Rajasthan Marudhara Gramin Bank Vs DCIT (ITAT Jaipur)
“Notional” Is Not Enough: ITAT Allows Bank’s ₹40.06 Crore Deductions
Two Banking Provisions, Two Disallowances Deleted
The Jaipur Tribunal allowed Rajasthan Marudhara Gramin Bank’s claims for ₹37,41,31,381 towards mark-to-market loss on Available for Sale securities and ₹2,65,00,000 towards provision for bad and doubtful debts on standard assets. The aggregate relief amounted to approximately ₹40.06 crore.
The Tribunal held that the mark-to-market claim complied with the applicable RBI guidelines and ICDS VIII, Part B. It also followed judicial precedents permitting deduction under Section 36(1)(viia) for qualifying provisions relating to standard assets. The decision demonstrates why banking deductions require examination under the specific provisions governing banks, rather than rejection merely because an amount is described as a “provision”.
An Accepted Return Followed by Revision
The assessee, a Regional Rural Bank established under the Regional Rural Banks Act, 1976, filed its return declaring total income of ₹96,50,67,205. The original assessment under Section 143(3) accepted the returned income.
Subsequently, an order under Section 263 dated 30 March 2023 restored the assessment to the AO. In the consequential assessment, the AO disallowed the mark-to-market loss and the standard-asset provision.
The CIT(A) confirmed both disallowances through an ex parte order. Before the Tribunal, the bank contended that the appellate authority had failed to properly examine the facts and legal submissions already placed before the AO.
AFS Securities Required Year-End Valuation
The bank explained that its investment portfolio was classified into Held to Maturity, Available for Sale and Held for Trading categories under the applicable RBI framework.
For the securities in dispute, classified as Available for Sale, the bank followed the prescribed valuation method of cost or market value, whichever was lower, with the relevant depreciation recognised in its accounts.
The bank held approximately ₹1,344.09 crore in AFS Government securities. Their value had declined by approximately ₹48.17 crore as on 31 March 2018. Since approximately ₹10.76 crore had already been provided in earlier years, the provision recognised during Financial Year 2017-18 was approximately ₹37.41 crore.
The bank relied on ICDS VIII, Part B, which requires covered securities to be classified, recognised and measured according to the extant RBI guidelines. Consequently, it argued that its claim followed the income computation framework itself.
CBDT Circular Read Without Its Banking Exception
The AO rejected the deduction by relying on CBDT Instruction No. 3/2010 and Question 8 of Circular No. 10/2017, treating the loss as a notional provision without actual settlement of the securities.
The Tribunal found this reasoning incorrect. ICDS I does not impose an absolute prohibition on every mark-to-market loss: its restriction expressly accommodates recognition permitted by another ICDS.
Further, Question 7 of Circular No. 10/2017 clarifies that general ICDS provisions apply unless sector-specific provisions exist. It specifically identifies the provisions in ICDS VIII for banks and certain financial institutions.
Question 8 addresses the corresponding treatment of mark-to-market gains and expected profits. It could not be read as overriding the banking provisions or imposing a blanket disallowance of the bank’s AFS valuation loss.
The Tribunal noted that neither the AO nor the Departmental Representative had controverted the bank’s demonstration of compliance with the applicable RBI guidelines and ICDS VIII, Part B. It therefore directed allowance of ₹37,41,31,381.
Judicial Support for the Valuation Loss
The Tribunal also referred to earlier decisions, including Jain Sahakari Bank Ltd. v. DCIT and ACIT v. Mehsana Urban Cooperative Bank Ltd., supporting the treatment of relevant AFS securities and the allowance of valuation losses.
Thus, the claim succeeded both because it complied with the applicable computation standards and because the treatment found support in the cited banking precedents. Actual sale was not required for allowance of this qualifying year-end valuation loss.
Standard Assets Do Not Automatically Exclude Provision Deduction
The second dispute concerned ₹2.65 crore provided against standard assets, forming part of the bank’s broader deduction claim under Section 36(1)(viia). The AO disallowed it because the advances were classified as standard rather than bad or doubtful.
The Tribunal followed decisions including SBI v. DCIT, Nagaur Urban Cooperative Bank Ltd. v. ACIT and DCIT v. Punjab Gramin Bank.
The reasoning distinguished a provision made “for” bad and doubtful debts from one necessarily made “on” debts already classified as bad or doubtful. Standard classification did not, by itself, eliminate anticipated recovery risk or exclude a qualifying provision from the statutory deduction.
The Tribunal directed allowance of the ₹2.65 crore claim and allowed the appeal. It also condoned the bank’s three-day filing delay, accepting the explanation concerning its professional consultant.
