The ITO, Patan Ward-4, Mehsana V. Gozaria Nagrik Sahakari Bank Ltd., Mehsana

ITA 1026/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85816 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 08-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Keywords: Capital asset; Depreciation; Cost of acquisition; Bad and doubtful debts; Provision of bad debts
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMEDABAD , MH MHMH MH BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI N. S. SAINI, ACCOUNTANT MEMBER. ITA. NO. 1026/AHD/2011 (ASSESSMENT YEAR:2007-08) INCOME TAX OFFICER, PATAN, WARD 4, MEHSANA APPELLANT VS. GOZARIA NAGARIK SAHAKARI BANK LTD. BAZAR, AT. & POST: GOZARIA, DIST: MEHSANA RESPONDENT PAN: AAAAT1074G /BY APPELLANT : SHRI B. L. YADAV, SR. D.R. /BY RESPONDENT : SHRI S. R. SHAH, A.R. WITH SHRI KETAN MISTRY !' /DATE OF HEARING : 02.03.2015 #$% !' /DATE OF PRONOUNCEMENT : 13.03.2015 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY REVENUE AGAINST THE O RDER OF COMMISSIONER OF INCOME TAX (APPEALS), GANDHINAGAR, ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 2 AHMEDABAD, DATED 17.01.2011 FOR A.Y. 2007-08 ON THE FOLLOWING GROUNDS. 1. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND O N FACTS IN DELETING THE ADDITION OF RS.91,03,750/-, MADE ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR DEPRECIATI ON ON GOVERNMENT SECURITIES. 2. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.8,05,841/-, MADE ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR BAD DEBTS. 2. FIRST ISSUE IS WITH REGARDS TO ADDITION OF RS.91 ,03,750/- MADE ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR DE PRECIATION ON GOVERNMENT SECURITIES. ASSESSEE IS ENGAGED IN A CTIVITY OF BANKING BUSINESS. ASSESSING OFFICER HAS MADE DISAL LOWANCE BASICALLY ON THE FOLLOWING TWO GROUNDS: A) THAT ALL PROVISIONS WHICH WERE DEBITED IN THE PR OFITS AND LOSS ACCOUNT HAVE TO BE DISALLOWED AND ADDED BACK TO THE TOTAL INCOME AS PER INCOME TAX ACT. B) ASSESSEE HAS SHOWN GOVERNMENT SECURITIES IN THE BALANCE SHEET AS INVESTMENT AND DEBITED THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR DEPRECIATION AMOUNTING TO RS.91,03,750/- WHICH IS NOT ALLOWABLE UNDER THE ACT . 3. MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AU THORITY, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F ASSESSEE. CIT(A) FOUND THAT CBDT HAS ISSUED INSTRUCTION FOR A SSESSMENT OF BANKS VIDE ITS INSTRUCTION NO. 17/2008 DATED 26. 11.2008 (F. NO. 228/3/3008 - ITA- III). POINT NO. VII OF THE SA ID INSTRUCTION STATES AS UNDER: ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 3 AS PER RBI GUIDELINES DATED 16TH OCTOBER 2000, THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED TO BE CLASSIFIED UNDER THREE CATEGORIES VIZ. HELD TO MATURITY (HTM), HELD FOR TRADING (HFT) AND AVAILABLE FOR SALE (AFS). INVESTM ENTS CLASSIFIED UNDER HTM CATEGORY NEED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISITION COST UNLESS T HESE ARE MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTIZED OVER THE PERIOD REMAINING TO MA TURITY. IN THE CASE OF HF 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. THE LA TEST GUIDELINES OF THE RBI MAY BE REFERRED TO FOR ALLOWI NG ANY SUCH CLAIMS.' 