the outset it is noted that the Ld.DR has raised objections on first principles while arguing the grounds raised in the revenue appeal similar to what has been argued in assessee’s appeal. The same has been considered by this bench in paragraphs 5-5.20. We therefore at the cost of repetition are not considering the same.

We rely and follow mutatis mutandis, our observations recorded herein above in paragraphs 5-5.20.

27. Ground No.1 being general in nature does not call for any specific adjudication.

28. Ground No.2 relates to the taxability of interest on securities on accrual basis vis-à-vis due basis. The facts, as noted by the Assessing Officer, reveal that the assessee-bank reduced a sum of ₹497,99,38,038/- from its taxable income representing net interest accrued but not due. The Assessing Officer recorded that interest accrued but not due as on 31.03.2010 amounted to ₹4523,86,69,146/- as against ₹4025,87,31,108/- as on 31.03.2009, and the differential amount was claimed as deduction in computation of income.

28.1. The Assessing Officer observed that the assessee follows mercantile system of accounting and recognizes interest income on accrual basis in its books prepared in accordance with RBI guidelines. However, for tax purposes, such income is offered only on due basis.

The Assessing Officer held that once income is recognized in books and there is certainty and quantification, the same must be brought to tax and cannot be excluded merely on the ground that it has not become due. It was further observed that such exclusion results in distortion of income and violation of matching principle, particularly when the assessee claims broken period interest on accrual basis.

The Ld.CIT(A) deleted the addition relying upon the Ld.CIT(A) decision for A.Y. 2009-10.

28.2. The Ld.DR, supporting the order of the Assessing Officer, vehemently contended that the principle of res judicata does not apply to income-tax proceedings and each year is an independent unit of assessment. It was argued that the assessee has been consistently taking shelter under earlier orders by claiming that the issue is covered, while continuing to adopt a method that results in deferment of taxable income. It was further submitted that the assessee maintains its books on accrual basis in accordance with RBI guidelines which ensure certainty of income, and therefore it cannot adopt a different method for taxation. It was emphasized that there cannot be two sets of income, one for books and another for tax purposes, and the method adopted by the assessee leads only to artificial deferment of taxation.

28.3. Per contra, the Ld.AR submitted that the issue is squarely covered in favour of the assessee by consistent decisions of the Tribunal in assessee’s own case as well as by the judgment of the Hon’ble Bombay High Court. It was contended that interest on securities becomes taxable only when it becomes due and enforceable. It was further submitted that consistency must be maintained as held in Radhasoami Satsang 193 ITR 321. The Ld.AR has relied on assessee’s own case decided by the ITAT in favour of the assessee vide order dated:

• 11 October 2024 for AY 2006-07 and AY 2007-08.
• 06 June 2023 for AY 2009-10.
• 22 March 2022 for the AY 2005-06.
• 30 September 2021 for AY 2003-04.
• 12 July 2021 for the AY 2001-02 and 2002-03.
• 06 March 2020 for the AY 2000-01.
• 03 February 2020 for the AY 2008- 09.
• 19 May 2008 for AY 1991-92 to AY 1994-95.
• 17 September 2009 for AY 1995-96.
• 26 July 2013 for AY 1996-97.

We have carefully considered the rival submissions and perused the material available on record.

28.4. It is not in dispute that the assessee follows mercantile system of accounting and recognizes interest income on accrual basis in its books. It is also not in dispute that there is no uncertainty regarding realization of such income. On first principles, we find considerable force in the reasoning of the Assessing Officer and the submissions of the Ld. DR. Once income is recognized in books on accrual basis and such recognition is supported by RBI norms ensuring certainty and quantification, there appears to be no justification to exclude the same from taxable income. The method adopted by the assessee results in recognition of income in books, its exclusion in computation, and subsequent offering in later years, thereby resulting in deferment of taxation. Further, the assessee is claiming expenditure such as broken period interest on accrual basis while not offering corresponding income on the same basis, which is inconsistent and contrary to the matching principle. We also note that the Coordinate Bench in assessee’s own case in ITA No. 3868/Mum/2013 dated 11.10.2024 has observed that the concept of accrual cannot be applied differently for accounting and taxation purposes and such selective treatment leads to distortion of income. 28.5. However, it is an admitted position that the identical issue has been consistently decided in favour of the assessee in earlier years and the same has been affirmed by Hon’ble jurisdictional High Court. In view of the binding nature of such precedents and following the principle of judicial discipline, we are constrained to follow the earlier decisions. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld.

Accordingly, Ground No.2 raised by the Revenue is dismissed.

29. Ground No.3 raised by the revenue relates to disallowance of broken period interest amounting to of ₹ 556,19,72,591/-

During the year under consideration, assessee paid total broken period broken period interest of Rs.1646,94,25,721/- on purchase of securities, out of which Rs.556,19,72,591/- pertained to securities held at the year end and was claimed as revenue expenditure.

29.1. Broken Period Interest relating to Government and other approved securities refers to interest relatable to the period from last due date (upto which interest was paid) till the date of purchase or sale. Thus, when a bank purchases securities, it pays the market price of security plus Broken Period Interest to the seller, because seller is entitled to interest till the date of sale. This is an age-old practice in the Government securities market. The purchasing banker treats the Broken Period Interest paid as expenditure and the selling banker treats the Broken Period Interest received as income. The purchasing bank becomes the owner of security from the date of purchase only and therefore it is natural that interest relatable to the period before purchase is treated as income of the selling bank. These securities are fixed income earning assets, where earnings accrue in direct proportion with time.

29.2. The assessee submitted that above-said approach consistently adopted by all banks is also supported by Accounting Standards 9 and 13 framed by the Institute of Chartered Accountants of India. To quote from AS-9 on Revenue Recognition:

“these revenues are recognised on the following bases

a. Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable”

29.3. Similarly, AS-13 on Accounting for Investments refers to “when unpaid interest has accrued before the acquisition of an interest-bearing investment and is therefore included in the price paid for the investment, the subsequent receipt of interest is allocated between-pre-acquisition-and-post-acquisition-periods, the pre-acquisition period is deducted from cost”.

29.4. It was thus submitted that the assessee has been consistently showing Broken Period Interest received over the BPI paid as income and vice versa which is a regular market practice. The assessee placed reliance on the decision of Hon’ble Bombay High Court in the case of American Express International Banking Corporation reported in 258 ITR 601, wherein it has been held that Broken Period Interest is deductible in computing business income, after considering the decision of Hon’ble Supreme Court in case of Vijaya Bank vs. ACIT reported in (1991) 187 ITR 5541.

29.5. The also submitted that the issue regarding allowability of Broken Period Interest was considered in great detail by Hon’ble Bombay High Court in the case of American Express(supra). Hon’ble Court inter alia factually distinguished the decision of Hon’ble Supreme Court in the case of Vijaya Bank (supra), the relevant portion of which is reproduced below:

“In that case (Vijaya Bank’s case) the facts were as follows. During the assessment year under consideration, Vijaya Bank entered into an agreement with Jayalakshmi Bank Limited, whereby Vijaya Bank took over the liabilities of Jayalakshmi Bank. They also took over assets belonging to Jayalakshmi Bank. These assets consisted of two items viz. Rs.58,568 and Rs.11,630. The said amount of Rs.58,568 represented Interest, which accrued on securities taken over by Vijaya Bank from Jayalakshmi Bank and Rs. 11,630 was the interest which accrued upto the date of purchase of securities by the assessee-Bank from the open market. These two amounts were brought to tax by the A.O. under section 18 of the Income-tax Act. The assessee-Bank claimed that these amounts were deductible under sections 19 and 20. This was on the footing that the department had bought to tax, the aforesaid two amounts as interest on securities under section 18. It is in the light of these facts that one has to read the judgement in Vijaya Bank’s case. In the light of the above facts, it was held that outlay on purchase of income bearing asset was in the nature of capital outlay and no part of the capital outlay can be set-off as expenditure against income accruing from the asset in question. In our case, the amount which the assessee received has been brought to tax under the head “Business” under section 28. The amount is not brought to tax under section 18 of the Income-tax Act. After bringing the amount to tax under the head “Business”, the department taxed the Broken Period Interest Received on sale, but at the same time, disallowed Broken Period Interest Payment at the time of purchase and this led to the dispute. Having assessed the amount received by the assessee under section 28, the only limited dispute was whether the impugned adjustments in the method of accounting adopted by the assessee-Bank should be discarded. Therefore, the judgement in Vijaya Bank’s case has no application to the facts of the present case. If the department had brought to tax, the amounts received by the assessee-Bank under section 18, then Vijaya Bank’s case was applicable. But, in the present case, the department brought to tax such amounts under section 28 right from inception. Therefore, the Tribunal was right in coming to the conclusion that the judgement in Vijaya Bank’s case did not apply to the facts of the present case”

Hon’ble Bombay High Court held that:

“That the judgement in the case of Vijaya Bank had no application to the facts of the case. That, having assessed the income under section 28, the department ought to have taxed interest for Broken Period Interest Received and the department ought to have allowed deduction for Broken Period Interest Paid.”