Author’s Comments
The ruling reinforces the importance of reading general restrictions together with specific statutory and sectoral provisions. A provision cannot be disallowed merely by attaching the label “notional” when the applicable computation standard recognises it.
For banks, the supporting record should establish the securities’ classification, valuation working, RBI compliance and earlier provisions. Similarly, standard-asset provisioning must satisfy Section 36(1)(viia), including its applicable conditions and limits. The judgment supports these qualifying claims; it does not establish unrestricted deductibility of every accounting provision.
Cases Discussed
- Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors. (1987) 167 ITR 471 (SC) — relied upon while considering the liberal construction of “sufficient cause” for condonation of delay.
- United Commercial Bank Vs. CIT (1999) 240 ITR 355 (SC) — cited on valuation of stock-in-trade/securities at cost or market value.
- CIT vs. HDFC Bank Ltd. (2014) 368 ITR 377 (Bom.) — cited in support of the treatment of banking securities under RBI directions.
- Jain Sahakari Bank Ltd Vs. DCIT, ITA No. 6459/Mum/2014, dated 16.04.2018 — relied upon for AFS securities being valued on mark-to-market basis and resulting loss being deductible.
- ACIT vs. Mehsana Urban Cooperative Bank Ltd., ITA No. 2703/Ahd/2011, dated 14.10.2015 — relied upon regarding AFS securities and loss arising from their valuation/revaluation.
- SBI vs. DCIT, ITA No. 3644/Mum/2016 — relied upon for deduction under section 36(1)(viia) in respect of provision made for standard assets.
- Nagaur Urban Co-operative Bank Ltd. vs. ACIT, ITA No. 240/Jodh/2013 — followed on provision for bad and doubtful debts created on standard assets.
- DCIT vs. Punjab Gramin Bank, ITA No. 134/Asr/2015 — relied upon for holding that section 36(1)(viia) does not exclude qualifying provision relating to standard assets.
FULL TEXT OF THE ORDER OF ITAT, JAIPUR BENCH
The present appeal has been filed by the assessee against the order passed by the National Faceless Appeal Centre (NFAC), Delhi(hereinafter referred to as “Ld. CIT(A)”), dated 25.06.2025 under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The appeal is noted to be delayed for filing by 3 days. An application by the assessee seeking condonation of the delay has been filed before us stating that the professional/consultant engaged by the assessee for filing appeal was engaged in religious function (Parushan Parv) and due to which he could not join the office and afterwards, the professional consultant was undergoing through some physical weakness, due to which he could not attend his office which lead to delay in filing of the present appeal.
3. Ld. DR, on the other hand, vehemently opposed the condonation of delay contending that the reason brought out by the assessee reflected laxity on his part in pursuing the remedy of filing appeal and therefore the delay ought not to be condoned.
4. The law governing condonation of delay is now well settled. The Hon’ble Supreme Court in Collector, Land Acquisition, Anantnag &Anr. v. Mst. Katiji & Ors.(1987) 167 ITR 471 (SC) laid down that the expression “sufficient cause” occurring in the Limitation Act should receive a liberal construction so as to advance substantial justice. The Court held that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. The Court further observed that there is no presumption that delay is deliberate or occasioned on account of culpable negligence or mala fides and that ordinarily a litigant does not stand to benefit by lodging an appeal belatedly.
5. Considering the averments made by the assessee before us, we are of the view that the assessee has adduced sufficient cause for the delay in the filing of the present appeal before us and further noting the smallness of the delay, we condone the delay of 3 days in the filing of the present appeal before us. Order was pronounced in the Open Court.
6. The grounds raised by the assessee read as under:-
1.On the facts and in the circumstances of the case, the order passed by the Ld. CIT(A) is bad in law and bad on facts.
2. On the facts and in the circumstances of the case, Ld. CIT(A) erred in sustaining the disallowance made by Ld. AO for mark to market loss for Rs. 37,41,31,381/-. Requisite direction for deletion of disallowance so made and sustained may kindly be made.
3. On the facts and in the circumstances of the case, Ld. CIT(A) erred in sustaining the disallowance made by Ld. AO for provision made for bad and doubtful debts for Rs. 2,65,00,000/- on the finding that such provision made for standard assets and therefore not allowable u/s 36(1)(via). Requisite direction for deletion of disallowance so made and sustained may kindly be made.
4.The appellant crave liberty to add, amend, alter, modify, or delete any of the ground of appeal on or before its hearing before your honour.
5.The appellant prayed for relief and justice.