3.1 BANK HAS CORRECTLY FOLLOWED GUIDELINES ISSUED BY THE RESERVE BANK OF INDIA FOR THE CLASSIFICATION AND VA LUATION OF INVESTMENT. AS PER THIS GUIDELINE, INDIVIDUAL SCRI P IN AVAILABLE FOR SALE CATEGORY WILL BE MARKED TO MARKET AT THE YEAR END OR AT MORE FREQUENT INTERVALS. 3.2 ASSESSEE BANK IS REGULARLY FOLLOWING METHOD OF ACCOUNTING FOR THE VALUATION OF SECURITIES BASED ON THE RESERV E BANK INSTRUCTIONS/GUIDELINE TIME TO TIME AND GENERALLY A CCEPTED ACCOUNTING STANDARDS. ACCORDINGLY ASSESSEE BANK IS REGULARLY VALUING GOVERNMENT SECURITIES HELD AS AFS ON MARK T O MARKET (COST OR MARKET VALUE WHICHEVER IS LESS). THE PROV ISION FOR DEPRECIATION IS DEBITED TO PROFIT & LOSS ACCOUNT AS AN EXPENSE. THE METHOD AND COMPUTATION HAS BEEN VERIFIED AND CE RTIFIED BY RESERVE BANK OF INDIA IN ITS INSPECTION REPORT DATE D 5 TH DECEMBER, 2007. FOLLOWING ARE THE YEAR- WISE PROVI SION ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 4 AMOUNT FOR THE DEPRECIATION IN VALUES OF GOVERNMENT SECURITIES. SR. NO. FINANCIAL YEAR AMOUNT OF PROVISION FOR DEPN. IN GOVERNMENT SECURITIES DEBITED TO P&L ACCOUNT (AMT. IN RS.) 1. 2002-03 13,55,000.00 2. 2003-04 12,44,750.00 3. 2004-05 NIL 4. 2005-06 3,30,000.00 INCOME TAX ASSESSMENT FOR THE ABOVE SAID YEARS WERE COMPLETED ALLOWING THE CLAIM OF PROVISION FOR DEPRE CIATION IN GOVERNMENT SECURITIES. SIMILARLY FOR A.Y.2007-08 AL SO ASSESSEE DEBITED PROVISION FOR THE DEPRECIATION IN VALUE OF GOVERNMENT SECURITY TO THE PROFIT & LOSS ACCOUNT. SAME WAS DI SALLOWED BY ASSESSING OFFICER AND SAME ASSESSING OFFICER HAS AL LOWED CLAIM ON PROVISION FOR THE DEPRECIATION IN VALUE OF GOVER NMENT SECURITY FOR F.Y. 2005-06 RELEVANT TO A.Y.2006-07. CIRCULAR NO.665,GUIDELINE ISSUED BY THE RBI, INSTRUCTION NO. 17/2008 ISSUED BY CBDT, DECISION OF THE BANK OF BARODA 262 ITR 334 (BOM) AND CIT VS. NEDUNGADI BANK LTD (2003) 130 TAX MAN 93 (KER) WERE REQUESTED TO BE CONSIDERED AND BASED ON THE REGULARLY FOLLOWED ACCOUNTING METHOD, THE CLAIM OF PROVISION FOR DEPRECIATION IN THE VALUE OF SECURITIES WAS REQ UESTED TO BE ALLOWED. HAVING CONSIDERED THE SAME, CIT(A) HAS AL LOWED THE CLAIM OF ASSESSEE. 4. SAME HAS BEEN OPPOSED BEFORE US ON BEHALF OF REV ENUE INTER ALIA SUBMITTED THAT DELETION OF ADDITION OF R S.91,03,750/- MADE ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR DE PRECIATION ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 5 ON GOVERNMENT SECURITIES WAS NOT JUSTIFIED. ACCORD INGLY, ORDER OF CIT(A) BE SET ASIDE AND THAT OF ASSESSING OFFICE R BE RESTORED. ON OTHER HAND, LEARNED AUTHORIZED REPRESENTATIVE SU PPORTED THE ORDER OF CIT(A). 5. AFTER GOING THROUGH RIVAL SUBMISSIONS AND MATERI AL ON RECORD, WE FIND THAT AS PER SECTION 6 READ WITH SEC TION 5(B) AND (C) BANKING REGULATION ACT AND AS PER GUIDELINE ISS UED BY THE RESERVE BANK OF INDIA, INVESTMENT ACTIVITIES IS NOR MAL BANKING ACTIVITY AND SHOULD BE TREATED AS BANKING STOCK IN TRADE. THE FORMAT OF BALANCE SHEET HAS BEEN PRESCRIBED BY LEGI SLATURE AND BANK HAS TO REPORT THEIR FINANCIAL RESULT IN THAT F ORMAT ONLY. AS PER THIS FORMAT, INVESTMENT IN GOVERNMENT SECURITY THOUGH TREATED AS BANKING ASSETS (STOCK IN TRADE) HAS TO B E SHOWN IN THE BALANCE SHEET AS INVESTMENT. FURTHER, BANKS AR E SHOWING GAIN OR LOSS ARISES FROM SALE OF SECURITY AS BUSINE SS INCOME/LOSS RATHER THAN CAPITAL GAIN. THE ABOVE PO SITION HAS ALSO BEEN CLARIFIED BY CIRCULAR NO. 665 DATED 05-10 -1993. 