29.6. The assessee submitted that similar view has also been taken in inter alia the following cases:

i. CIT v. Citibank N.A. (264 ITR 18) (Bom)

ii. CIT v. Nedungadi Bank Ltd. (264 ITR 545) (Bom);

iii. Credit Lyonnais (94 ITD 401) (Bom);

iv. Union Bank of India (Income Tax Reference 149 of 1995) (Bom);

v. Gilt Securities Trading Corporation Ltd. (ITA No. 2784/Mum/2000);

vi. Gilt Securities Trading Corporation Ltd. (ITA No. 5154/Mum/2004).

29.7. The Ld.AO rejected the submissions of the assessee by observing as under:

“5.3. In the assessment made for A.Y. 2007-08 and for earlier year, the contention of the assessee treating the broken period interest paid on purchase of securities as revenue expenditure has not been accepted by the revenue relying upon the decision of Hon’ble Supreme Court in the case of CIT Vs. Vijaya Bank reported in 187 ITR 541. The Hon’ble Supreme Court has held that any amount paid at the time of purchase is a part of the purchase consideration of the asset and thus it is the capital cost.

5.4. The bulk of a bank’s assets are held either in the form of (a) loans and advances or (b) investments. Investments form a significant portion of a bank’s assets, next only to loans and advances, and are an important source of overall income. Commercial banks’ investments are of three broad types: (a) Government securities, (b) other approved securities and (c) other securities. These three are also categorised into SLR (Statutory Liquidity Ratio) investment and non-SLR investments. SLR investments comprise Government and other approved securities, while non-SLR investments consist of ‘other securities’ which comprise commercial papers, shares, bonds and debentures issued by the corporate sector. Under the SLR requirement, banks are required to invest a prescribed minimum of their net demand and time liabilities (NDTL) in Government- and other approved securities under the Banking Regulation Act, 1949. It is to be noted that SLR is prescribed in terms of banks’ liabilities and not assets. This provision amounts to ‘directed investment’, as the law directs banks to invest a certain minimum part of their NDTL in specific securities.

5.5 As per the RBI guidelines, the investments (SLR as well as Non-SLR) are disclosed in the Balance Sheet of the Bank as per the six-category classification listed below:

a. Government securities,

b. Other approved securities,

c. Shares,

d. Debentures & Bonds,

e. Investment in subsidiaries joint ventures in the form of shares, debentures, bonds etc, and

f. Others (Commercial Paper, Mutual Fund Units, etc.).

5.6 As far as the categorization and valuation of banks’ investment portfolio is concerned the key features of RBI guidelines are as under:

5.7 The investment portfolio of a bank normally consists of both “approved securities” (predominantly Government securities) and “others” (shares, debentures and bonds). The Bank should classify their entire investment portfolio under three categories viz. ‘Held to Maturity’ (HTM), ‘Held for Trading’ (HFT), and ‘Available for Sale’ (AFS). HTM includes securities acquired with the intention of being held up to maturity; HFT includes securities acquired with the intention of being traded to take advantage of the short-term price/interest rate movements; and AFS refers to those securities not included in HTM and HFT.

5.8 The guidelines of RBI with regard to securities held-to-maturity (HTM) given in the Master Circular applicable to the previous year relevant to the current assessment year state the following:

i) The securities acquired by the banks with the intention to hold them up to maturity will be classified under ‘Held to Maturity (HTM)’.

ii) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.

Thus, the RBI guidelines make the fact clear that the securities held to maturity are identified and categorized at the time of acquisition. That they are the investments of the bank and are as such taken to the balance sheet of the bank.

5.9 The assessee has claimed that when a Bank purchases securities with an intention to hold them as HTM, the purchase price paid includes two components namely, the price of the security and the broken period interest. The assessee further claimed that the interest component of the purchase price paid – for the broken period – cannot be considered as the cost price of the security but needs to be considered as a separate revenue item. Moreover, the assessee is also claiming that the broken period interest has to be adjusted against the other interest income earned by the Bank.

5.10 The assessee relied on the case of American Express International Banking Corpn. Vs. CIT (2002) 258 ITR 601 (Bom.) in this regard. However, the facts of the case are distinguishable since the Hon’ble High Court of Bombay has based its judgment on the premise that the broken period interest was charged to tax under the head of Business Income.

5.11 It is pertinent here to consider the observations of the Hon’ble Supreme Court of India in the case of United Commercial Bank Ltd. Vs. CIT (1957) 32 ITR 688 (SC), wherein it was clarified that the interest on securities held by the bank cannot be treated as business income but has to be assessed to tax as interest income on securities i.e. u/s 56 of the present Income Tax Act, 1961. Moreover, the Hon’ble Supreme Court of India in the case of Vijaya Bank Ltd. Vs. Addl.CIT (1991) 187 ITR 541 (SC) clearly stated that broken period interest is part of capital outlay for acquisition of securities. Further, the Rajasthan High Court in the case of CIT vs. The Bank of Rajasthan Limited came to the conclusion that the amount paid by the bank towards broken period interest on securities purchased by it is not an allowable business deduction but has to be considered as the purchase paid for acquiring the securities after considering the case of American Express International Banking vs. CIT (258 ITR 601) in detail.

5.12 Furthermore, the jurisdictional High Court of Bombay in the following cases clearly held that interest income on securities cannot be considered as business income of a bank:

(i) CIT vs. Banque National de Paris (1999) 237 ITR 278 (Bom.)

(ii) Banque National de Paris vs. CIT (1999) 237 ITR 518 (Bom.)

(iii) Mercantile Bank Ltd. Vs. CIT (2001) 252 ITR 225 (Bom.)

5.14 In this connection it is necessary to go into the background of the issue. Prior to 01.04.1989, the income from securities was assessable under the head ‘Interest on Securities’ [Clause B of Section 14 of the Income Tax Act]. This head of income was omitted w.e.f.01.04.1989 but, at the same time, Clause (28B) of Section 2 and Clause (id) of Section 56 were inserted by the Finance Act of 1988. Interest on securities is now defined under the Income-tax Act under Clause (28B) of Section 2 of the Income Tax Act as under:

“(28B) ‘Interest on securities’ means, –

(i) interest on any security of the Central Government or a State Government;

(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act”

As far as taxation of interest on securities is concerned, clause (id) of Section 56(2) states as under:

“(id) income by way of interest on securities, if the income is not chargeable to income-tax under the head ‘Profits and gains of business or profession’”

5.15 Thus, the interest on securities, which does not fall under the head Profits and Gains of Business or Profession, has to be brought to tax under the head ‘Income from Other Sources’. The assessee, in its reply, has relied on the case of CIT vs. Cocananda Radhaswami Bank Ltd. [57 ITR 306(SC)] and further submitted that it has been settled by a series of decisions of the High Courts and the Hon’ble Supreme Court of India that the securities held by the Banks may constitute as either stock-in-trade or investment. If the argument of the assessee is applied in its case, then as can be seen from the discussion at Para 2.2 above that securities Held-to-Maturity (HTM) need to be considered as its investments and the securities held under the head Held-for-Trade (HFT) and Available-for-Sale (AFS) as its stock-in-trade.