7. Brief facts relating to the case are that, the assessee Rajasthan Marudhara Gramin Bank (RMGB) is a Regional Rural Bank established under the Regional Rural Banks Act 1976. For the impugned assessment year, return of income was filed declaring total income of Rs.96,50,67,205/-. Thereafter, assessment under section 143(3) of the Act was completed accepting the returned income. Subsequently, order under Section 263 of the Act was passed on 30.03.2023 and the assessment was restored to the AO. While framing assessment in consequence of the order under Section 263 of the Act, the AO made the following disallowances:-
1) Disallowance of Mark to Market Loss u/s. 37 of the Act amounting to Rs.37,41,31,381/-
2) Disallowance of provision for standard assets u/s 36(1)(viia) of the Act of Rs.2,65,00,000/-
8. The disallowances made by the AO were confirmed by the Ld. CIT(A) in an ex parte order passed.
9. Aggrieved by the same, the assessee has come up in appeal before us. Ld. Counsel for the assessee at the outset pointed out that the Ld. CIT(A) had confirmed the addition made by the AO on merits stating that the issue had been discussed at length both in the order passed u/s 263 of the Act and even by the AO, and he had found the orders so passed to be well reasoned.
10. Ld. Counsel for the assessee stated that the challenge to the order of the Ld. CIT(A) was that he had not adjudicated the issue before him considering the facts and position of law on record, as pleaded by the assessee before the AO.
11. He contended that before us, the attempt of the assessee was to demonstrate that the Ld. CIT(A) had mis-appreciated the issues before him, and had confirmed the disallowances made ,ignoring the facts and law pleaded by the assessee before the AO.
12. Taking up first the issue of disallowance of Mark to Market (MTM) Loss of Rs.37,41,31,381/-. Ld. Counsel for the assessee first drew our attention to the facts noted in the assessment order, pointing out that the AO had noted the assessee to have made a provision for the MTM Losson AvailableFor Sale (AFS) investments of the assessee Gramin Bank , and according to the AO, the same were not allowable. Ld. Counsel for the assessee pointed out that, in response to the show cause notice issued by the AO as a consequence, the assessee had elaborately explained that the impugned provision of MTM on AFS had been created by the assesseeas per the guidelines laid down by RBI in this regard, and in accordance with Income Computation and Disclosure Standards (ICDS VIIIB) prescribed by the Income Tax Act/ law itself. He pointed out that the assessee had explained to the AO that, the investment portfolio held by Banks were required to be classified into three categories:-
1. Held Till Maturity (HTM)
2. Available For Sale (AFS)
3. Held For Trading (HFT)
13. That as per RBI guidelines the investments categorized as HTM were to be recorded at their historical cost, while the remaining two securities i.e. AFS and HFT, since they formed stock in trade of banks, they were to be recorded at cost or market value whichever is less as at the end of the year. That depreciation/ appreciation accordingly in the scrip value is to be worked out scrip wise and the net depreciation was to be provided for in the accounts. The assessee accordingly, followed the RBI guidelines, as above, and created a provision for Mark to Market losses on its AFS scrips as at the end of the year amounting to Rs. 37.41 crores. That this provision was also as per the ICDS prescribed by law. Our attention was drawn to the submissions made by the assessee reproduced at page 3 of order as under:-
From perusal of details furnished by the assessee bank it is noticed that the assessee has claimed Rs. 374131381/- for Market to Market (MTM) Provision on AFS”. Since, the Market to Market loss is not allowable so a Show cause notice was issued to the assessee on 12.03.2024 and the assessee vide its reply dated 15.03.2024 has furnished its reply as under:
“As per the RBI guidelines RPCD.CO.RRB.BC.No./ 74 103.05.33/2013-14 January 07, 2014 (copy attached in Annexure-4), the Investment Portfolio of the Banks are required to be classified under three categories viz Held to Maturity (HTM), Held for Trading (HIFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the Bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts.
We are having a portfolio of Rs. 1344.09 crore in Government Securities, categorized under Available for sale (AFS), which was in loss as per Mark to Market as on 31st March, 2018 (details of the same are attached in Annexure5). As Marked to Market of our AFS securities and an amount of Rs. 48.17 crore is declined from the book value, we have already provided Rs. 10.76 crore in the previous years and therefore, Rs.37.41 crore were provided during the current FY 2017-18.
