DCIT, Hyderabad V. M/s Andhra Bank Ltd., Hyderabad

ITA 218/HYD/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2805 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 01-02-2011
• Assessment Year: misc
• Appeal Filed On: 11-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M DAYASAGAR
• Keywords: Reopening of assessment; Business income; Depreciation; Earning of tax free income; Cost of acquisition; Tangible material; Bad and doubtful debts; Difference of opinion; Block assessment; Revised return; Reason to believe; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 142(1); 14A; 147; 145; 148; 263; 12; 10; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B , HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER S. NO. ITA NO. AY APPELLANT RESPONDENT 1. 95/HYD/10 2001-02 ANDHRA BANK, SAIFABAD, HYDERABAD. (PAN /GIR NO. AABCA7375C/A- 034 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), HYDERABAD. 2. 96/HYD/10 2003-04 -DO- -DO- 3. 97/HYD/10 2006-07 -DO- -DO- 4. 218/H/10 2006-07 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), HYDERABAD. ANDHRA BANK, SAIFABAD, HYDERABAD. (PAN /GIR NO. AABCA7375C/A- 034 ASSESSEE BY : SHRI S. ANANTHAN REVENUE BY : SHRI M. DAYASAGAR DATE OF HEARING : 04/01/2013 DATE OF PRONOUNCEMENT : 04/04/ 2013 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: APPEALS BEING ITA NOS. 95 TO 97/HYD/10 FILED BY TH E ASSESSEE AND APPEAL BEING ITA NO. 218/HYD/10 FILED BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS OF THE CIT( A) FOR THE ASSESSMENT YEARS 2001-02, 2003-04, AND 2006-07. SIN CE COMMON ISSUES ARE INVOLVED IN THESE APPEALS, THEY WERE CLU BBED AND HEARD 2 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. TOGETHER AND, THEREFORE, A COMMON ORDER IS PASSED F OR THE SAKE OF CONVENIENCE. ITA NO. 95/H/10 - AY 2OO1 -2OO2 -ASSESSEES APPEAL 2. THE ASSESSEE BANK HAS FILED ITS RETURN OF INCOME FOR A.Y. 2001-02 ON 30.10.2001 RETURNING INCOME OF RS. 97 ,69,98,502/-. THEREAFTER, THE BANK FILED A REVISED RETURN OF INCOME ON 2L.05.2002 REDUCING ITS RETURNED INCOM E TO RS.89,74,20,236/- AND ASSESSMENT U/S 143(3) WAS COMPLETED ON AN INCOME OF RS. 122,59,24,368/- ON 16.03.2004 AND THE SAME WAS REVISED U/S. 263 BY HON'BLE CIT, HYDERABAD-I VIDE ORDER DATED 03.03.2006 ON AN INCOME OF RS.187, 12, 13,460/ -'. SUBSEQUENTLY, NOTICE U/ S. 148 DATED 07.03.2008 WAS ISSUED WITH P RIOR APPROVAL OF HON 'BLE CIT, CIT/HYD-I/ 147/18/2007-08 , DATED 29.02.2008 AS THE INCOME HAS ESCAPED ASSESSME NT OR HAS BEEN UNDER ASSESSED WITHIN THE MEANING OF IT ACT AS PER PROVISIONS OF SECTION 147 OF IT ACT. NOTICE U/S. 148 WAS ISSUED FOR THE REASONS THAT DURING THE YEAR REL EVANT TO A.Y. 2001-02 ASSESSEE COMPANY HAS REVERSED ITS UNREALISED INTEREST ON NPAS WHILE RECOGNISING THE I NTEREST INCOME FOR THE A.Y. 2001-02 I.E. IT HAS REDUCED ITS CURRENT YEARS INTEREST INCOME TO THAT EXTENT AND SA ME IS NOT ALLOWABLE AS PER PROVISIONS OF IT ACT. FURTHER, DURING THE YEAR, THE ASSESSEE COMPANY HAS CLAIMED INTEREST EXPENDED FOR PURCHASING/ SALE OF SECURITIES AND SUC H BROKEN PERIOD INTEREST CLAIMED BY THE ASSESSEE IS N OT AN ALLOWABLE EXPENDITURE AS PER PROVISIONS IT ACT. FUR THER, DURING THE YEAR ASSESSEE COMPANY .H AS CLAIMED DEPRECIATION ON SECURITIES HELD UNDER AVAILABLE FOR 3 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. SALE/HELD FOR TRADING CATEGORY AND THE SAME IS TO B E ALLOWABLE AS PER THE RBI REVISED GUIDELINES READ WI TH CBOT CIRCULAR NO.665 READ WITH PROVISIONS OF IT ACT AS FOLLOWS. 'HTM CATEGORY OF INVESTMENTS CANNOT BE TREATED AS STOCK-IN-TRADE. NO DEPRECIATION IS TO BE PROVIDED FOR ON INVESTMENTS CLASSIFIED UNDER THE CATEGORY 'HELD TO MATURITY' AND VALUATION OF INVESTMENTS CLASSIFIED UNDER THE CATEGORIES AVAILABLE FOR SALE AND HELD FOR TRADING IS REQUIRED TO BE DONE SCRIP-WISE AND THEREAFTER DEPRECIATION/ APPRECIATION IS REQUIRED TO BE PROVIDED FOR EACH CLASSIFICATION OF CATEGORY AND ONLY NET DEPRECIATION, IF ANY, IS REQUIRED TO BE PROVIDED FO R AND NET APPRECIATION IF ANY IS REQUIRED TO BE IGNORED' 148 NOTICE WAS SERVED ON THE ASSESSEE ON 12.03.2008 AND FOR WHICH ASSESSEE FILED THEIR RETURN OF INCOME ON 10.04.2008. IN RESPONSE TO SUBSEQUENT NOTICES U/S. 143(2) AND 142(1) ISSUED ASSESSEE BANK REPRESENTATIVES SHRI PRASAD REDDY, SENIOR MANAGER AND SHRI VASUDEV MURTHY, CHIEF MANAGER, APPEARED FROM TIME AND TIME AND FILED THEIR SUBMISSIONS /REPLIES AS CALLED FOR. DURING TH E PROCEEDINGS AND HEARINGS, AUTHORISED REPRESENTATIVES OF THE ASSESSEE BANK HAS SOUGHT FOR THE REASONS RECORDED AN.D SAME WERE FURNISHED AND BROUGHT TO THE NOTICE OF AUTHORISED REPRESENTATIVES VIDE ORDER SHEET NOTINGS DATED 14.05.2008, 14.06.2008, 24.07.2008 AND 08.08.2008 AND REQUESTED TO FILE THEIR REPLIES/ OBJECTIONS