'THE QUESTION WHETHER A PARTICULAR ITEM OF INVESTME NT IN SECURITIES CONSTITUTES STOCK-IN-TRADE OR A CAPITAL ASSET IS A QUESTION OF FACT IN FACT, THE BANKS ARE GENERALLY G OVERNED BY THE INSTRUCTIONS OF THE RESERVE BANK OF INDIA FROM TIME TO TIME WITH REGARD TO THE CLASSIFICATION OF ASSETS AN D ALSO THE ACCOUNTING STANDARDS FOR INVESTMENTS. THE BOARD HAS , THEREFORE, DECIDED THAT THE ASSESSING OFFICERS SHOU LD DETERMINE ON THE FACTS AND CIRCUMSTANCES OF EACH CA SE AS TO WHETHER ANY PARTICULAR SECURITY CONSTITUTES STOCK-I N-TRADE OR INVESTMENT TAKING INTO ACCOUNT THE GUIDELINES IS SUED BY THE RESERVE BANK OF INDIA IN THIS REGARD FROM TIME TO TIME. ' ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 6 CBDT HAS FURTHER ISSUED INSTRUCTION FOR ASSESSMENT OF BANKS VIDE ITS INSTRUCTION NO. 17/2008 DATED 26.11,2008 ( F. NO. 228/3/3008 ITA-III). POINT NO. VII OF THE SAID IN STRUCTION, WHICH HAS BEEN DISCUSSED ABOVE. THE ACCOUNTS HAD B EEN MAINTAINED AND SHOWN AS PER RBI GUIDELINES. THE DEP RECIATION OF ASSETS HAS BEEN CLAIMED ON SECURITIES WHICH HAD BEEN CLASSIFIED AS AVAILABLE FOR SALE (AFS). AS PER T HE BOARD'S CIRCULAR, THE DEPRECIATION IS TO BE AGGREGATED SCRI P WISE AND NET DEPRECIATION, IF ANY, IS REQUIRED TO BE PROVIDED FO R IN THE ACCOUNTS. SAME IS THE CLAIM OF ASSESSEE. ASSESSING OFFICER HAS NOT REBUTTED ANY OF THE ABOVE CONTENTION LEGAL AS W ELL AS FACTUAL ASPECTS OF THE ISSUE. THE CONTENTION OF AS SESSING OFFICER THAT ONLY PROVISION HAS BEEN DEBITED TO THE P&L ACCOUNT AND NOT EXPENSES DOES NOT CARRY ANY WEIGHT IN VIEW OF RESERVE BANK OF INDIA DIRECTIONS AND CBDT INSTRUCTIONS DISC USSED ABOVE. THE CIRCULAR AND THE INSTRUCTION OF THE BOA RD AS QUOTED ABOVE ARE SQUARELY APPLICABLE IN THIS CASE, WHERE T HE PROVISION FOR DEPRECIATION ON THE 'AVAILABLE FOR SALE' CATEGO RY OF SECURITIES HAS CORRECTLY BEEN CLAIMED. SO, CLAIM OF ASSESSEE IS ALLOWABLE AS PER CIRCULAR AND INSTRUCTION. SIMILAR CLAIM OF DEPRECIATION AND VALUE OF GOVERNMENT SECURITIES WAS MADE AND ALL OWED IN EARLIER ASSESSMENT YEAR. IN SUCH CIRCUMSTANCES, SA ME METHOD OF ACCOUNTING HAS BEEN FOLLOWED AND DISALLOWED FROM YEAR TO YEAR. SUCH CLAIM HAS BEEN ALLOWED BY VARIOUS JUDIC IAL PRONOUNCEMENTS. HON'BLE MUMBAI HIGH COURT IN CASE OF CIT VS BANK OF BARODA (2003) 262 ITR 334 HAS HELD THAT 'DEPREDATION IN VALUE OF INVESTMENT HELD BY BANK WA S ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 7 ALLOWABLE AS DEDUCTION MORE SO WHEN THE LOSS WAS DE BITED TO P&L A/C WHICH WAS REFLECTED AS PROVISION FOR LIABIL ITY IN THE BALANCE SHEET AND THE SHARE AND SECURITIES WERE VAL UED AT COST ON THE ASSET SIDE ' SIMILAR VIEW HAS BEEN TAKEN BY HONBLE KERALA HIGH COURT IN CASE OF CIT VS NEDUNGADI BANK LTD (2003) 130 TAXMAN 93 (KER). THEREFORE, DEPRECIATION IN VA LUE WAS ALLOWABLE EVEN IF SPECIFIC INSTRUCTIONS OF THE BOAR D WERE NOT THERE. CIRCULAR AND INSTRUCTION OF THE CBDT BEING SQUARELY APPLICABLE ON FACTS OF ASSESSEES CASE, SO CIT(A) W AS JUSTIFIED IN ALLOWING THE SAME WHICH NEEDS NO INTERFERENCE FROM OUR SIDE. WE UPHOLD THE SAME. 6. NEXT ISSUE IS WITH REGARDS TO DISALLOWANCE OF CL AIM U/S.36(1)(VIIA) IN