Our Bank has claimed the said expenditure on the basis of the following guidelines which are as under:
Income Computation and Disclosure Standards (ICDS)-VIII Part B (copy attached as Annexure-6) relating to Securities held by aScheduled Bank or public financial institutions formed under a Central or a State Act etc. inter alia, provides as under:-
“Securities shall be classified, recognised and measured in accordance with the extant guidelines issued by the Reserve Bank of India in this regard and any daim for deduction in excess of the said guidelines shall not be taken into account
In light of the above, Investment depreciation, in accordance with RBI guidelines for scheduled banks should be treated as tax deductible expenditure under normal provisions of Income Tax Act.”
14. Ld. Counsel for the assessee thereafter pointed out that the AO rejected the contention of the assessee stating that the MTM loss was not allowable as per CBDT Instruction No.03/2010 dated 23.03.2010 and Circular No.10/2017 question No. 8. He drew our attention to the findings of the AO in this regard contained at page 4 of his order as under:-
The contention put forth by the assessee bank is not accepted. The ‘Market to Market’ Loss is not allowable as per the CBDT instruction NO. 3/2010 dated 23/03/2010 and Circular No. 10/2017.In the present case, this claim has been routed through the profit and loss account by way of making a provision only without any actual valuation/settlement of AFS and thus the same was not an allowable deduction as per the CBDT Instruction which is mandatory to be followed by the departmental authorities.
Moreover, after issue of Notification of different CDS vide Notification No 892(E) dated 31.3.2015 and Notification No 87 dated 29.9.2016 w.e.f. AY 2017-18, it has been made mandatory for the assessee to follow the relevant CDS while computing the income under the Income Tax Act and to report the adjustments, on account of application of specific ICDS,I n the audit reports. In the present case nothing has been reported in the audit report in the form of adjustments on account of following of any specific ICDS and that is why. one of the specific reasons of scrutiny of this case was non-compliance of ICDS by the assessee bank. As per para 4(ii) of ICDS-1, the marked to market (MTM) loss or an expected loss shall not be recognized for deduction unless recognition is in accordance with the provisions of other ICDS. The CBDT has issued an explanatory Circular No 10/2017, explaining the various issues related to ICDS notification.
Question No 8 of this Circular No 10/2017 reiterates and makes it clear that MTM loss or gain, being only notional claims, are not be given effect while computing total income of the assessee.
In view of the above, claim of Rs. 37,41,31,381/- for Market to Market provision on AFS is disallowed and added back to the total income of the assessee bank. Penalty Proceedings u/s 270A of the Act for under reporting of income are initiated separately.
15. Ld. Counsel for the assessee contended that the Revenue has not disputed the RBI guidelines requiring the AFS securities to be valued at Mark to Market as at the end of the year. He contended that the Revenue/the AO also does not dispute the fact that the ICDS VIII Part B which is the Computation and Disclosure Standards prescribed under the Income Tax Act, for securities held by Scheduled Banks and Public Finance Institution formed under State or Central Act, provides for the securities to be classified and recognized and measured in accordance with the extant guidelines issued by the RBI. He pointed out that the AO has not pointed out any infirmity in the facts pointed out by the assessee to him as above, regarding the RBI guidelines and Computation and Disclosure Standards prescribing banks to follow the RBI guidelines for measurement of securities.
16. He thereafter contended that, the sole basis with the AO for rejecting assessee’s claim was that the CBDT instructions categorically stated the MTM losses to be not allowable and reference was made in this regard to CBDT Instruction No.03/2010 dated 23.03.2010 and Circular No. 10/2017 question No. 8.
17. Ld. Counsel for the assessee contended that the reliance by the AO on the CBDT circulars as aforestated was completely misplaced. He drew our attention to the relevant CBDT Circular No. 10/2017 placed before us at paper book page No.42-49, and pointed out that subject of the said CBDT Instruction/Circular was Clarification on the Income Computation and Disclosure Standards (ICDS) which was notified under Section 145(2) of the Income Tax Act 1961. He stated that the AO had referred to question No. 8 of the said Circular to contend that the CBDT had clarified that MTM loss or gains being only notional were not to be given effect while computing the total income of the assessee. Ld. Counsel for the assessee took us to question No. 7 and 8 in this regard and the contents of which are reproduced hereunder:-
Question 7: Whether the provisions of ICDS shall apply to Banks, Non-banking financial institutions, Insurance companies, Power sector, etc.?
Answer: The general provisions of ICDS shall apply to all persons unless there are sector specific provisions contained in the ICDS or the Act. For example, ICDS VIII contains specific provisions for banks and certain financial institutions and Schedule I of the Act contains specific provisions for Insurance business.
Question 8: Para 4(ii) of ICDS-I provides that Market to Market (MTM) loss or an expected loss shall not be recognized unless the recognition is in accordance with the provisions of any other ICDS. Whether similar consideration applies to recognition of MTM gain or expected incomes?