5.16 The guidelines of the RBI with regard to trading of securities under the head ‘HFT and AFS’, in contra-distinction to those on HTM, are as follows:

“Available for Sale & Held for Trading

i) The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under ‘Held for Trading (HFT)’.

ii) The securities which do not fall within the above two categories (HTM & HFT) will be classified under ‘Available for Sale (AFS)’.

iii) The banks will have the freedom to decide on the extent of holdings under HFT and AFS. This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills, capital position.

iv) The investments classified under HFT would be those from which the bank expect to make a gain by the movement in the interest rates/market rates. These securities are to be sold within 90 days.

v) Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.”

5.17 Current assets are defined as those assets that are reasonably expected to be realized in cash or sold during the normal operating cycle of a business entity or within one year whichever is longer. On the other hand investments are held in anticipation of earning a long term return. The securities held under HTM category are long term and are valued at cost price or face value whereas, securities held under HFT and AFS categories are short term and are valued cost price or market price, whichever is lower. Thus, the securities held under HTM have all the characteristics of investment and the securities held under the head HFT and AFS categories have all the characteristics of current assets and they need to be assessed as such under the Income Tax Act. In view of the above, the investment made in acquiring securities under the head HTM has to be considered as the purchase price of the security and under no circumstances, the purchase price can be divided further into components of price and broken period interest as observed by the Hon’ble Supreme Court in the case of Vijaya Bank (supra).

5.18 Once it is concluded that interest income on the securities held under the head ‘HTM’ has to be assessed u/s 56 of the I. T. Act, the only deduction that can be allowed is as per clause (iii) of Section 57 of the I. T. Act. Clause (iii) of Section 57 of the I. T. Act is reproduced below:

“(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

In the given circumstances, any claim for deduction from the interest on securities held under HTM category by the assessee cannot be sustained because the assessee is in no position to show that any reasonable expenditure has been incurred for the purpose of realizing interest on securities. The amounts claimed by the assessee for deduction are not shown to have been expended for the purpose of realizing the interest and are, therefore, not allowable as deductible expenditure.

5.19 The broken period interest paid by the assessee is nothing but part of the price paid for the securities for acquiring the securities. Whatever be the reason that prompted the assessee to purchase the securities, the price paid for them is in the nature of capital outlay only. No part of it can be set off as expenditure against interest accruing on these securities. In view of the above discussion, the broken period interest claim of the assessee is considered as part of the cost price of the securities acquired by the assessee bank and the deduction of Rs. 556,19,72,591/- claimed is disallowed herewith.”

29.8. On an appeal, the Ld.CIT(A), held as under:

“5.3 The facts of the case are discussed above. Here AO had disallowed claim of deduction of Rs. 556,19,72,591/- for the year under consideration on the ground that it is against the theory of real income as well as matching concept which are fundamental to the accounting. This issue is recurring in nature in as per CIT(A)’s order in appellants own case in A.Yrs. 1997-98 to 2009-10 and also ITAT’s order in appellant’s own case for the A.Yrs. 1991-92 to 1996-97 which are in favour of the appellant and which are as under:

Relevant para of CIT(A) order of AY 2007-08 is reproduced as under:

“This is also a recurring issue. It has been submitted that the issue of allowability of broken period interest paid has been decided by my predecessor CsIT(A) in AYs 2003-04 to 2006-07 in the appellant’s own case in favour of the assessee; and the Hon’ble ITAT too has decided the issue in AYs 1991-92 to 1996-97 in favour of assessee. It has been pointed out that the Hon’ble ITAT in the appellant’s own case for A.Y. 1991-92 to 1994-95, para 8 had held as under:

“we find that a similar issue arose before the Hon’ble Bombay High Court in the case of American Express International Bank (supra) wherein the Bombay High Court after considering the decision of Hon’ble Supreme Court in the case of Vijaya Bank held as under:

The judgment in the case of Vijaya Bank had no application to the facts of the case. That having assessed the income u/s 28, the department ought to have taxed interest for broken period interest received and the department ought to have allowed the deduction for broken period interest paid.”

The facts being identical and there being no change in law, hence, respectfully following the same, we decide this ground in favour of the assessee.

The decision of Hon’ble ITAT for AY 1996-97 in ITA no 5470/Mum/2002 [order dated 26.07.2013] on the issue is also placed on record. Accordingly the broken period interest paid of Rs 60,07,65,382 is allowable deduction. The same is therefore allowed.”

In light of the above, the action of the Assessing Officer in making a disallowance in relation to BPI is illegal and contrary to law. In other words, the question of making any addition in relation to BPI, either protective or substantive, does not arise.

Relevant para of CIT(A) order of AY 2009-10 is reproduced as under:

“In view of the above decision of the CIT(A) and ITAT, claim of the appellant is allowed. Disallowance in relation to BPI is against the law and question of making any addition in relation to BPI either protective or substantive does not arise. This ground of appeal is allowed.”

Relevant extract of the order of the Bombay High Court for assessment year 1996-97 is reproduced as under:

“a) Whether, on the facts and in the circumstance of the case, the Tribunal was right in law in allowing the Broken Period Expenses, whereas the same is in the nature of Capital outlay towards acquiring investments, given that the main business of the assessee is that of banking and therefore the ratio laid down by the Apex Court in the case of Vijaya Bank (57 Taxmann 152) is squarely applicable in the case of assessee?

Re:- Question (a):

(i) It is an agreed position between parties that the decision of this Court in American Express International Banking Corporation vs. C.I.T. 258 ITR 601 covers the issue raised herein.

(ii) In view of the above, question (a) as formulated does not give rise to any substantial question of law. Therefore not entertained.”

The Assessing Officer has attempted to distinguish the judgment of the Bombay High Court in the case of American Express and has incorrectly not allowed the claim of the Bank merely on the basis of the fact that interest ccrued but not due as on 31 March 2008 was not offered for tax by the Bank. The Assessing Officer has not appreciated the fact that allowance of BPI is an independent item and cannot be linked with taxability of interest. If at all, the BPI paid has to be linked, the linkage should be with BPI received as mandated by the Bombay High Court in the case of American Express discussed above. The relevant extract from the judgment is reproduced below for ready reference.

“…That the judgement in the case of Vijaya Bank had no application to the facts of the case. That, having assessed the income under section 28, the department ought to have taxed interest for Broken Period Interest Received and the department ought to have allowed deduction for Broken Period Interest Paid.”

It is abundantly clear in the present case that the BPI received has been offered for tax. This finding is also recorded in para 5.1 of the assessment order, which clearly states that BPI received of Rs. 1339.75 crore is credited to the Profit and Loss Account, which in turn is offered for tax.

In view of the above, the question of disallowance of BPI paid by linking it to interest on securities (as against linking to BPI received) does not arise in light of the Bombay High Court judgment in the American Express’ case, which has subsequently been upheld by the Supreme Court in Citibank’s case.

Without prejudice to and independent of the above, the Assessing Officer has not appreciated that in most of the securities of the Bank on which interest is claimed as not taxable on the basis that income has not become due, the income is not relatable to securities in respect of which allowability of BPI is claimed.

Without prejudice to the above we may mention that the Bank is eligible for relief in respect of BPI on securities disallowed in earlier years which were sold during the current financial year.

5.4 I have considered the appellant’s submissions. In view of the above decision of CIT(A) and ITAT, claim of the appellant is allowed. Disallowance in relation to BPI is against the law and question of making any addition in relation to BPI either protective or substantive does not arise. This ground of appeal is allowed.”

29.9. On appeal before this Tribunal, the Ld.DR submitted as under:

“The assessee bank has made provision for securities- bonds and debentures, which have matured during the year but payment has not been received by 31st March and claimed it as deduction. The assessee claims that it has made the provision following RBI Guidelines. Provisions are not allowable unless specifically provided in the Act. like 36(1) (via). There is no provision in the Act under which this provision is to be allowed. If the amounts are not recovered, they can be allowed as deduction as bad debts. As held by the Supreme Court in Southern Technologies Ltd. v. JCIT [2010] 320 ITR 577 (SC), RBI Guidelines have nothing to do with computation total income under the Income-tax Act. The Supreme Court has observed :

“We need to emphasize that RBI Guidelines has nothing to do with the accounting treatment or taxability of “income” under the Income-tax Act. Thetwo i.e. I.T. Act and RBI Guidelines operate in different fields Ultimately, the nature of transaction has to be examined in each case. The authority has to examine the nature of expenses/loss.