IF ANY ALONG WITH DETAILS OF INFORMATION AS CALLED FOR. FURTHER, ASSESSEE WAS REQUESTED TO GIVE INFORMATION AS CALLED FOR VIDE THIS OFFICE LET TER DATED 14.05.2008 AND SUFFICIENT TIME AND OPPORTUNITY WAS OFFERED AS REQUESTED FROM TIME TO TIME. FURTHER, ASSESSEE FILED THEIR SUBMISSIONS VIDE THEIR LETTER DATED 20.10.2008 AND INFORMATION AS CALLED FOR VIDE THEIR LETTER DATED 06.12.2008 AFTER VERIFYING THE SUBMISSIONS MADE AND INFORMATION SUBMITTED/ AVAILABLE ASSESSMENT IS COMPLETED AS UNDER: 3. THE ASSESSEE'S OBSERVATIONS AND SUBMISSIONS ARE 4 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. NOT ACCEPTABLE AND TENABLE AS PER THE PROVISIONS OF IT ACT KEEPING IN VIEW THE FACTS OF THE CASE ON HAND F OR THE ASSESSEE BANK FOR RELEVANT A.Y. 2001-02 PROCEEDINGS U/S. 148 ARE VALID AS THE REVENUE HAS THE REASON TO BELIEVE THAT THE INCOME HAS ESCAPED ASSESSMENT 811.D S81NE IS MORE SO WHEN THE S81NE IS BACKED BY SUCH ISSUE (S) IN THE ASSESSMENTS MADE IN SUBSEQUENT YEARS OR CURRENT YEARS IN SCRUTINY U/S. 143(3). IN THE INSTANT CASE, RELEVANT ISSUES HAVE BEEN CONSIDERED AND DISALLOWANCES WERE MADE IN SUBSEQUEN T ASSESSMENT (S) AND AS UPHELD / ADJUDICATED BY APPELLATE AUTHORITIES. FOR BREVITY THE BRIEF EXTRAC TS OF PROVISIONS U/ S. 147 OF IT ACT IS REPRODUCED BELOW: '147. IF THE ASSESSING OFFICER HAS REASON TO BELIEVE THAT ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR 811.Y ASSESSMENT YEAR, HE MAY, SUBJECT TO THE PROVISIONS OF SECTIONS 148 TO 153, ASSESS OR REASSESS SUCH INCOME 811.D ALSO 811.Y OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT 811.D WHICH COMES TO HIS NOTICE SUBSEQUENTLY INTHE COURSE OF THE PROCEEDINGS UNDER THIS SECTION, OR RE COMPUTE THE LOSS OR THE DEPRECIATION ALLOWANCE OR ANY OTHER ALLOWANCE, AS THE CASE MAY BE, FOR THE ASSESSMENT YEAR CONCERNED (HEREAFTER IN THIS SECTION AND IN SECTIONS 148 TO 153 REFERRED TO AS THE RELEVANT ASSESSMENT YEAR]: PROVIDED THAT WHERE AN ASSESSMENT UNDER SUB-SECTION (3) OF SECTION 143 OR THIS SECTION HAS BEEN MADE FOR THE RELEVANT ASSESSMENT YEAR, NO ACTION SHALL BE TAKEN UNDER THIS SECTION AFTER THE EXPIRY OF FOUR YEARS FROM TH E END OF THE RELEVANT ASSESSMEN T YEAR, UNLESS ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR SUCH ASSESSMENT YEAR BY REASON OF THE FAILURE ON THE PART OF THE ASSESSEE TO MADE A RETURN UNDER SECTION 139 OR IN RESPONSE TO A NOTICE ISSUED UNDER SUB SECTION(L) OF SECTION 142 OR SECTION 148 OR TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS 5 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. NECESSARY FOR HIS ASSESSMENT, FOR THAT ASSESSMENT YEAR. EXPLANATION 1- PRODUCTION BEFORE THE ASSESSING OFFICER OF ACCOUNT BOOKS OR OTHER EVIDENCE FROM WHICH MATERIAL EVIDENCE COULD WITH DUE DILIGENCE HAVE BEEN DISCOVERED BY THE ASSESSING OFFICER WILL NOT NECESSARILY AMOUNT TO DISCLOSURE WITHIN THE MEANING OF THE FOREGOING PROVISO.' 4. THE CRUX OF THE POWERS AND DISCHARGE OF RESPONSIBILITY BY REVENUE U/S. 147 ARE MEANT TO BRING TO TAX INCOME OMITTED TO BE EITHER DISCLOSED IN THE RE TURN OR ASSESSED IN THE ORIGINAL ASSESSMENT BY REASON (S) O F FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FUL LY AND TRULY ALL MATERIAL FACTS WITH DUE DILIGENCE. ACCORD INGLY, ASSESSEE'S RELIANCE ON VARIOUS CITATIONS AND SUBMIS SION TO CONCLUDE THAT THERE IS ONLY MERE CHANGE OF OPINION IS FAR STRETCHED AND DEVOID OF FACTS OF THE CASE AND NOT REASONABLE AND JUSTIFIABLE. IN VIEW OF THIS ASSESSE E'S CONTENTIONS AND OBJECTIONS ARE NOT ACCEPTABLE AND PROCEEDINGS U/S. 148 ARE SQUARELY VALID ILL THE LARGER PERSPECTIVE AND IN THE INTEREST OF JUSTICE AS PER T HE PROVISIONS OF I.'T. ACT. ACCORDINGLY, ALL THE FACTS OF THE CASE, PROVISIONS OF IT ACT AND OF RE-ASSESSMENT PROCEEDINGS ARE BROUGHT TO THE NOTICE OF ASSESSEE'S AUTHORISED REPRESENTATIVES SHRI M.V. PRASAD REDDY A ND OTHERS VIDE ORDER SHEET NOTINGS DATED 20.10.2008 AND 28.11.2008 AND REQUESTED TO GIVE FULL INFORMATION AS CALLED FOR AND AS DISCUSSED AS IT IS TIME BARRING ASSESSMENT. ACCORDINGLY, ASSESSEE'S AUTHORISED REPRESENTATIVE HAS SUBMITTED THE DETAILS OF INFORMA TION AS CALLED FOR VIDE THEIR LETTER DATED 06.12.2008 AND AFTER VERIFYING THE INFORMATION SUBMITTED AVAILABLE ASSES SMENT 6 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. WAS COMPLETED. 5. THE AO HAS HELD THAT THE RELEVANT ISSUES HAVE BE EN CONSIDERED AND DISALLOWANCES MADE IN THE SUBSEQUENT ASSESSMENTS AND AS UPHELD/ ADJUDICATED BY APPELLATE AUTHORITIES. IN THE CIRCUMSTANCES THE AO JUSTIFIED THE REOPENING OF ASSESSMENT. 6. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFOR E THE COMMISSIONER OF INCOME TAX (APPEALS). THE CIT(A) UP HELD THE REOPENING OBSERVING AS UNDER: 4.0 I HAVE CONSIDERED THE FACTS ON RECORD AND THE SUBMISSIONS OF THE APPELLANT ON THIS ISSUE. THE AO NOTICED THAT THE APPELLANT HAD REDUCED THE INTEREST INCOME WHICH HAS ACCRUED ON ACCOUNT OF CERTAIN ADVANCES MADE BY THE APPELLANT, WHICH IT CLASSIFIED AS NPAS. THE APPELLA NT HAD NOT DISCLOSED THE FACT THAT THE INTEREST IT HAD CREDITE D TO ITS P&L A/C ON ACCOUNT OF SUCH ADVANCES, WAS REDUCED, RESUL TING IN UNDER STATEMENT OF ITS TOTAL INCOME. THE AO HAS COM E TO KNOW OF SUCH DERECOGNIZING OF INTEREST INCOME BY TH E APPELLANT SUBSEQUENT TO THE COMPLETION OF ASSESSMEN T U/S 143(3) MADE BY HIM. SIMILARLY THE FACTS RELATING TO CLAIM OF INTEREST ON SECURITIES PURCHASED AND CLASSIFIED AS HELD TO MATURITY (HTM) CATEGORY AS REVENUE EXPENDITURE HAS COME TO THE KNOWLEDGE OF THE AO LATER ON, ON ACCOUNT OF THE OMISSION OF THE APPELLANT IN DISCLOSING FULL FACTS RELATING TO THE IT. 7. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US AN D HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: GROUND NO. 1 IS GENERAL IN NATURE. GROUND NO. 2.A) TO 2.C) IS DIRECTED AGAINST THE ACT ION OF THE CIT(A) IN CONFIRMING THE ACTION OF THE AO IN MAKING REASSESSMENT U/S 143(3) R.W.S. 147 OF THE IT ACT FO R THE ASSESSMENT YEAR 2001-02 AND DETERMINING THE ASSESSE ES INCOME FROM BUSINESS AT RS. 219,83,09,050/-. 7 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. GROUND NO. 3.A) TO 3.C) IS DIRECTED AGAINST THE ORD ER OF THE CIT(A) IN CONFIRMING THE ACTION OF THE AO IN DISALL OWING UNREALIZED INTEREST OF RS. 4,78,00,000/- ON NPAS WH ICH WAS REDUCED FROM INTEREST INCOME. GROUND NO. 4.A) TO 4.C) IS DIRECTED AGAINST THE ACT ION OF THE CIT(A) IN DISALLOWING BROKEN PERIOD INTEREST PAID A T THE TIME OF PURCHASE OF HTM SECURITIES TREATING IT AS CAPITA L EXPENDITURE RELYING ON THE DECISION OF SC IN THE CA SE OF VIJAYA BANK VS. CIT, 187 ITR 541. 8. THE ASSESSEE IN ADDITION TO THE SAID GROUNDS OF APPEAL, FILED A PETITION REQUESTING FOR ADMISSION OF THE FOLLOWIN G ADDITIONAL GROUNDS OF APPEAL: 1. WITHOUT PREJUDICE TO GROUND NO. 3(B), THE LEARNE D CIT(A) OUGHT TO HAVE ALLOWED THE UNREALIZED INTEREST OF RS . 4,78,00,000/- ON NON-PERFORMING ASSETS AS DEDUCTION U/S 36(1)(VII) OF THE ACT BY TREATING THE SAME AS BAD D EBTS WRITTEN OFF. 2. THE APPELLANT SUBMITS THAT IT HAD WRITTEN OFF RS . 74,89,22,470/- AS BAD DEBTS IN RESPECT OF ITS NON-R URAL BRANCHES DURING THE ASSESSMENT YEAR AND THAT THE SA ME BE ALLOWED AS DEDUCTION U/S 36(1)(VII) OF THE IT ACT.` 9. THE LEARNED DR FILED WRITTEN SUBMISSIONS WHEREIN HE HAS CONTENDED THAT THE PLAIN READING OF PROVISO TO SECT ION 147 COUPLED WITH THE EXPLANATION CLARIFIES THAT EVEN IF THE DETAILS WERE PRODUCED BEFORE THE AO IN THE COURSE OF PROCEEDINGS U/S 143(3) OR 147, EVEN THEN ON THE SAME ISSUE REOPENING ONLY JUSTIFIED AFTER EXPIRY OF FOUR YEARS FROM THE END OF THE RELEVANT A SSESSMENT YEAR. THE LEARNED DR RELIED ON THE DECISION OF MAL EGAON ELECTRICITY CO. (P) LTD. VS. CIT, 78 ITR 466 AND TH E HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. RINKU C HAKROBARTY, 56 DTR 227. FURTHER, THE LEARNED DR RELIED ON THE C ASE LAWS, RELIED ON BY THE CIT(A), WHICH ARE AS FOLLOWS: 1. SUNDARAM AND COMPANY, 66 ITR 604 (SC) 8 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. 2. SHAHBARA (DELHI) SAHARANPUR LIGHT RAILWAY CO. LTD., 208 ITR 882 (CAL.) 3. GIRILAL AND CO., 300 ITR 432 (BOM.) 10. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING CASE LAWS IN SUPPORT OF ASSESSEES CASE: 1. HINDUSTAN LEVER LTD., [2004] 137 TAXMAN 479 (BOM.) 2. HEWELETT PACKARD DIGITAL GLOBAL SOFT LTD., [2011 (9 ) TMI 800 (HC- KARNATAKA) 3. TITANOR COMPONENTS LTD., [2011] 243 CTR 520 (BOM.) 4. SMT. RAJ RANI GULATI, [2010] 329 ITR 370 (ALL) 5. ICICI BANK LTD., [2011] 16 TAXMANN.COM 250 (BOM.) 6. LOK HOUSING & CONSTRUCTION LTD., [2012] 348 ITR 335 (BOM.) 11. WE HAVE GONE THROUGH THE ORDERS OF THE AUTHORIT IES BELOW AND FIND THAT ALL THESE ISSUES ARE COMMON ISSUES I N THE ASSESSMENT OF ALL THE BANKS. THESE ISSUES ARE SUBJ ECT OF MATTER APPEALS BEFORE VARIOUS FORUMS. THEREFORE IT CANNOT BE SAID THAT THE ASSESSING OFFICER WOULD NOT HAVE APPLIED HIS MI ND ON THESE ISSUES. 