RESPECT OF PROVISION FOR BAD DEB TS MADE BY THE CO-OPERATIVE BANK. ASSESSING OFFICER HAS MADE DISA LLOWANCE AFTER MAKING COMMENTS AS REPRODUCED IN PARA-3(B) BY OBSERVING AS UNDER: 'THE SUBMISSION OF THE ASSESSEE REGARDING BAD DEBTS PROVISION IS ALSO DULY CONSIDERED. HOWEVER, IT IS N OT ACCEPTABLE OR TENABLE. SECTION 36(L)(VIIA) CLEARLY STATES THAT IN RESPECT OF ANY PROVISION FOR BAD DEBTS MADE BY A CO- OPERATIVE BANK OTHER THAN PRIMARY AGRICULTURE CREDI T SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURE AND RURAL DEV ELOPMENT BANK, AN AMOUNT (NOT EXCEEDING SEVEN AND ONE HALF P ERCENT) OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DED UCTION UNDER THIS CLAUSE AND CHAPTER VIA) AND AN AMOUNT NOT EXCEEDING TEN PERCENT OF THE AGGREGATE AVERAGE ADVA NCE MADE BY THE RURAL BRANCHES OF SUCH BACK COMPUTED IN THE PRESCRIBED MANNER. IT IS VERY CLEAR THAT AS PER FINANCE ACT.2007, FOR CO-OPERATIVE BANK THIS IS ONLY EFFECTIVE FROM 01/04/2007 I.E. FO R A.Y. ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 8 2008-09, SINCE THIS ASSESSMENT PERTAINS TO THE A. Y . 2007- 08 THE CLAIM OF ASSESSEE IS NOT ALLOWABLE. HENCE I MAKE AN ADDITION OF RS.8,05,841' 6.1 MATTER WAS CARRIED BEFORE FIRST APPELLATE AUTHO RITY, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F ASSESSEE AND HAVING CONSIDERED THE SAME, IT WAS OBSERVED BY CIT(A) THAT AMENDMENT WAS BROUGHT IN SO THAT IT WAS MADE APPLIC ABLE ALSO TO THE CO-OPERATIVE BANKS WITH EFFECT FROM 01.04.20 07. THIS PROVISION WAS SUBSTANTIVE PROVISION THEREFORE ASSES SEE WAS JUSTIFIED IN SUBMITTING THAT IT IS APPLICABLE FROM ASSESSMENT YEAR 2007-08 AND NOT FROM YEAR 2008-09 AS HELD BY A SSESSING OFFICER . THIS ISSUE WAS CLARIFIED IN NOTES ON CLAU SES TO THE FINANCE BILL, 2007 ITSELF. THE RELEVANT PORTION IS REPRODUCED BELOW: IT IS PROPOSED TO AMEND THE EXPLANATION TO THE SAI D ITEM (FA) IN VIEW OF THE AMENDMENT TO THE DEFINITIO N OF 'SCHEDULED BANK' AS GIVEN IN THE EXPLANATION TO CLA USE (VIIA) OF SUB-SECTION 36 WHICH EXCLUDES CO-OPERATIVE BANK FROM PURVIEW OF THE SAID DEFINITION. THIS AMENDMENT IS O F CONSEQUENTIAL NATURE. THIS AMENDMENT WILL TAKE EFFE CT RETROSPECTIVELY FROM 1 ST APRIL, 2007 AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 2007-08 AN D SUBSEQUENT YEARS.' IN VIEW OF THIS, NO AMBIGUITY REMAINS ON THE ISSUE AND ASSESSEE HAD JUSTIFIED THE COMPUTATION OF ALLOWABLE DEDUCTION OF THE PROVISION IN ITS WRITTEN SUBMISSIONS BEFORE THE ASSESSING OFFICER . ASSESSING OFFICER HAS NOT DISPUTED THE C OMPUTATION. IN VIEW OF ABOVE, CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF THE CLAIM MADE U/S.36(1)(VIIA) OF T HE ACT. THIS ITA NO. 1026/AHD/11 A.Y. 2007-08 [ITO VS.GOZARIA NAGARIK SAHAKARI BANK LTD.] PAGE 9 REASONED FINDING NEEDS NO INTERFERENCE FROM OUR SID E. WE UPHOLD THE SAME. 7. IN THE RESULT, APPEAL FILED BY REVENUE IS DISMIS SED. PRONOUNCED IN THE OPEN COURT ON THIS THE 13 TH DAY OF MARCH, 2015. SD/- SD/- (N. S. SAINI) (SHAILENDR A KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD: DATED 13/03/2015 TRUE COPY S.K.SINHA & & & & ' ' ' ' ('% ('% ('% ('% / COPY OF ORDER FORWARDED TO:- 1. +, / REVENUE 2. / ASSESSEE 3. // 0 / CONCERNED CIT 4. 0- / CIT (A) 5. '45 , , / DR, ITAT, AHMEDABAD 6. 589 :; / GUARD FILE. BY ORDER / & ,