Such examination and finding thereof will not depend upon presentation of expenses/loss in the financial statement. In our view, the RBI Guidelines and I.T. Act operate in different fields.”

In the case before the Supreme Court the assessee NBFC had created provision for NPA as per RBI Guidelines and has debited to the profit of loss accounts and claimed it as deduction. The Supreme Court rejected the claim of deduction and held the provision as not allowable despite the fact that the provision was created in accordance with RBI Guidelines as there was no specific provision to allow the same under the Income-tax Act.”

29.10. On the contrary, the Ld.AR relied on the view taken by Ld.CIT(A) and submitted that the securities held by banks constitute stock-in-trade and income therefrom is assessable under the head “business”, and therefore all incidental expenditure including broken period interest is allowable. Reliance was placed on the judgment of the Hon’ble Bombay High Court in American Express International Banking Corporation (258 ITR 601), which has been approved by the Hon’ble Supreme Court. Further, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Bank of Rajasthan reported in (2024) 167 taxmann.com 430 wherein erstwhile State Bank of Mysore now merged with State Bank of India is a party, where it has been clarified that where securities are held as stock-in-trade, broken period interest is to be allowed. The Ld.AR submitted that the issue also stands decided in favour of the assessee by Tribunal in assessee’s own case, vide its Order dated:

• 11 October 2024 for AY 2006-07 and AY 2007-08
• 06 June 2023 for AY 2009-10
• 22 March 2022 for the AY 2005-06
• 30 September 2021 for AY 2003- 04 and AY 2004-05
• 12 July 2021 for the AY 2001-02 and 2002-03
• 03 February 2020 for the AY 2008- 09
• 26 July 2013 for AY 1996-97
• 19 May 2008 for AY 1991-92 to AY 1994-95
• 17 September 2009 for AY 1995-96

We have perused the submission advanced by both sides in light of records placed before us.

29.11. We have considered the rival submissions and perused the material available on record. The limited issue for our consideration is the allowability of Broken Period Interest (BPI) paid on purchase of securities classified under the HTM category.

29.12. It is an undisputed position that in the Government securities market, the purchaser of a security pays, in addition to the purchase price, the interest accrued from the last due date till the date of purchase, commonly referred to as Broken Period Interest. Such payment represents interest relatable to the period prior to acquisition of the security and, correspondingly, the seller accounts for the same as income. The purchaser, having acquired the security only from the date of purchase, becomes entitled to interest thereafter. Thus, BPI paid is intrinsically linked to the period prior to acquisition and partakes the character of revenue expenditure rather than forming part of the cost of acquisition of the security.

29.13. We find that the aforesaid treatment is in consonance with the recognized accounting principles embodied in Accounting Standard–9 and Accounting Standard–13 issued by the Institute of Chartered Accountants of India, which mandate recognition of interest on a time proportion basis and require that interest pertaining to the pre-acquisition period be excluded from the cost of investment. The method consistently followed by the assessee is, therefore, in accordance with commercial principles and reflects the true income.

29.14. The contention of the Revenue that, since the securities are classified under the HTM category, the same are to be treated as investments and the BPI paid should be capitalized, does not merit acceptance. Merely because Broken Period Interest received is assessed as business income, it does not ipso facto follow that the underlying securities are to be regarded as stock-in-trade. The Hon’ble Supreme Court in Bank of Rajasthan Ltd. v. CIT (2024) 167 taxmann.com 430 has clarified that the characterization of securities in the hands of a banking company is a fact-dependent exercise and that RBI classification is not determinative for tax purposes. However, for the limited purpose of allowability of Broken Period Interest, such distinction is not decisive.

29.15. In the present case, the Revenue has admittedly brought to tax the Broken Period Interest received as business income. In such circumstances, the corresponding Broken Period Interest paid cannot be disallowed, as doing so would result in taxing notional income and would be contrary to the settled principle that only real income can be brought to tax. This position stands fortified by the judgment of the Hon’ble Bombay High Court in American Express International Banking Corporation (supra), wherein it has been held that, once Broken Period Interest received is taxed as business income, the Broken Period Interest paid is allowable as deduction so as to arrive at the correct taxable income. Hon’ble Bombay High Court has factually distinguished the decision of Hon’ble Supreme Court in Vijaya Bank(supra) on the ground that the same was rendered in the context of the erstwhile provisions relating to “interest on securities”, which no longer govern the field.

29.15. Therefore reliance placed by the Revenue on the decision of Hon’ble Supreme Court in Vijaya Bank v. CIT(supra) is misplaced. The said decision was rendered in the context of the erstwhile scheme of taxation under the head “Interest on securities”, where the income was assessed under specific statutory provisions then in force. The facts and statutory framework in the present case are materially different, inasmuch as the income from securities, including Broken Period Interest, is assessed as business income under section 28. This distinction has been clearly recognized by Hon’ble Bombay High Court in American Express International Banking Corporation v. CIT,(supra), wherein it has been held that once Broken Period Interest received is taxed as business income, the corresponding payment cannot be disallowed. We therefore hold that, the decision in Vijaya Bank does not apply to the facts of the present case.

29.16. We are also of the considered view that no useful purpose would be served by remanding the matter to the file of the Ld.AO for examining the nature of HTM securities. The allowability of Broken Period Interest does not hinge upon such characterization. Hon’ble Supreme Court in case of Bank of Rajasthan Ltd. v. CIT reported in (2024) 167 taxmann.com 430 clarifies that classification is fact-dependent and RBI guidelines are not determinative; however, it does not make the allowability of Broken Period Interest contingent upon such classification.

29.17. In the present case, the material facts are not in dispute, in as much as the assessee has paid Broken Period Interest on purchase of securities and has correspondingly offered Broken Period Interest received to tax as business income. The method followed is consistent and borne out from the record. In the absence of any factual ambiguity requiring verification, we find no justification for restoring the issue to the file of the Ld.AO.

29.18. In view of the above discussion, we hold that the Broken Period Interest paid by the assessee on purchase of HTM securities is allowable as deduction. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld.

Accordingly, ground no.3 raised by the revenue stands dismissed.

30. Ground No.4 relates to taxation of guarantee commission.

The assessee receives commission on DPG in advance covering the entire period of guarantee. The guarantee is issued for a period more than one year, and the commission relating to the Period of DPGs falling in the year under reference is considered as income as per accounting practice followed consistently by the assessee year after year.

30.1. It is submitted that though the commission on DGPs covering more than one year was received in advance for the entire period of currency of DPG, the portion thereof relating to the financial year was treated as income and offered for tax. The balance amount of commission pertaining to the subsequent period or periods: was carried forward and offered for tax in the relevant years in accordance with the tenure and assessee’s obligation under the DPGs. The assessee submitted that, the portion so received relating to the financial year only be considered as income of the said year.

The assessee submitted that Accounting Standard-9 on Revenue Recognition prescribed by the Institute of Chartered Accountants of India mandatorily requires as under:

“Commitment, facility or loan management fees which relate to continuing obligations or services should normally be recognized over the life of the loan or facility having regard to the amount of the obligation outstanding the nature of services provided and the timing of the costs relating thereto”

30.2. It was also submitted that, Section 145 amended from 1.4.1997 (effective from assessment year 1997-98) requires Banks to follow consistently mercantile method. The assessee thus submitted that present claim is squarely covered in its favour by the decision of the Hon’ble Calcutta High Court in the case of Bank of Tokyo Ltd. reported in 71 Taxman 85, wherein Hon’ble High Court held that the income from deferred guarantee commission did not accrue or arise in the year in which the guarantee agreements were entered, and that the same should be spread over the period to which the guarantee commission related and should be assessed proportionately.