12. WHEN ASSESSMENT U/S 143(3) HAS BEEN COMPLETED I F THE ASSESSING OFFICER CHOOSES TO REOPEN THE ASSESSMENT BEYOND 4 YEARS FROM THE END OF THE ASSESSMENT YEAR, THEN AS PER PROVISO TO SEC 147(1) THE INCOME ESCAPING ASSESSMENT SHOULD BE DUE TO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FUL LY AND TRULY ALL PARTICULARS FOR MAKING THE ASSESSMENT. MERE CHANGE OF OPINION ON THE PART OF THE ASSESSING OFFICER AND HIS BELIEF TH AT THE DECISION ON SOME ISSUES COULD BE DIFFERENT WILL NOT GIVE HIM THE JURISDICTION TO REOPEN THE ASSESSMENT. EVEN IF ON T HE BASIS OF 9 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. LATER JUDGEMENTS, THE DECISION IN THE REGULAR ASSES SMENT IS FOUND NOT TO BE CORRECT WILL NOT BE SUFFICIENT GROUND TO REOPEN. THE AO SHOULD HAVE COME INTO POSSESSION FRESH MATERIAL, SO METHING TANGIBLE WHICH HAS LIVE NEXUS WITH THE INCOME ESCAP ING ASSESSMENT AS HELD IN CIT V KELVINATOR OF INDIA LTD ., 320 ITR 561 SC. 13. IN THIS CASE THE ASSESSMENT U/S 143(3) HAS BEEN COMPLETED. OF THE THREE ISSUES, THE COD HAD NOT GRANTED PERMIS SION TO THE REVENUE TO PROSECUTE ONE OF THE ISSUES VIZ., REVERS AL OF INTEREST INCOME RECOGNISED EARLIER, IN APPEAL BEFORE THE ITA T. EVENTHOUGH IT IS NOW RECOGNISED THAT APPROVAL OF THE COD IS NO T NECESSARY FOR PROSECUTION OF APPEAL, THE BASIS OF THE REQUIREMENT OF COD APPROVAL, VIZ., REDUCTION IN LITIGATION AMONG GOVER NMENT DEPARTMENTS IS STILL VALID. IF THE COD HAD APPLIED THEIR MIND AND REFUSED PERMISSION TO THE REVENUE TO PURSUE THE APP EAL IN RESPECT OF CERTAIN ISSUES, THE REVENUE IS PRECLUDED FROM DO ING SO. IT IS AN INTER-SE ARRANGEMENT BETWEEN THE GOVERNMENT DEPARTM ENTS/ GOVERNMENT OWNED UNDERTAKINGS. HENCE THE ISSUE REGA RDING REVERSAL OF INTEREST INCOME RECOGNISED OFFERED FOR INCOME NO LONGER SURVIVES. EVEN OTHERWISE ALL THE MATERIALS W ERE BEFORE THE AO AND THE AO HAS NOW SOUGHT TO DISALLOW THE REVERS ED INCOME ON THE BASIS OF THE MATERIALS ALREADY BEFORE HIM. I T IS CLEARLY A CHANGE OF OPINION. 14. AS REGARDS THE SECOND ISSUE VIZ., BROKEN PERIOD INTEREST, THIS HAS BEEN A SUBJECT MATTER OF LITIGATION AND NUMEROU S DECISIONS. WHENEVER SECURITIES ARE PURCHASED, THE PURCHASE PRI CE IS INCLUSIVE OF INTEREST UPTO THE DATE OF PURCHASE. AS INTEREST EARNED FROM THE SECURITIES ARE ASSESSED AS BUSINESS INCOME , INTEREST FOR THE BROKEN PERIOD INCLUDED IN THE PURCHASE PRICE OF THE SECURITIES 10 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. ARE TO BE ALLOWED AS A DEDUCTION. (AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION VS. CIT (2002) 258 ITR 601 BOM. CIT VS. NEDUNGADI BANK LTD. (2003) 264 ITR 545 KER).THAT BE ING SO, THE ALLOWANCE OF BROKEN PERIOD INTEREST AS A DEDUCTION IN CASES OF SECURITIES PURCHASED HAS BEEN ALLOWED BY VARIOUS CO URTS. THEREFORE IN ALLOWING THE BROKEN PERIOD INTEREST IN THE ORIGINAL ASSESSMENT, THE AO CAN NOT SAID TO HAVE COMMITTED A NY ERROR. THE PARTICULARS ABOUT THE BROKEN PERIOD INTEREST CL AIMED WAS BEFORE THE ASSESSING OFFICER AS HE HAS TAKEN THE FI GURE FROM THE ORIGINAL ASSESSMENT FOR DISALLOWING. THE AO HAD NOT COME ACROSS ANY FRESH MATERIAL WHICH WILL LEAD HIM TO THE SATIS FACTION THAT INCOME HAS ESCAPED ASSESSMENT. THEREFORE THE PRESEN T REOPENING ON THIS ISSUE IS MERELY A CHANGE OF OPINION ON THE PART OF THE ASSESSING OFFICER. 15. THE THIRD ISSUE, VIZ., DEPRECIATION ON SECURITI ES, IS ALSO SUBJECT MATTER OF NUMEROUS DECISIONS IN THE CASE OF BANKS. ONCE THE INVESTMENT IN SECURITIES ARE MADE WITH A VIEW T O COMPLY WITH STATUTORY REQUIREMENT OF LIQUIDITY, THE SECURITIES CONSTITUTE STOCK IN TRADE AND VALUING THEM AT MARKET OR COST WHICHEV ER IS LOWER IS AN ACCEPTED METHOD OF ACCOUNTING. THE APEX COURT HA S UPHELD THE SAME IN THE CASE OF UNITED COMMERCIAL BANK V. CIT 240 ITR 355 (SC). THE AOS ATTEMPT TO CLASSIFY THEM AT HELD TO MARKET OR READY FOR SALE ETC IS MERELY A CHANGE OF OPINION. T HERE HAS BEEN NO FRESH FACTS OR EVIDENCE COLLECTED BY THE AO ON T HE BASIS OF WHICH HE CAN BE SAID TO HAVE COME TO CONCLUSION THA T INCOME HAS ESCAPED ASSESSMENT. 16. AS REGARDS THE ISSUE REGARDING DISALLOWANCE OF UNREALISED INTEREST, WE FIND THAT THE SAME ARE COVERED BY THE DECISIONS OF CIT VS. INDUSTRIAL FINANCIAL CORPORATION INDIA LTD. , 205 ITR 75 11 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. (DEL.) AND UNION BANK OF INDIA VS. ACIT, 16 TAXMAN. COM 304 (MUM.) 17. AS REGARDS THE ISSUE WITH RESPECT TO DEDUCTION U/S 36(1)(VII) IN RESPECT OF DEBTS WRITTEN OFF BY THE NON-RURAL BR ANCHES OF THE ASESSEES BANK, IS COVERED IN FAVOUR OF THE ASSESSE E BY THE CATHELIC SYRIAN BANK VS. CIT [2012] 18 TAXMAN.COM 2 82 (SC) THUS IN THE INSTANT CASE THERE IS NOTHING NEW WHICH HAS COME TO THE NOTICE OF THE ASSESSING OFFICER AFTER THE ORIGI NAL ASSESSMENT U/S 143(3). THE ACCOUNTS HAD BEEN FURNISHED BY THE PETITIONER WHEN CALLED UPON. THEREAFTER, THE ASSESSMENT WAS CO MPLETED UNDER SECTION 143(3) OF THE INCOME-TAX ACT. NOW, ON A MERE RELOOK AND REVIEW, THE OFFICER HAS COME TO THE CONC LUSION THAT THE INCOME HAS ESCAPED ASSESSMENT. THE PROVISO TO SECTI ON 147 OF THE INCOME-TAX ACT REQUIRES A FAILURE ON THE PART O F THE ASSESSEE TO MAKE A PROPER RETURN. IN THE PRESENT CASE, NO SU CH CASE IS MADE OUT ON THE RECORD. IN THE CIRCUMSTANCES, FROM THE FACTS AND EVIDENCE ON RECORD WE ARE OF THE OPINION THAT THE R EOPENING IS BASED ON A MERE RELOOK OF THE SAME SET OF FACTS AND