Answer: Same principle as contained in ICDS-I relating to MTM losses or an expected loss shall apply mutatis mutandis to MTM gains or an expected profit.
18. Referring to the same he pointed out that the CBDT made itself amply clear in question No. 8 that the general provisions of ICDS would apply to all persons unless there are sector specific provision contained in ICDS and had specifically noted in respect to question no. 7 that for banks and financial institutions there was a sector specific ICDS VIIIB contain specific provisions for the Computation and Disclosure Standards to be followed for banks and financial institutions.
19. He thereafter pointed out that question No.8 which was relied upon by the AO was in relation to the issue of recognition of MTM gain or expected incomes ,specifically considering that the ICDS (I) provided for MTM loss or expected loss not to be recognized, to which, he pointed out, the CBDT answered that the principle as contended for MTM losses would apply to MTM gains also.
20. Ld. Counsel for the assessee stated therefore that Circular No. 10/2017 question No. 8 in no way stated that MTM losses were not allowable to banks and financial institutions. He contended that in fact the answer to question No. 7 clarified the position of CBDT that for Banks and financial institutions ICDS VIII would apply and he pointed out that the assessee had already clarified to the AO that as per ICDS VIII the securities were to be classified, recognized and measured in accordance with the extant guidelines of RBI.
21. He therefore stated that the reliance placed by the AO on CBDT Circular No. 10/2017 for holding that the MTM losses were not allowable to the assessee was completely misplaced.
22. The CBDT Instruction No.3/2010 issued in 2010, he contended stood overridden by the later specific ICDS VIII Part B notified 2016. He further contended that the issue of valuation of stock in trade at cost or market value stood settled by the decision of Hon’ble Apex Court in the case of United Commercial Bank Vs. CIT (1999) 240 ITR 355 (SC) followed by the decision of the Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 368 ITR 377 (Bom.).
23. Ld. DR however relied on the order of the Authorities below and stated that the MTM losses had been rightly disallowed since they were contrary to the CBDT Circular No. 10/2017 and 03/2010.
24. We have heard both the parties and have carefully gone through the orders of the Authorities below. The issue for adjudication is the allowability of claim of MTM losses amounting to Rs37,41,31,381/-on assets investments of the assessee Gramin bank classified as Available For Sale /AFS category.
25. The ld. Counsel for the assessee has fairly demonstrated before us that the claim is as per RBI Guidelines, by which it is governed and as per Computation and disclosure Standards(ICDS) prescribed by law. He has pointed outthat as per the extant guidelines issued by the RBI, the AFS securities were to be valued at cost or market price whichever is less and since the market price of the impugned securities during the impugned year had depreciated the assessee had accordingly booked the MTM losses for the depreciation in the value of the securities classified as AFS. Ld. Counsel for the assessee has also fairly demonstrated that this claim of MTM losses was in accordance with ICDS VIII B which specifically was the Computation and Disclosure Standards for Banks.
26. Neither, has the AO disputed the above contention of the assessee, nor has the ld. DR being able to controvert the same before us.
27. What derives therefore is that the claim of MTM losses by the assessee of Rs.37,41,31,381/- during the year was in accordance with the extant RBI guidelines and ICDS VIII B prescribed by law, applicable to the assessee Bank.
28. Having noted so, we find that the reason for disallowing the claim by the AO was that the CBDT Circular No. 10/2017 categorically stated MTM losses to be not allowable. In this regard, reference has been made by the AO to question No. 8 of the said Circular. Ld. Counsel for the assessee fairly demonstrated before us, that the question No.8 of the said Circular was not in relation to claim of MTM losses on securities held by bank. Ld. Counsel for the assessee, has also demonstrated before us, that question No. 7 of the same circular clearly mentioned that for banks the Computation and Disclosure Standards were specifically provided for in ICDS VIII B which they were required to follow for MTM purpose and as noted above as per ICDS VIII B, the MTM losses are allowable being in accordance with the guidelines of RBI.
29. Therefore, it is evident that the AO had disallowed the claim of MTM losses for incorrect reasons. He had relied on CBDT Circular No. 10/2017 as per which however clearly the assessee’s claim of MTM losses has been rightly made.
30. Therefore on considering the entire facts and circumstances of the case and the position of law in this regard we find that the assessee had fairly demonstrated its claim of MTM losses of Rs.37,41,31,381/- to be in accordance with ICDS VIII B which was prescribed to be followed by the assessee Rural Bank and in accordance with RBI guidelines and the basis adopted by the AO/Revenue Authorities for disallowing the same was completely incorrect. For the aforesaid reason alone we hold that the disallowance of claim of MTM losses is not sustainable.