30.3. It was submitted that, the principle laid down by Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation reported in 225 ITR 802 and of by Hon’ble Punjab & Haryana High Court in the case of Punjab Tractors Co-operative Multipurpose Society Ltd. reported in 234 ITR 105 is clearly applicable to the case of the assessee.

30.4. The assessee also relied in decision of coordinate bench of this Tribunal wherein the issue was decided in favour of assessee subject to verification for the assessment years 1984-85 to 1990-91. It was submitted that the Ld.AO in his order giving effect to the aforesaid orders of this Tribunal allowed claim of the assessee.

30.5. The Ld.AO held that the entire commission received by the assessee is taxable in the year of receipt and cannot be spread over the period of guarantee. Ld.AO rejected the method followed by the assessee of recognizing such income over the period of guarantee. 30.6. On an appeal, Ld.CIT(A) relied on the assessee’s own case before Ld.CIT(A) for A.Y. 2007-08, 2009-10 and that of this Tribunal for A.Y. 2007-08 and allowed the claim of assessee by observing as under:

“7.3. I have considered the appellant’s submissions. This is a recurring issue and this issue was considered by CIT(A) in appellant’s own case for A.Y. 2007-08 and 2009-10 and by ITAT for A.Y. 2007-08 which are reproduced as under:-

“This is a recurring issue which has arisen in the case of Appellant in the AYs 1999-2000, 2000-2001, 2001-02, 2002-03, 2003-04, 2004­05, 2005-06 and 2006-07 wherein my predecessor had the occasion to hold that the income from Guarantee Commission cannot be spread over the period of guarantee. My predecessor CIT(A) had dismissed the ground of appeal and decided the issue against the assessee. However later in assessee’s appeal for AY 1996-97, the Hon’ble ITAT vide its order dated 26.07.2013 in ITA no 5470/M12002 had decided the issue in favour of the assessee.

This order of Tribunal has been delivered after the decision /dated 30.03.2013)of my predecessor for AY 2006-07. Therefore respectfully following the Hon’ble tribunal’s order, the issue is decided in the favour of assessee”

Relevant para of the ITAT for AY 1996-97 is reproduced as under:

“Ground No. 2 is regarding Deferred Payment Guarantee Commission. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. We note that an identical issue has been decided by this Tribunal in assessee’s own case for the assessment year 1984-85 vide order dated 22.8.2006 in para 5.2 as under:

“After hearing both the parties and going through the material on record and also the decisions relied upon by the assessee, we find that undisputedly the assessee is a banking company. The assessee is following the mercantile system of accounting and there from, income is eligible to tax upon accrual. The system of accounting followed by the assessee is bona fide. The assessee receives the commission for the entire period: of the debt repayment that it guarantees at the time when the guarantee agreement is entered into. The assessee had consistently shown in his books of account deferred guarantee commission receivable in respect of future periods, should not be taxed in the year. In other words where the commission related to a period beyond the previous year, the proportionate commission was deferred and shown as income in the year to which it related. The guarantee related to more than 12 months and/ or the guarantee period extended beyond the period covered by the previous year relevant to the Assessment Year.

Refund of upto 50% of guarantee commissioner for the unexpired period to valued clients may be permitted by the assessee’s officials on receiving back the discharged guarantee bond in those cases also where the purpose for which the guarantee was issued has been fulfilled in a shorter period. Thus, the right to receive commission for the un-expired period of the guarantee became perfected and crystallized only with the expiry of the unexpired period. Accordingly, the right to receive commission for the unexpired period of the guarantee became perfected and crystallized only with the expiry of the unexpired period and income from deferred guarantee commission did not accrue or rose in the relevant Assessment year 1984-85. However, this issue has been decided by the Tribunal against assessee in case of assessee itself. Now it is stated that decided this issue in favour of the assessee. The counsel of assessee has stated that decision of the Hon’ble Supreme Court in the case of Madras Industrial Corpn. (supra) also support the case of the assessee. These decisions were not available, when Tribunal decided the issue against assessee. To meet the ends of justice we restore this issue to the file of the A0 and that the Assessing Officer to decide the issue a fresh after taking into consideration the decision in case of Bank of Tokyo and in case of Madras İndustrial Corpn. (supra) and if it is found that facts are identical then the decision of the Hon’ble High Court in case of Bank of Tokyo (supra) has to he followed. We order accordingly.”

5. As it is clear from the above order of the Tribunal for the assessment year 1984-85 that in the earlier years upto the assessment year 1983-84 this issue was decided by the Tribunal against the assessee. However, in view of the subsequent decisions of Hon’ble Calcutta High Court in case of Bank of Tokyo 71 Taxman 85 as well decision of Hon’ble Supreme Court in case of Madras Industrial Investment Corporation Ltd. 225 TR 802, the Tribunal has set aside this issue to the record of the Assessing Officer for deciding the same afresh after taking into consideration, the decisions in case of Bank of Tokyo (supra) as well as in case of Madras Industrial Corporation (supra). The Ld. AR of the assessee has pointed out that in the consequential order the Assessing Officer has allowed the claim of the assessee. We note that in the consequential order dated 19.12.2007. The AO has followed the decision of Hon’ble Calcutta High Court in case of Bank of Tokyo (supra) and decided the issue by accepting the claim of the assessee in para 3 as under: “3. Ground No. 4 relates to deferred bank guarantee commission of Rs. 3,97,99,363/- treated as income. The Hon ‘ble Tribunal has restored this issue to the file of the AO and directed the AO to decide the issue afresh after taking into consideration the decision in the case of Bank of Tokyo and in the case of Madras Industrial Corporation, and if it is found that facts are identical, then the decision of the Hon’ble High Court in the case of Bank of Tokyo has to be followed.

Accordingly, the above decision has been gone through.

The decision of the Calcutta High Court in the case of Bank of Tokyo is squarely applicable in this case, wherein it is held that the income deferred guarantee commission did not accrue or arise in the year in which the guarantee agreements were entered and that the same should be spread over the period to which the guarantee commission related and should be assessed proportionately. Accordingly, excess addition made in the original order is reduced.”

6. The AO has accepted the claim of the assessee as evident from the consequential order. Accordingly we decide this issue in favour of the assessee and against the revenue”.

7.4 In view of the above decisions of CIT (A) and ITAT, claim of the appellant allowed. This ground of appeal is allowed.”

30.7. The Ld.DR supported the order of the Ld.AO and submitted as under:

There is no basis for spreading the guarantee commission over the guarantee period for taxation purpose through a clumsy separate adjustment account

– The entire amount of commission is received in the first year when the guarantee is given. The service is complete, The commission is received. No further service is required to be rendered. The bank is not required to monitor the repayment of loan. Then there is no reason why the commission should be spread over a period for taxation purpose.

– The income has accrued and has been received during the year. Hence it should be taxed in the first year.

– The guarantee commission can be considered as a fee and be taxed in the first year.

– In any case, if there is a default, the bank will suffer a much larger loss which can be claimed as deduction in the relevant year.

– There is another angle also. The person paying the commission is paying the whole amount at one time and would be claiming the entire amount as deduction in the first year. He is not spreading the payment to the bank over the guarantee period. The bank is receiving the whole amount in the first year.

There is no justification why the bank will postpone payment of tax, This is against the matching principle.

– This is also a device to postpone payment of tax.

30.8. On the contrary, the Ld.AR submitted that the issue is covered in favour of the assessee by the decision of the Hon’ble Supreme Court in Madras Industrial Investment Corporation Ltd. (225 ITR 802), wherein it has been held that where expenditure or income relates to a period extending beyond one year, it can be spread over the relevant years. It was submitted that the assessee consistently followed this method and the same has been accepted in earlier years. The Ld.AR submitted that, it was decided against the assessee by the Tribunal in its own case for AY 2006-07 and AY 2007-08 vide its Order dated 11/10/2024 (Para. No. 92 to 103 at Page No. 76 to 81) by incorrectly distinguishing the facts for the said year vis-à-vis the years in which the issue is decided in favour of the Bank. The Ld.AR listed the orders passed by this Tribunal where it has been decided in assessee favour :

• 22 March 2022 for the AY 2005-06
• 30 September 2021 for the AY 2003-04
• 12 July 2021 for AY 2001-02 and 2002-03
• 06 March 2020 for AY 2000-01
• 22 August 2006 for AY 1984-85 to AY 1989-90
• 31 January 2018 for AY 1999-00

We have carefully considered the rival submissions and perused the material available on record.