DOCUMENTS WHICH WERE ALREADY AVAILABLE BEFORE THE AO AT THE T IME OF ORIGINAL ASSESSMENT AND IT WAS MERELY A CHANGE OF OPINION. T HE ASSESSING OFFICER ALSO HAS NOT POINTED OUT WHAT WAS THE FAILU RE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY THE PAR TICULARS REQUIRED FOR MAKING THE ASSESSMENT. IT IS A WELL SETTLED PRI NCIPLE THAT REOPENING AFTER 4 YEARS FROM END OF THE RELEVANT AS SESSMENT YEAR, WHEN THE ASSESSMENT UNDER SEC 143(3) HAS BEEN COMPLETED AND THE ASSESSEE HAD FURNISHED FULL FACTS, IS NOT P ERMISSIBLE UNDER PROVISO TO SEC 147(1). THE FOLLOWING AMONG OTHER CA SES SUPPORT THIS VIEW: CIT VS M/S KELVINATOR OF INDIA LIMITED 320 ITR 561 SC 12 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. MIHIR TEXTILES LTD. V. JCIT 347 ITR 546 GUJ. NYK LINE (INDIA) LTD. V. DCIT (NO. 2) 346 ITR 361 B OM. 18. THE AO HAS SUBSTANTIATED REOPENING STATING THAT THAT DISALLOWANCES ON THE ABOVE ISSUES HAVE BEEN MADE AN D WERE ADJUDICATED BY APPELLATE AUTHORITIES. IT WAS NOT AS IF THERE WAS ANY FACTUAL AND TANGIBLE MATERIAL REGARDING THESE I SSUES WHICH CAME TO LIGHT IN THE SUBSEQUENT YEARS. IT WAS ONLY A CONCLUSION BASED ON A DIFFERENT INTERPRETATION ON THE SAME SET OF FACTS. THUS THE AO HAD MERELY CHANGED HIS CONCLUSION, ON THE SA ME SET OF FACTS AVAILABLE FOR THIS YEAR. LEGAL CONCLUSION ARR IVED AT ON SIMILAR SET OFF FACTS IN THE SUBSEQUENT YEAR CANNOT BE THE REASON FOR REOPENING. IT IS A SETTLED PROPOSITION THAT REOPENI NG IS NOT PERMITTED ON THE BASIS OF SUBSEQUENT DECISION OF TH E HIGH COURT OR SUPREME COURT. COMMERCIAL CO-OPERATIVE BANK LTD. V. ITO 336 ITR 1 96 GUJ AUSTIN ENGINEERING CO LTD V CIT 312 ITR 70 GUJ CIT V. BAER SHOES (INDIA) PVT. LTD 331 ITR 435 MA D. 19. THUS A DIFFERENT LEGAL INTERPRETATION OF A PROV ISION IN THE SUBSEQUENT YEAR, ON THE SAME SET OF FACTS CANNOT BE THE BASIS OF REOPENING FOR AN EARLIER YEAR, PARTICULARLY WHEN IT IS BEYOND 4 YEARS FROM THE END OF THE ASSESSMENT YEAR. 20. IN THE CIRCUMSTANCES WE HOLD THAT THE REOPENING IS WITHOUT JURISDICTION AND HENCE INVALID. AS WE HAVE HELD TH AT THE ASSESSMENT IS WITHOUT JURISDICTION, WE ARE NOT DEAL ING WITH OTHER ISSUES ON MERITS. 21. IN THE RESULT, THE ASSESSEES APPEAL BEING ITA NO. 95/H/10 IS TREATED AS ALLOWED. 13 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. ITA 96/H/10 AY 2003-04 22. THIS IS AN APPEAL AGAINST THE ORDER GIVING EFFE CT TO THE ORDER OF THE CIT U/S 263. 23. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL: GROUND NO. 1 IS GENERAL IN NATURE. GROUND NO. 2.A) TO 2.B) IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN CONFIR MING THE ACTION OF THE AO IN CONSIDERING RS. 32.68 CRORES AS ALLEGED NOTIONAL PROFIT ON SALES OF INVESTMENTS IN TRADING BOOK AS INCOME OF THE ASSESSEE FOR THE AY 2003-04 WHEN IN F ACT IT IS ONLY A NOTIONAL INCOME AND WAS NOT EARNED BY THE AS SESSEE ON SALE OF INVESTMENTS. 24. THE AO CONSIDERED RS. 32.68 CRORES REPRESENTING NOTIONAL PROFIT ON SALE OF INVESTMENT IN HFT CATEGORY AS INC OME OF THE ASSESSEE. THE FACTS RECORDED BY THE AO ARE AS FOLLO WS: THAT THE CIT-1, HYDERABAD HAD CONSIDERED THE ISSUE IN DETAIL IN HIS ORDER U/S 263 DATED 15-02-08 AT PARA 14.02 TO 14.8 AND HELD THAT THE PROFIT OF S.32.68 C RORES ACCRUED IN THE PROCESS OUGHT TO HAVE BEEN BROUGHT T O TAX; - THE APPELLANTS REPRESENTATIVE CLARIFIED THAT IT ARRIVED AT THE AVERAGE VALUE BY CLUBBING OF DIFFERENT SECUR ITIES AS COMPUTED BY THE STATUTORY AUDITORS AND THE APPELLANT'S REPLY THAT SUCH INCOME WAS NOTIONAL AND NOT REAL WAS ACCEPTABLE TO HIM AS THE APPELLANT MAD E AN OVERALL PROFIT OF RS.32.6~ CRORES ON ACCOUNT OF 'TR ADING BOOK ' DURING THE YEAR AS PER STATUTORY AUDIT REPORT AS REAL INCOME. 25. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED AS FO LLOWS: THAT STATUTORY AUDITORS IN NOTES ON ACCOUNTS - 14 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. SCHEDULE 17 CLAUSE 4 (E) IN THE ANNUAL REPORT OBSERVED THE BANK FOLLOWS THE PRACTICE ACCOUNTING THE SALE OF SECURITIES IN THE TRADING BOOK ON THE BASIS OF PURCHASES MADE ON THE SAME DAY IN TRADING BOOK EVEN THROUGH THE STOCK IS HELD IN AVAILABLE FOR SALE OR HTM CATEGORY. HAD THE ACCOUNTING 'OF THESE TRANSACTIONS BEEN MADE IN THE CATEGORY IN WHICH THE EXISTING STOCKS ARE HELD, THE PROFITS AND INVESTMENTS WOULD HAVE BEEN HIGHER BY RS.32.68 CRORES; - THAT IT IS RELEVANT TO NOTE THAT SECURITIES ARE UNDERSTATED BY RS. 32. 