31. Even otherwise we find that this issue has been dealt with invarious decisions of ITAT wherein it has been consistently held that MTM losses on AFS are allowable to Banks.
32. In this regard, the ITAT Mumbai Benches in the case of Jain Sahakari Bank Ltd Vs. DCIT in ITA No.6459/Mum/2014 dated 16.04.2018 held as under:-
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4. We have considered rival contentions and gone through the orders of the authorities below. From the record we found that the assessee has claimed premiums amounting to Rs.26,55,846/-. Out of the total premium sum of Rs. 13,14,816/- pertains to premium paid on investments classifieds HTM and balance Rs. 13,41,030/-pertains to premium paid on investment classified as AFS.
5. As per CBDT Instruction No. 17/2008 dated 26.11.2008 read with CBDT Circular 665/05-10-1993 and RBI Guidelines for Classification and Valuation of Investments by banks No DBOD No. BP. BC. 32/21.04.048/2000-2001, the bank is required to amortize premium paid on investment in respect of securities held as HTM over the remaining period of balance life of investment i.e. up to the date of maturity. This proposition is upheld by the decision of Hon’ble co-ordinate ITAT Mumbai Bench in the case of DCIT vs Bank of Rajasthan Ltd in ITA No. 3238/M/2010 for AY 2007-08 wherein it was held that premium paid on securities under HTM category be amortized over the period remaining to maturity.
6. We also found that similar issue had arise in the A.Y.2009-10wherein disallowance of premium of Rs.35,66,780/- in respect of securities held as HTM was made. The LdCIT(A) following the CBDT instructions and RVI guidelines has allowed the premium paid under HTM category to be amortized over the period of life of investment up to maturity. The Ld. CIT(A) therefore allowed an amount of Rs 14,36,141/- for the AY 2009-10. However, the Ld. CIT(A) did not give direction to grant deduction of balance premium over the life of the securities in subsequent years. Accordingly, we direct the AO to allow balance premium over the life of the securities in the subsequent years.
7. The assessee as per the Ground No. 3 has claimed that the part ofpremium amounting to Rs. 4,47,1417- pertains to the assessment year ,under consideration and hence the same be allowed and further to givedirection to allow the balance premium as per page number 14 of the Ld.CITA’s order for the AY 2009-10.
8. The assessee has further claimed amortization of premium inrespect of Securities held as AFS for AY 2011-12 amounting to Rs13,41,030/- raised as per Ground number 4 and 5. As per the RBIguidelines and CBDT Instruction No. 17/2008 dated 26.11.2008, the bankis required to recognize the total cost of securities on the date of purchaseincluding premium. The said investment classified as AFS is to be valued on the reporting date on Mark to Market basis. The loss, if any can be claimed as deduction. The same is the method of valuation of stock in trade. Accordingly, the loss incurred amounting to Rs.9,43,540/- as per details placed on record as per page number 3 of Paper Book is directed to be allowed.
9. Further, the assessee has purchased and sold part of theinvestment classified as AFS, the details of which is placed on record asper page number 6A and 6B of Paper Book, and claimed premium of Rs.3,00,000/-. The investment sold is 10.25% GDI 2021 and 12.30% GOI2016. On sale of investment the profit of Rs 9,27,8507- arising there fromhas been offered for taxation. The details are placed on record as perpage no.6A and 6B of the Paper Book. The net gain that has accrued tothe assessee is Rs. 6,27,850/- (Rs.9,27,850/- – Rs.3,00,000). Theassessee instead of showing the net gain has claimed premiumamounting to Rs. 3,00,000/- and has disclosed income of Rs. 9,27,850/-.The resultant net effect being same. The Ld. AO has disallowed the losswhereas he has accepted the income of Rs.9,27,850/-. Accordingly, wedirect the AO to allow loss of Rs.3 lakhs.