30.9. We find that the Coordinate Bench of the Tribunal in assessee’s own case in ITA No. 3868/Mum/2013 for AY 2006–07, vide order dated 11.10.2024, examined this issue in detail in paras 96 to 103 as under:

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. 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.

98. The decision of the coordinate bench in assessee’s own case for assessment year 1984 in ITA number 2448/bomb/1988 (22 August 2006) in ground number 4 has discussed this issue and following the decision of the Calcutta High Court in case of Bank of Tokyo Ltd (71 taxmann 85) the issue was restored to the file of the learned assessing officer to decide afresh after taking into the decision into consideration. However, decision for the assessment year 2005 – 06 rendered on 22 March 2022 in ITA number 3685/M/2013 as per paragraph number 6 – 9 following the decision in assessee’s own case has allowed the claim.

99. Hon Calcutta High court in case of bank of Tokyo Limited relied on by the ITAT while allowing the claim of the assessee has following fact that the Tribunal has also recorded a finding of fact that the assessee-bank has been refunding guarantee commission to its different clients in those cases where guarantee contract was revoked prematurely. In other words, the assessee-bank has been refunding guarantee commission for the unexpired period of guarantee in case the guarantee contract was revoked earlier. This finding negatives the stand taken and/or allegation made by the IAC (Assessment) to the effect that the guarantee contract was irrevocable, and the bank was not refunding the guarantee commission for the unexpired period. It was contended on behalf of the revenue that the commission was payable initially and not year by year. That being the mandatory requirement, the right to receive accrued at the point of time the guarantee agreement is entered. Further under rule 16 framed by the Foreign Exchange Dealers ‘ Association of India the guarantee commission was refundable, if the guarantee is cancelled before the expiry of the full period.

100. Facts do not show that such deferred guarantee commission is refundable at all subsequently. 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 Tribunal in the case of Dy. DIT (International Taxation) v. Chohung Bank [2010] 126 ITD 448 considered almost a similar case in which that the assessee bank gave guarantee for the period extending the close of the year. The question arose as to whether such commission should be considered for the period of guarantee or charged to tax in the year in which the guarantee was given. The Tribunal held that the entire commission accrued at the time of giving guarantee and no part of it can be spread to next year.

103. Accordingly, respectfully following the decisions of the tribunal in assessee’s own case for the earlier years, we find that the commission on deferred guarantee issued by the bank is chargeable to tax as and when deferred guarantee is issued and commission is received. Accordingly ground number 1 of the appeal is dismissed.

30.10. We, are in complete agreement with the decision of the co­ordinate bench and accordingly hold that the guarantee commission is taxable in the year of receipt and cannot be spread over the period of guarantee. The order of the Ld. CIT(A) is therefore set aside and the action of the Ld.AO is restored.

Accordingly, this ground raised by the revenue stands is allowed.

31. Ground No.5 relates to disallowance of staff welfare expenditure incurred for reservation of school seats for employees’ children.

31.1. The assessee incurred Rs.35,91,55,222/- towards various staff welfare facilities such as holiday home, scholarship, school seats, hospital beds, sports facilities and other facilities for the benefit of the employees. These payments were included in the staff welfare expenses as the payments were towards the welfare of the staff. As such expenses are incurred wholly and exclusively for the purpose of business of the Bank, the same should be allowed as a deduction under section 37(1).

31.2. It was also submitted that the staff welfare expenses includes payments of Rs. 20,12,520 made with a view to ensure that certain seats in various schools all over India are reserved for the children of the officers of the Bank so that the hardship otherwise faced by the officers of the Bank for children’s education during transfer / re­location may be reduced.

31.3. It was submitted that the assessee made payment for reservation of seats was done for its employees under the Bank’s Staff Welfare Scheme and hence it is treated as a part of normal business expenditure. The agreements entered into by the assessee with various schools etc. clearly indicate that the payments are made to them for securing reserved seats in the school, for the children of the employees.

The Ld.AO however disallowed the same holding that the expenditure is not wholly and exclusively for the purposes of business.

31.4. On appeal, Ld.CIT(A) relied on the view taken by his predecessor in assessee’s own case before Ld.CIT(A) for A.Y. 2007­08, 2009-10 and before ITAT for A.Y. 1996-97.

31.5. Before this Tribunal, Ld.DR submitted that the payments are made to various schools for keeping some seats reserved for the children of the officers of the Bank, which is like a donation and should not be allowed as deduction as it is not wholly and exclusively for the purpose of business. The Ld.DR submitted that each item of expenditure should be examined with reference to the agreement with the different school and allowances or disallowances should be done on case to case basis.

31.6. The Ld.AR on the contrary, submitted that the expenditure is incurred to facilitate employees who are frequently transferred across locations and ensures smooth functioning of banking operations. It was submitted that such expenditure is incidental to business and allowable under section 37(1). The Ld.AR also placed reliance on the decision of Hon’ble Bombay High Court in case of Mahindra and Mahindra Ltd reported in 261 ITR 501 and following decisions of Hon’ble Supreme Court and various High Court in this issue:

i. Shri Venkata Satyanarayan Rice Mills vs. CIT (223 ITR 101) (Supreme Court;

ii. CIT vs. India Radiators Ltd. (236 ITR 719) (Mad);

iii. CIT vs. Emtici Engineering Ltd. (242 ITR 86) (Guj);

iv. CIT v. Travancore Cochin Chemicals Ltd. (243 ITR 284) ;

v. Indian Oil Corporation Ltd. (ITA Nos. 4923 & 6063/Mum/1989) (Mum); and

vi. Nuclear Power Corporation of India Ltd. (ITA No. 336/Mum/1999) (Mum).

31.7. the Ld.AR relied on the decision of cases decided in favour of the assessee by ITAT in own case vide Order dated:

• 11 October 2024 for AY 2006-07 and AY 2007-08
• 06 June 2023 for AY 2009-10
• 22 March 2022 for the AY 2005-06
• 30 September 2021 for the AY 2003-04 and AY 2004-05
• 12 July 2021 for the AY 2001-02 and 2002-03
• 06 March 2020 for the AY 2000-01
• 03 February 2020 for the AY 2008- 09
• 19 May 2008 for AY 1992-93
• 17 September 2009 for AY 1995- 96
• 26 July 2013 for AY 1996-97

31.8. Further, the jurisdictional Hon’ble Bombay High Court, upon appeal by the Income-tax Department against the ITAT’s Order for AY 1996-97, vide its Order dated 01/08/2016 decided the issue in favour of the assessee.

We have perused the submissions advanced by both sides in light of records placed before us.

31.9. We have considered the submissions of both sides and perused the material on record. We find that the issue under consideration is squarely covered in favour of the assessee by the consistent view taken by the Coordinate Benches of this Tribunal in the assessee’s own case for earlier years, including the recent decisions for A.Y. 2006­07 and 2007-08. Further, we note that the Hon’ble High Court, vide its order dated 01/08/2016 in the assessee’s own case for A.Y. 1996­97, upheld the view taken by this Tribunal and decided the issue in favour of the assessee. The Revenue has not brought on record any distinguishing facts or change in law to warrant a deviation from the settled position.

31.10. We further find that the expenditure incurred on staff welfare is intrinsically connected with the business operations of the assessee. In the case of a banking company, efficient and uninterrupted functioning is largely dependent upon the morale, health and motivation of its employees. Such expenditure cannot be regarded as gratuitous or voluntary in nature, but constitutes a necessary outlay to ensure better productivity, industrial harmony and effective discharge of business functions. The same has a direct nexus with the business of the assessee and is incurred wholly and exclusively for the purposes of business.

31.11. Respectfully following the binding precedent, we hold that the expenditure in question, being incidental to the business of the assessee, is allowable as deduction under section 37(1) of the Act.