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33. The ITAT Ahmedabad Benches in the case of ACIT vs. Mehsana Urban Cooperative Bank Ltdin ITA No. 2703/Ahd/2011 dated 14.10.2015 in this regard held as under:-
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“8. We have heard the rival contentions and gone through the facts of thecase. Assessee has sold government securities and met net loss ofRs.3,28,78,600/- after adjustment of profit of Rs.5.35,800/- and premium onpurchase of securities of Rs.11,01,000/- total amounting to Rs.3.39,79,600/-.Guidelines of RBI as well as CBDT Circular No.665 dated 5.10.1993 havebeen elaborately discussed in the order of CIT(A) and relevant extract of thesame have been reproduced above in our order. As per RBI guidelines securities purchased by the primary urban co-op, banks can be classifiedunder three heads –
i) Held to Maturity (HTM)
ii) Available for Sale (AFS)
iii) Held for Trading (HFT) The loss incurred by the assessee of Rs.3,39,79,600/- is from sale of securities held for “Available for Sale (AFS) and the detailed working of the same has been provided by the Id. AR of the assessee in the Paper Book. These securities which are available for sale which are held by the assessee as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are inter Asst. Year 2008-09 alia known as CLR and SLR and the profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss. Further the Id.AR has referred to the judicial pronouncement of the ITAT, Mumbai Bench in the case of Yes Bank Ltd, vs. Dy. CIT in ITA Nos.5833 & 5910 (Mum) of 2012& 2829 (Mum) of 2013 for AYs 2006-07 & 2007- 08 dated July 21, 2015 wherein it was held:-
“12. It is pertinent to mention that a single largest test to decide whether thesecurity is held as capital asset or in stock-in-trade is the intention of theassessee at the time of purchase. Merely because some items so purchasedhappen to be held till maturity cannot convert what is acquired as stock intrade into a capital asset at a later point of time. Intention at the time ofpurchase is relevant and not a subsequent event of holding the security for alonger period. Instruction No. 17/2008 dated 26.11.2008 issued by the CBDTwherein, at para vi. It has been clearly stated that in the case of HFT and AFS Securities of the Bank, the depreciation and appreciation to be aggregated script wise and only depreciation, if any, is required to be provided in the accounts.
13. In view of the above, we do not find any merit in the action of lower authorities for disallowing loss arose on the year end revaluation of securities. Our view is supported by decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 226 Taxman 132/49taxmann.com 335, United Commercial Bank vs. CIT (1999) 240 ITR 355/106Taxman 601 (SO. Investment Ltd, vs. CIT (1970) 77 ITR 533 (SO and CIT vs. Bank of Baroda (2003) 262 ITR 334/129 Taxman 716 (Bom). Respectfully following the decision of Hon’ble Supreme Court and Hon’ble Bombay High Court and considering the classification of security so made and the loss arose on account of revaluation of securities are required to be allowed. Accordingly, we set aside the order of both the lower authorities and matter is restored back to the file of AO for deciding afresh in the light of our above observation. We direct accordingly.”
Asst. Year 2008-09 We, therefore, on the basis of our examination of facts vis-a-vis RBI guidelines and above referred CBDT Circulars as well as relying on the decision of ITAT, Mumbai Bench, see no reason to interfere with the order of CIT(A) and the same is hereby upheld. This ground of Revenue is dismissed.”
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34. In the light of the above we have no hesitation in holding that the assessees claim of MTM losses on AFS investments, of Rs.37,41,31,381/-, was in accordance with law and we accordingly direct the AO to allow the said claim to the assessee.
35. Coming to the issue of disallowance of provision for bad and doubtful debts on Standard Assets of Rs.2,65,00,000/- . Ld. Counsel for the assessee pointed out from page 5 of the assessment order that the said claim was disallowed noting that the provision had been made on Standard Assets and not for any bad and doubtful debts. Ld. Counsel for the assessee in this regard contended that the claim made by the assessee was as per the provisions of section 36(1)(vii)(a) of the Act which allowed for a provision for bad and doubtful debts made by Banks to be created of 7.5% of the total income plus 10% of the average rural advances. That the assessee accordingly ,in accordance with provisions of section 36(1)(vii)(a) of the Act, had made the claim of Rs.86.65 crores out of which Rs.2.65 crores pertained to provision created on Rural advances classified asStandard Assets . This provision he contended was as prescribed by RBI credential norms also. Ld. Counsel for the assessee contended the assessee’s claim was allowable covered by various decisions the ITAT holding the provision created under section 36(1)(vii)(a) of the Act for Standard Assets to be allowable. Reliance was placed in this regard on the following decisions:-
i) SBI vs. DCIT [ITA No. 3644/Mum/2016]
ii) Nagaur Urban Co-operative Bank Ltd. vs. ACIT [ITA No. 240/Jodh/2013]
iii) DCIT vs. Punjab Gramin Bank [ITA No. 134/Asr/2015]
iv) DCIT vs. The Nawanshahr Central Co-Op. Bank [ITA No. 61/Asr/2017
36. Ld. DR however relied on the order of the AO.
37. We have heard the rival contentions. The issue for adjudication is whether provision for bad and doubtful debts created under section 36(1)(vii)(a) of the Act on advances classified as Standard Assets is allowable or not. The assessee had created the provision of Rs.2.65 crores under section 36(1)(vii)(a) of the Act on standard assets which the AO was held not allowable since they did not qualify as bad and doubtful debts.