Accordingly, this ground raised by the revenue stands dismissed.

32. Ground Nos. 6 & 7 relates to Disallowance under Section 14A.. This issue has been dealt with while deciding Ground no.3 in assessee’s appeal. The view taken herein above shall be apply mutatis mutandis. The issue has been remitted for limited verification as per direction in paras 9.22 -9.24.

Accordingly, this ground raised by the revenue stands partly allowed.

33. Ground No.8 relates to disallowance of depreciation claimed on securities classified under the Held to Maturity (HTM) category.

33.1. The facts as emanating from the assessment order reveal that the assessee-bank, in its books of account, had valued its investment portfolio in accordance with RBI guidelines by classifying securities into HTM, AFS (Available for Sale) and HFT (Held for Trading). The assessee claimed depreciation on the entire portfolio of securities treating the same as stock-in-trade of its banking business.

33.2. The Assessing Officer, however, observed that securities classified under HTM category are intended to be held till maturity and are not meant for trading, and therefore partake the character of investments. Accordingly, the Assessing Officer disallowed the depreciation claimed on such HTM securities.

33.3. The Ld.CIT(A) on this issue has relied on the assessee’s own case before Ld. CIT(A) in A.Y. 2007-08, 2009-10 and by ITAT for A.Y. 1996-97.

33.4. The Ld.DR, supporting the order of the Assessing Officer, submitted that the classification of securities under HTM, as per RBI guidelines, clearly indicates the intention of the assessee to hold such securities till maturity and not to trade in them. It was contended that depreciation is allowable only in respect of stock-in-trade and not in respect of investments. It was further argued that the assessee cannot treat the same securities as stock-in-trade for claiming depreciation while treating them as investments for other purposes. 33.5. Per contra, the Ld.AR submitted that irrespective of RBI classification, the entire investment portfolio of a bank constitutes its stock-in-trade, as banking business inherently involves dealing in securities. Reliance was placed on the decision of the Hon’ble Supreme Court in UCO Bank vs. CIT (240 ITR 355), wherein it has been held that the method of accounting followed by banks in valuing their securities at cost or market value whichever is lower is permissible and depreciation is allowable. It was also submitted that the issue is covered in favour of the assessee by consistent decisions of the Tribunal in assessee’s own case:

• 11 October 2024 for AY 2006-07 and AY 2007-08
• 06 June 2023 for Assessment Year 2009-10
• 22 March 2022 for the AY 2005-06
• 30 September 2021 for the AY 2003-04 and 2004-05
• 12 July 2021 for the AY 2002-03
• 03 February 2020 for the AY 2008- 09
• 17 September 2009 for the AY 1995-96
• 26 July 2013 for the AY 1996-97

33.6. Further, the Hon’ble Bombay High Court decided the issue in favour of the assessee, vide its Order dated 01 August 2016 and for AY 1997-98, vide its Order dated 18 June 2019.

We have considered the rival submissions and perused the material on record.

The issue for consideration is whether depreciation is allowable on securities classified under the HTM category by the assessee-bank.

33.7. It is an undisputed position that the assessee, being a banking company, has classified its investment portfolio in accordance with RBI guidelines into HTM, AFS and HFT categories. The Ld.AO disallowed depreciation in respect of HTM securities on the premise that such securities are intended to be held till maturity and, therefore, partake the character of capital investments.

33.8. In our opinion, aforesaid approach of the Revenue fails to appreciate the settled legal position governing banking business. It is well established that, in the case of banks, securities constitute integral part of their business operations and are held as part of circulating capital. The distinction between “investment” and “stock-in-trade” in such cases cannot be applied in a rigid or mechanical manner divorced from the functional realities of banking.

33.9. Hon’ble Supreme Court in UCO Bank v. CIT(supra) upheld the principle that, banks are entitled to value their securities at cost or market value, whichever is lower, and claim depreciation accordingly, recognizing that such method reflects true income. This principle is rooted in the doctrine of real income, which mandates that only real profits, and not notional or illusory gains, can be brought to tax.

33.10. Reliance placed by the Revenue on RBI classification to deny depreciation is misplaced. While RBI guidelines are undoubtedly relevant for prudential regulation, their role in income-tax proceedings is limited to providing guidance on the nature and valuation of assets. They do not, by themselves, determine the taxability or allowability under the Act.

33.11. In this context, decision of Hon’ble Supreme Court in Southern Technologies Ltd. v. JCIT (supra) is clearly distinguishable. In that case, the issue pertained to allowability of provision for NPAs by an NBFC, where Hon’ble Court held that RBI directions cannot override the specific provisions of the Income-tax Act. However, the Court also recognized that RBI norms may be relevant in understanding the nature of income and accounting treatment.

33.12. In present facts of the case, we are not confronted with a claim contrary to the Act, but with the question of correct computation of business income of a bank, where valuation of securities at lower of cost or market value has been judicially accepted as a permissible method.

33.13. Further, Hon’ble Supreme Court in CIT v. Bank of Rajasthan Ltd. reiterated that the treatment of securities in the hands of banks must be viewed in the context of their business model, and regulatory classification under RBI norms does not conclusively determine their tax character.

33.14. We also find that the CBDT itself has, in its circulars, accepted that banks may follow the method of valuing securities at cost or market value whichever is lower, and that such method, when consistently followed, reflects true and fair income. Thus, the position adopted by the assessee is in consonance not only with judicial precedents but also with administrative guidance.

33.15. Equally important is the principle of consistency. We note that in the assessee’s own case for earlier assessment years, the coordinate benches of this Tribunal consistently has held that, depreciation on securities, including those classified under HTM category, is allowable. The Ld. DR has not brought on record any material change in facts or law warranting a deviation from such settled position. In the absence of any distinguishing feature, a contrary view would lead to uncertainty and arbitrariness in tax administration.

33.16. In view of the foregoing, we hold that the mere classification of securities under the HTM category, for RBI purposes, does not disentitle the assessee from claiming depreciation where such securities form part of its banking business and are valued in accordance with a recognized and consistently followed method. The Ld.AO is directed to allow the claim of depreciation on HTM securities.

Accordingly, this ground raised by the revenue stands dismissed.

37. Ground No.9 relates to disallowance of certain employee benefit expenses under section 43B.

The Ld.AO observed that the assessee claimed deduction in respect of bonus, leave encashment and other employee-related liabilities, which, according to the Ld.AO, were not actually paid within the prescribed time and therefore hit by the provisions of section 43B. 34.1. On an appeal before the Ld. CIT(A), he relied on assessee’s own case before Ld. CIT(A) for A.Y. 2008-09 and allowed the claim of assessee.

34.2. Before this Tribunal, Ld.DR submitted that section 43B clearly mandates that certain expenses are allowable only on actual payment basis and not on accrual basis. It was contended that the assessee claimed deduction merely on the basis of provision without establishing actual payment within the prescribed time and therefore the Ld.AO was justified in making the disallowance.

34.3. The Ld.AR, on the other hand, submitted that the payments in question were in fact made before the due date of filing the return of income and therefore allowable in view of the proviso to section 43B. Reliance was placed on the decision of the Hon’ble Supreme Court in Allied Motors (P) Ltd. vs. CIT (224 ITR 677) and CIT vs. Alom Extrusions Ltd. (319 ITR 306), wherein it has been held that if payment is made before the due date of filing return, deduction cannot be disallowed. It was thus submitted that the Ld.AO did not properly verify the factual position.

The Ld.AR submitted that, the claim has been allowed by ITAT in earlier years vide order dated 03/02/2020 for A.Υ 2008-09 and also, decided in favour of the assessee by the Tribunal in the case of erstwhile State Bank of Mysore vide:

• Order dated 11 August 2025 for the AY 2008-09
• Order dated 05 August 2025 for the AY 2010-11
• Order dated 03 November 2025 for the AY 2011-12

We have considered the rival submissions and perused the material on record.

34.4. The issue for consideration is the allowability of deduction in respect of bonus, leave encashment and other employee-related liabilities in the light of the provisions of section 43B of the Act. It is a settled position of law that section 43B mandates allowance of certain expenditures only on actual payment basis. However, the proviso to section 43B provides that where such payments are made on or before the due date of filing the return of income under section 139(1), the deduction shall be allowed in the year of accrual itself.

34.5. The Hon’ble Supreme Court in Allied Motors (P) Ltd. v. CIT (supra) and CIT v. Alom Extrusions Ltd.(supra) has authoritatively held that payments made before the due date of filing the return are allowable and the proviso to section 43B is curative in nature.

34.6. In the present case, the assessee contended that the impugned amounts were in fact paid before the due date of filing the return of income. However, we find that the Ld.AO has not carried out proper verification of the factual position regarding actual payment and the timing thereof.

34.7. Insofar as leave encashment is concerned, it is governed by the specific provision contained in section 43B(f), which requires actual payment for allowability. Therefore, the allowability of such claim shall be strictly examined with reference to the said provision and the judicial position prevailing thereon.

34.8. In our considered view, the allowability of the claims under this section essentially depends on factual verification, as to whether the payments have been made within the time prescribed under the proviso to section 43B and, in the case of leave encashment, whether the conditions of section 43B(f) are satisfied.

34.9. Accordingly, we deem it appropriate to restore this issue to the file of the Ld.AO for the limited purpose of verifying: (i) whether the payments towards bonus and other employee-related liabilities were made on or before the due date of filing the return of income; and

(ii) whether the claim of leave encashment satisfies the requirement of actual payment in terms of section 43B(f).

The Ld.AO shall grant deduction in accordance with law after due verification.

Accordingly this ground raised by the revenue stands allowed for statistical purposes.

35. Ground No.10 relates to allowability of donation of ₹ 5 lakhs claimed as business expenditure by note and allowed by Ld CIT(A).

35.1. The Ld.DR submitted that donation, by its very nature, is voluntary and cannot be said to be incurred for business purposes unless a direct nexus is established. It was argued that the assessee has failed to demonstrate any business expediency in making such payment.

35.2. The Ld. AR submitted that the expenditure was incurred in the course of business and was aimed at promoting goodwill and maintaining business relations. It was contended that such expenditure is allowable under section 37(1). Without prejudice, it was submitted that the claim may be considered under section 80G.

We have perused the submissions advanced by both sides in light of records placed before us.

The issue for consideration is the allowability of donation claimed by the assessee.

35.3. At the outset, it is a settled position that a donation, by its very nature, is voluntary and would not ordinarily qualify for deduction under section 37(1) of the Act unless the assessee is able to demonstrate a clear nexus between the expenditure and the business interests, or establish that the same was incurred out of commercial expediency.

35.4. In the present case, the assessee contended that the donation was made to promote goodwill and maintain business relations. However, we find that no material has been placed on record to substantiate how the impugned payment had direct or proximate nexus with the business operations of the assessee so as to qualify as an expenditure incurred wholly and exclusively for the purposes of business. A general plea of goodwill or brand building, without supporting evidence, is insufficient to bring such expenditure within the ambit of section 37(1).

Accordingly, we hold that the claim of the assessee for deduction under section 37(1) is not sustainable.

35.5. However, the alternate contention of the assessee that the claim may be considered under section 80G merits consideration. The allowability under section 80G is subject to fulfilment of prescribed conditions, including the nature of the donee institution and availability of requisite certificates.

35.6. In the absence of verification of these conditions at the level of the Ld.AO, we deem it appropriate to restore this limited aspect to the file of the Assessing Officer. The Ld.AO shall examine the eligibility of the donation under section 80G and grant deduction in accordance with law, after affording reasonable opportunity of being heard to the assessee.

35.7. Accordingly, the claim under section 37(1) is rejected, and the alternate claim under section 80G is restored to the file of the Ld.AO for limited verification.

Accordingly, ground raised by the Revenue stands partly allowed for statistical purposes.

36. Ground No.11 relates to computation of interest under section 244A.

The Ld.AO restricted the claim of interest on refund on the ground that part of the delay was attributable to the assessee.

36.1. The Ld. DR submitted that the revised return claiming the DTR relief was filed very late on 14/02/2012 when the original return was filed on 30/09/2010. The long delay is attributable to the assessee. Hence the order of the Ld. CIT(A) is erroneous.

36.2. The Ld.AR submitted that the assessee is entitled to interest on the entire refund amount and that the Ld.AO erred in reducing the period for which interest is payable. It was contended that the delay, if any, was not attributable to the assessee and that interest should be granted in accordance with law.

36.3. The Ld.AR on this issue has placed reliance on the following judicial precedents:-

• CIT v. Tech Mahindra (2017) 397 ITR 748 (Bombay)
• CIT v. Larsen & Toubro Ltd. (330 ITR 340) (Bom.)
• CIT v. State Bank of Travancore (42 com 572) (Ker.)
• CIT v. Sutlej Industries Ltd. (325 ITR 331) (Del.)

We have perused the submissions advanced by both sides in light of records placed before us.

36.4. The controversy relates to the grant of interest under section 244A and the restriction thereof on the ground that part of the delay is attributable to the assessee. At the outset, it is well settled that interest under section 244A is a statutory right and cannot be curtailed except in accordance with the provisions of the Act. The exclusion of any period from the computation of interest is permissible only where the delay is demonstrably attributable to the assessee and such attribution must be based on cogent material on record.

36.5. In the present case, we find that the Ld.AO restricted the grant of interest primarily on the ground that the revised return claiming relief was filed at a later point in time. However, mere filing of a revised return at a later date, by itself, cannot automatically lead to the conclusion that the entire intervening period is attributable to the assessee, unless it is established that such delay had a direct bearing on the processing of refund.

36.6. At the same time, we also note that the factual aspects regarding the nature of delay and the extent to which it can be attributed to the assessee have not been properly examined on record. In the absence of complete facts, a definitive conclusion cannot be drawn at this stage.

36.7. Accordingly, in the interest of justice, we deem it appropriate to restore this issue to the file of the Ld.AO for fresh adjudication. The Ld.AO is directed to examine the facts in detail and determine the period, if any, attributable to the assessee, in accordance with law and in the light of judicial precedents relied upon by the assessee. Needless to say, the assessee shall be afforded adequate opportunity of being heard.

Accordingly, this ground raised by the revenue stands allowed for statistical purposes.

37. Ground No.12 relates to allowability of provision made by the assessee towards wage revision.

The assessee filled additional ground before Ld.CIT(A) that the claim for provision of wage revision was made in the revised return, but was considered by the Ld.AO. The Ld.CIT(A) allowed the claim for provision of wage revision relying on assessee’s own case decided by Ld.CIT(A) for A.Y. 2009-10.

Before this Tribunal, the Ld.DR submitted that unless the liability has crystallized, deduction cannot be allowed. It was contended that the provision made by the assessee is merely an estimate and therefore not allowable.

The Ld.AR on the contrary submitted that, the provision is based on scientific and actuarial basis taking into account wage agreements and past experience, and therefore represents an ascertained liability. The Ld.AR on this issue relied on the cases decided in favour of assessee by the Tribunal in its own case vide its order dated 06/06/2023 for A.Y 2009-10 and order dated 03/02/2020 for A.Y 2008-09. The Ld.AR further relied on the following cases:

• DCIT v/s. Bank of India [ITA No. 3082/Mum/2015] vide Order dated 08 November 2017 for AY 2009-10;
• Bank of Baroda v/s. ACIT [ITA/4619/Mum/2012] vide Order dated 04 November 2015 for AY 2008-09

We have perused the submissions advanced by both sides in light of records placed before us.

The allowability of provision depends on whether the liability is reasonably ascertained or merely contingent. In the present case, the Ld.AO has not examined the basis of computation of such provision. In view of the principles laid down by Hon’ble Supreme Court in Bharat Earth Movers(supra), the matter requires verification. Accordingly, this issue is restored to the file of the Ld.AO to examine the nature of liability and decide the issue in accordance with law. Accordingly, this ground raised by the revenue stands allowed for statistical purposes.

In the result appeal filed by the assessee as well as revenue stands partly allowed for statistical purposes.

Order pronounced in the open court on 21/04/2026