38. Ld. Counsel for the assessee has stated that this issue has been decided by the ITAT in several cases holding the claim to be allowable. We have gone through the decisions of the ITAT cited before us and we have noted the contention of the ld. Counsel for the assessee to be correct. In the case of SBI (Supra) the ITAT dealt with the issue at para 73 of its order and categorically held that provision for bad and doubtful debts created on standard assets under section 36(1)(vii)(a) of the Act is allowable. Relevant portion of the order is reproduced hereunder:-
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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 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 its 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 the 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 thefile of the A.O. for fresh determination by issuing definite findings of fact. Even as the primary onus would be on the assessee, the A.O. cannot substitute his own judgement 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.”
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39. Similarly in the case of Nagaur Urban Cooperative Bank (Supra) also the ITAT held provision for bad and doubtful debts created on standard assets is allowable.
40. The ITAT Amritsar Bench in the case of Punjab Gramin Bank (Supra) also reiterated the aforesaid proposition of law holding at para 8 of its order as under:-
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8. We have heard the rival parties and have gone through the material on record. We find that the assessee had created a provision of Rs.50,00,000/- which included a sum of Rs. 13,25,000/- as provisions for bad and doubtful debts and the balance amount of Rs.36,75,000/-was provision against standard assets and the entire amount wasclaimed as deduction under section 36(1)(viia) of the Act. The Assessing Officer was of the opinion that the provisions made by the assessee against standard assets was a contingent liability and which was not allowable as business expenditure. The Id. CIT(A), however, allowed relief to the assessee by holding that the claim of the assessee fall into the main provisions of section 36(1) (viia). To resolve the dispute it is important to visit the provisions of section 36(1)(viia) of the Act and which for the sake of convenience are reproduced below.
“36(1)(viia) in respect of any provision for bad and doubtful debts made by (a)a scheduled bank (not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank outside India) or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five percent of the amount of such assets shown in the books of account of the bank on the last day of the previous year.
Provided further that for the relevant assessment years commencing on or after the 1 day of April, 2003 and ending before the 1 day of April, 2005, the provisions of the first proviso shall have effect as if for the words “five percent”, the words “ten percent had been substituted:
Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:
Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head “Profits and gains business or profession.”
From the above provisions it can be seen that deduction u/s 36(1)(viia) of the Act is allowed in respect of provisions for bad and doubtful debts This section does not differentiate between provision on bad assets and provision on standard assets. This deduction exclusively allows deduction in respect of provision for bad and doubtful debts to the extent mentioned in the various clauses of sub-section (1) of section 36 of the Act. The deduction under section 36(1) (viia) of the Act is allowed only in respect of certain specific categories of assessee mentioned in the clause like banks, financial institutions, etc. who are in business of lending money. It is not allowed even to non-banking financial institutions since they are not included in this clause. It is seen that though section 36(1)(vii) states that deduction for provision is allowable in respect of provision for bad and doubtful debts, the computation of such deduction is made with reference to total income of the specified Banks based upon quantum of average advances. The deduction of the provisions is neither limited to the quantum of bad debts in the books nor is computed with reference to the quantum of standard assets. The deduction in this clause refers to allowable provisions of anticipated default on the loans and advances made in respect of total assets including standard assets and the claim of the assessee does not fall into the proviso to section 36(1) (viia) as the proviso deals with further deduction for provisions on bad and doubtful debts. The claim of the assessee is covered in the main provisions of section 36(1) (viia) of theAct. The learned CIT(A) has passed a very exhaustive and speaking order and we do not find any infirmity in the same.
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41. In the light of the above, it is amply clear that the various Coordinate Benches of the ITAT have categorically held the claim of provision for bad and doubtful debts on standard assets to be allowable under section 36(1)(vii)(a) of the Act. The ld. DR was unable to draw our attention on any contrary decision of either of the Jurisdictional High Court or the Hon’ble Apex Court in this regard.
42. In the light of the same, we see no reason to confirm the order of the ld. CIT(A)/AO disallowing the claim of provision for bad and doubtful debts on standard assets amounting to Rs.2.65 crores. The AO is directed to allow the said claim to the assessee.
43. Ground of appeal raised by the assessee in this regard is allowed.
44. In effect, the appeal of the assessee is allowed.
Order pronounced under provision of Rule 34 of the ITAT Rules, 1963 on 28.09.2026.