68 CRORES. IN THIS CONNECTION, IT IS RELEVANT TO NOTE THAT SECURITIES ARE HELD BY BAN KS IN THE FOLLOWING THREE CATEGORIES: HTM - HELD TO MATURITY AFS - AVAILABLE FOR SALE HFT - HELD FOR TRADING BANK CAN SELL SECURITIES ONLY WHEN SUCH A SECURITY IS AVAILABLE WITH IT IN ANYONE OF THE ABOVE CATEGORIES BUT CANNOT SELL IT IF NO STOCK OF SUCH SECURITY IS AVAI LABLE IN ANY OF THE ABOVE CATEGORIES. SECURITIES IN HFT CATE GORY ARE NORMALLY TRADED. HOWEVER, IF A SECURITY IS AVAILABLE IN AFS CATEGORY, SALE OF SUCH SECURITY CAN BE MADE AND BOUGHT AGAIN ON THE SAME DAY. SUCH PURCHASE AND SAL E ARE RECORDED IN THE HFT CATEGORY AND DIFFERENCE BETWEEN SALE AND PURCHASE VALUE IS TAKEN AS PROFIT. THE AUDITORS OPINED THAT WHILE COMPUTING THE PROFIT ON SALE OF SECURITIES, THE APPELLANT HAD TAKEN INTO ACCOUNT THE PURCHASE RATE OF SECURITY IN THE SAME CATEGORY ON THE SAME DAY WHERE SECURITY IS BOUGHT AFTER THE TIM E OF SALE IGNORING THE COST IN OTHER CATEGORY WHERE S UCH SECURITY IS AVAILABLE BEFORE SALE. ACCORDING TO AUDITORS/ SINCE SALE OF SECURITY CANNO T BE MADE UNLESS STOCK OF SUCH SECURITY IS THERE IN ANYO NE OF THE CATEGORIES (MOSTLY AFS) PROFIT ON SALE IS TO BE COMPUTED TAKING INTO ACCOUNT THE SALE VALUE OF SECU RITY AND AVERAGE OF THE COST OF SECURITY AS AVAILABLE IN OTHER CATEGORY (AFS) AND PURCHASE VALUE OF THE SECURITY O N THE DAY OF ITS SALE IN TRADING BOOK. THAT ABOVE TWO METHODS OF COMPUTING PROFIT ARE 15 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. ILLUSTRATED HEREUNDER TAKING THE FOLLOWING VALUES: A. SALE VALUE OF SECURITY B. COST OF SECURITY IN AFS BEFORE SALE C. PURCHASE VALUE OF SECURITY ON THE DATE OF SALE AS PER TRADING BOOK METHOD ADOPTED BY BANK METHOD TO BE FOLLOWED A S PER AUDITORS SALE VALUE - RS.91 SALE VALUE RS.91.00 PURCHASE VALUE - RS.90 AVERAGE COST IN AFS AND PURCHASE VALUE AS PER TRADING BOOK 89.50 ---------- RS. 1 RS.1.50 ===== ====== THUS/ IF THE METHOD/ AS SUGGESTED BY THE AUDITORS/ IS FOLLOWED/ PROFIT OF THE BANK WOULD HAVE BEEN HIGHER BY 32.68 CRORES. PRESUMING FOR A MOMENT THAT THE ABOVE VIEW MAY BE CORRECT/ THOUGH NOT CONCEDING/ IT WOULD NOT MAKE ANY DIFFERENCE ON THE PROFIT FOR THE YEAR AS ALL THE SECURITIES HELD BOTH IN AFS & HFT CATEGORIES ARE TO BE VALUED AT THE END OF THE YEAR AT COST OR MARK ET VALUE WHICHEVER IS LOWER. CONTINUING THE ABOVE ILLUSTRATION/ PROFIT AT THE EN D OF THE YEAR WOULD BE AS UNDER: A. PROFIT ON SALE OF SECURITY AS CONSIDERED IN THE RS.L.00 ACCOUNTS BY THE BANK B. PROFIT ON VALUATION OF SECURITY AT AVERAGE VALUE OF RS..89.50 AS WORKED OUT BY AUDITORS AS AGAINST VALUE OF RS.89/- AS PER BOOKS AT THE TIME OF PURCHASE RS.0. 50 PS RS. 1.50 THUS, AS COULD BE SEEN FROM THE EBOVE, PROFIT AT THE END OF THE YEAR WOULD BE R,S.1.50. HENCE, MAKING ADDITION OF RS.32.68 CRORES TO THE INCOME RETURNED IS NOT CORRECT AND JUSTIFIED IN VIEW OF WHAT EXPLAINED ABOVE AS THE PROFIT AT THE END OF THE YEAR WOULD BE RS. 1.50 EVEN IF SUCH PROFIT IS RECORDED AT RS. 1/ - 16 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. ONLY IN THE BOOKS ON THE DATE OF SALE OF SECURITY. 26. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) HELD AS FOLLOWS: IN THIS CONTEXT, WE NEED TO CONSIDER THE PROVISION U/S 145 VIZ., THE METHOD OF ACCOUNTING BY THE ASSESSEE' S IN RESPECT OF INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AND THE CBDT NOTIFICATION NO.9949 DATED 25/01/1996 NOTIFYING THE ACCOUNTING STANDARDS FOR ASSESSEE'S FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. ACCORDING TO THIS NOTIFICATION, ALL ASSESSEES' FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING SHOULD DISCLOSE ACCOUNTING PRINCIPLES AND CHANGES IN ACCOUNTING POLICIES AND T HEY CANNOT HAVE HYBRID OR MIXED SYSTEM OF ACCOUNTING FO R THE PURPOSE OF DECLARING INCOME UNDER THE I.T. ACT. IN THE APPELLANT'S CASE, THE CENTRAL STATUTORY AUDITOR S HAVE, IN ACCORDANCE WITH THE ACCEPTED ACCOUNTING STANDARDS OBSERVED THAT THE ACCOUNTING PRACTICE FOLLOWED BY THE APPELLANT IN ARRIVING AT THE PROFIT S IN TRADING OF SECURITIES IN AFS, HFT & HTM WAS NOT IN ORDER AND THAT HAD THE ACCOUNTING OF THE SALE OR SECURITI ES IN THE TRADING ACCOUNT CONSIDERED THE STOCKS AVAILABLE UNDER AFS CATEGORY OR HTM CATEGORY, THE PROFITS AND INVESTMENTS WOULD HAVE BEEN HIGHER BY RS.32.68 CRORES. IN OTHER WORDS, THE ISSUE IS ONE OF METHOD OF ACCOUNTING FOR THE PURPOSE OF ARRIVING AT THE TOTAL INCOME AS PER THE PROVISIONS OF THE LT.ACT AND FOR THIS PURPOSE, PROVISION OF SECTION 145, THE CBDT NOTIFIC ATION NO.9949 AND THE OBSERVATIONS OF THE CENTRAL STATUTO RY AUDITORS OVERRIDE THE GUIDELINES PROVIDED BY THE RB I IN RESPECT OF RECOGNIZATION OF INCOME ON SALE OF SECUR ITIES. FURTHER, THE APPELLANT CANNOT FOLLOW ANY METHOD OTH ER THAN MERCANTILE SYSTEM OF ACCOUNTING AS PER THE PROVISIONS U/S 145 OF THE I.T. ACT, PARTICULARLY IN REGARD TO THE RECOGNIZATION OF INCOME ON SALE OF SECURITIE S. AS THE APPELLANT, ARRIVED AT THE PROFIT FIGURES BY TAK ING THE PURCHASE COST AS PER THE RBI GUIDELINES AND NOT IN ACCORDANCE WITH THE ACCOUNTING STANDARDS, BASED ON WHICH THE STATUTORY AUDITORS FOUND THAT THE INCOME COMPUTED WAS SHORT BY RS.32.68 CRORES. FURTHER, THE APPELLANT WAS NOT CORRECT IN STATING THAT THERE WOU LD BE NO DIFFERENCE IN THE OVERALL PROFIT AS THE SECURITI ES IN AFS & HTM CATEGORY ARE VALUED AT COST OR MARKET VALUE, WHICHEVER IS LOWER. THE FACT IS THAT THE APPELLANT HAD 17 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. VALUED THE HTM SECURITIES AT COST AND THIS IS AT VA RIANCE WITH THE APPELLANT'S STATEMENT ABOVE. FOR THESE REASONS, THE AO WAS JUSTIFIED IN BRINGING TO TAX TH E PROFITS THAT HAVE BEEN UNDER-REPORTED BY THE APPELL ANT IN ITS ACCOUNTS. ACCORDINGLY, THIS GROUND FAILS. 27. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 28. BEFORE US, IN ADDITION TO THE ORIGINAL GROUNDS OF APPEAL, THE ASSESSEE HAS ALSO FILED THE ADDITIONAL GROUNDS OF APPEAL AS FOLLOWS: 1. THE ADDITION MADE BY THE LEARNED AO AND SUSTAINE D BY THE CIT(A) IS NOT TENABLE IN LAW SINCE THERE WAS NO REJECTION OF ACCOUNTS BY THE LEARNED AO. 2. THE LEARNED CIT(A) ERRED IN SUSTAINING THE ADDIT ION BY THE LEARNED AO WITHOUT APPRECIATING THE FACT THAT THE A O HAD NOT REJECTED THE BOOKS OF ACCOUNT. 3. THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING THE S AME ACCOUNTING POLICY IN THE PAST. 29. WE FIND THAT NOTIONAL PROFIT ON SALE OF INVESTM ENT OF TRADING BOOK HAS BEEN BROUGHT TO TAX BY THE AO RELYING ON T HE STATUTORY AUDIT REPORT AS REAL INCOME AND FOLLOWING THE ORDER U/S 263 OF THE ACT. THE CIT(A) HELD THAT THE AO WAS JUSTIFIED IN B RINGING TO TAX THE PROFITS THAT HAVE BEEN UNREPORTED BY THE ASSESS EE IN ITS ACCOUNTS. THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF CIT VS. REALEST BUILDERS, 170 TAX MAN 218 (SC) AND IN THE CASE OF CIT VS. BILAHARI INVESTMENT (P.) LTD., 168 TAXMAN 95(SC) WHERE IT WAS HELD AS UNDER: EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS A ND FOLLOW THE METHOD OF ACCOUNTING, WHICH THE DEPARTMENT HAS EARLIER ACCEPTED. IT IS ONLY IN THOSE CASES WHERE THE DEPAR TMENT RECORDS A FINDING THAT THE METHOD ADOPTED BY THE AS SESSEE 18 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. RESULTS IN DISTORTION OF PROFITS, THE DEPARTMENT CA N INSIST ON SUBSTITUTION OF THE EXISTING METHOD. FURTHER, IN T HE PRESENT CASES, WE FIND FROM THE VARIOUS STATEMENTS PRODUCED BEFORE US, THAT THE ENTIRE EXERCISE, ARISING OUT OF CHANGE OF METHOD FROM COMPLETED CONTRACT METHOD TO DEFERRED REVENUE EXPENDITURE, IS REVENUE NEUTRAL. THEREFORE WE DO NO T WISH TO INTERFERE WITH THE IMPUGNED JUDGMENT OF THE HIGH CO URT. 30. THE DEPARTMENT HAS TO PROVE SATISFACTORY THAT T HE ACCOUNTS BOOKS ARE UNRELIABLE AND INCORRECT OR INCOMPLETE BE FORE IT CAN REJECT THE BOOKS OF ACCOUNTS AND THIS CAN BE DONE B Y SHOWING THAT IMPORTANT TRANSACTIONS ARE OMITTED OR IF PROPER PAR TICULARS AND VOUCHERS ARE NOT FORTHCOMING OR THE ACCOUNTS DO NOT INCLUDE ENTRIES RELATING TO A PARTICULAR CLASS OF BUSINESS. HENCE, ASSESSEES APPEAL ON THIS ISSUE IS ALLOWED. 31. WITH RESPECT TO THE ADDITIONAL GROUNDS FILED, T HE ASSESSEE HAS RELIED UPON THE FOLLOWING CASES: 1. ACIT VS. INTERMEDIA CABLE COMMUNICATION (P) LTD. [2012] 19 TAXMANN.COM 190 (PUNE) 2. DCIT VS. ASSOCIATED PETROLEUM CORPORATION [2011] 44 SOT 45 (AHD.) 3. JAI PULSE MILLS VS. ITO, [2010] 39 SOT 312 (AHD. ) 32. WE FIND THAT THE ISSUE IS DEALT WITH IN THE CA SE OF ACIT VS. INTERMEDIA CABLE COMMUNICATION PVT. LTD., 19 TAXMAN .COM 190 (PUNE) WHEREIN IT HAS BEEN HELD AS FOLLOWS: HOW THE AO CAN RESORT TO ESTIMATION OF INCOME WITH OUT REJECTION OF ACCOUNTS SYSTEMATICALLY MAINTAINED BY THE ASSESSEE FOR ALL THE YEARS UNDER CONSIDERATION AND ALSO WITHOUT INVOKING THE PROVISIONS OF SECTION 145 OF T HE ACT AFTER DULY COMPLYING WITH THE CONDITIONS SPECIFIED IN THEM ? SHOULD WE ENCOURAGE SUCH CALLOUS APPROACH OF THE AO , WHO DID NOT BOTHER TO READ THE SAID PROVISIONS AND COND ITIONS SPECIFIED THEREIN ?. AOS ORDER DOES NOT CONTAIN A WHISPER ABOUT THE PROVISIONS OF SECTION 145 OF THE ACT, WHI LE HE 19 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. PROCEEDED TO MAKE BEST JUDGMENT OF THE ASSESSMENT. THIS IS NOT DONE. THEREFORE, IN OUR CONSIDERED OPINION THE AO MADE A BEST JUDGMENT ASSESSMENTS IN THIS CASE ASSUMING JURISDICTION U/S 145(3) OF THE ACT INVALIDLY. SUCH ASSESSMENTS ARE UNSUSTAINABLE. 33. FOLLOWING THE DECISION OF THE COORDINATE BENCH IN THE CASE OF INTERMEDIA CABLE COMMUNICATIONS PVT. LTD. (SUPRA), WE ALLOW THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE. 34. IN THE RESULT, THE APPEAL OF THE ASSESSEE BEING ITA NO. 96/HYD/10 IS ALLOWED. ITA NO97/H/10 AY 2006-07 ASSESSEES APPEAL 35. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOL LOWING GROUNDS OF APPEAL: GROUND NO. 1 IS GENERAL IN NATURE. GROUND NO. 2.A) TO 2.C) ARE DIRECTED AGAINST THE AC TION OF THE CIT(A) IN CONFIRMING RS. 3,17,01,996/- OUT O F OPERATING EXPENDITURE HOLDING THAT EXPENDITURE TO T HAT EXTENT WAS INCURRED BY THE APPELLANT FOR EARNING TA X FREE INCOME. GROUND NO. 3.A) &B) ARE DIRECTED AGAINST THE ACTION OF THE CIT(A) IN CONFIRMING THE ACTION OF THE CIT(A) I N CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING DEDUCTION OF RS. 3,64,08,364/- CLAIMED U/S 35D OF THE ACT ON ACCOUNT OF EXPENDITURE INCURRED I N CONNECTION WITH PUBLIC ISSUE FOR RAISING CAPITAL FO R EXPANSION OF APPELLANTS BUSINESS STATING THAT THE APPELLANT IS NOT AN INDUSTRIAL UNDERTAKING. GROUND NO. 4.A) &B) ARE DIRECTED AGAINST THE OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OF FICER IN DISALLOWING PROVISION OF RS. 38,50,26,716/- MADE ON STANDARD ASSETS AND CLAIMED AS DEDUCTION U/S 36(1)(VIIA) OF THE ACT. 20 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. GROUND NO. 5.A) TO D) ARE DIRECTED AGAINST THE ACTI ON OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSIN G OFFICER IN DISALLOWING RS. 175,60,43,567/- BEING DEPRECIATION/FALL IN VALUE OF INVESTMENTS HELD TO MATURITY (HTM) CATEGORY ON THE GROUND THAT THE INVESTMENTS IN HTM CATEGORY CANNOT BE TREATED AS STOCK-IN-TRADE, AS PER RBI GUIDELINES AND HENCE NO DEPRECIATION IS TO BE PROVIDED ON THESE INVESTMENTS . GROUND NO. 6.A) TO C) ARE DIRECTED AGAINST THE ACTI ON OF THE CIT(A) IN DISALLOWING RS. 5,07,12,515/- BROKEN PERIOD INTEREST (NET) AT THE TIME OF PURCHASE OF HT M SECURITIES TREATING IT AS CAPITAL EXPENDITURE RELYI NG ON THE DECISION OF SUPREME COURT IN THE CASE OF VIJAYA BANK VS. CIT, 187 ITR 541. GROUND NO. 7.A) & B) ARE DIRECTED AGAINST THE ACTIO N OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSIN G OFFICER IN DISALLOWING UNREALIZED INTEREST OF RS. 2,36,00,000/- ON NPAS WHICH WAS REDUCED FROM INTERE ST INCOME. GROUND NO. 8.A) &B) ARE DIRECTED AGAINST THE ACTION OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSIN G OFFICER IN DISALLOWING PROVISION FOR LEAVE ENCASHME NT OF RS. 10,57,94,015/- ON THE GROUND THAT IT IS NOT AN ACCRUED LIABILITY BUT ONLY A CONTINGENT LIABILITY. 36. IN ADDITION TO THE ORIGINAL GROUNDS OF APPEAL, THE ASSESSEE FILED A PETITION SEEKING ADMISSION OF FOLLOWING ADD ITIONAL GROUNDS OF APPEAL: 1. WITHOUT PREJUDICE TO GROUND NO. 7 THE LEARNED CI T(A) OUGHT TO HAVE ALLOWED THE UNREALIZED INTEREST OF RS . 236,00,000/- ON NON-PERFORMING ASSETS AS DEDUCTION U/S 36(1)(VII) OF THE ACT BY TREATING THE SAME AS BAD D EBTS WRITTEN OFF. 2. THE APPELLANT SUBMITS THAT IT HAD WRITTEN OFF RS . 31,93,36,727/- AS BAD DEBTS IN RESPECT OF ITS NON-R URAL BRANCHES DURING THE ASSESSMENT YEAR AND THAT THE SA ME BE ALLOWED AS DEDUCTION U/S 36(1)(VII) OF THE IT ACT, 1961. 21 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. 37. THE FIRST ISSUE IN ASSESSEES APPEAL IS AGAINST THE DISALLOWANCE UNDER 14A BEING EXPENDITURE ATTRIBUTAB LE TO EARNING OF EXEMPT INCOME. THE AO DISALLOWED RS. 33,64,10,1 25/-, BEING RS 30,47,08,129/- INTEREST ON BORROWED CAPITAL UTIL ISED IN ACQUIRING TAX FREE SECURITIES AND RS. 3,17,01,996/- BEING 5% OF THE DIVIDEND EARNED OF RS.63,40,39,912/-. ON APPEAL , THE CIT(A) HELD THAT THE AO ERRED IN DISALLOWING PORTION OF IN TEREST EXPENDITURE OF THE ASSESSEE AMOUNTING TO RS. 30,47, 08,129/- AS BEING RELATED TO BORROWINGS UTILISED IN ACQUIRING T AX EXEMPT SECURITIES AND CONFIRMED THE DISALLOWANCE OF RS. 3, 17,01,996/- BEING 5% OF THE DIVIDEND EARNED TOWARDS ADMINISTRAT IVE EXPENSES. 38. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. THE ASSESSEE CONTENDED THAT THEY HAVE NOT EXPENDED ANY AMOUNT IN EARNING TAX EXEMPT INCOME. THEY ALSO CITED CASE LAWS IN SUP PORT OF THEIR CONTENTION. BUT AS THE CIT(A) HAS OBSERVED, THE ASS ESSEE HAS MADE INVESTMENT IN EXEMPT INVESTMENT IN 9 BRANCHES IN 164 TAX FREE SECURITIES. THIS COULD NOT HAVE BEEN DONE WITH OUT INCURRING EXPENDITURE ON SERVICES OF FUND MANAGERS, LEGAL ADV ICE, PORTFOLIO MANAGEMENT, ADMINISTRATIVE COST, EXPENDITURE ON MAN POWER AND OTHER RELATED COSTS. IT CANNOT THEREFORE BE SAID TH AT THE ASSESSEE HAS NOT EXPENDED ANY AMOUNT FOR EARNING TAX FREE IN COME. BUT AS RULE 8D IS NOT APPLICABLE TO THE YEAR IN APPEAL (GO DREJ AND BOYCE MFG CO LTD 328 ITR 1 BOM) THE SAME HAS TO BE EST IMATED. THE AO HAS ESTIMATED SUCH EXPENDITURE AT 5% OF THE DIVI DENDS EARNED. THIS HAS BEEN CONFIRMED BY THE CIT(A). 39. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLLOWING CASE LAWS: 22 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. 1. MUNJAL SALES CORPN. VS. CIT, LUDHIANA [2008] 298 IT R 298 (SC). 2. CIT VS. RELIANCE UTILITIES & POWER LTD., [2009] 313 ITR 340 (BOM.) 3. STATE BANK OF HYDERABAD VS. DCIT, HYDERABAD IN ITA NOS. 661,662 & 663/HYD/2003. 40. WE FIND THAT THE DELHI HIGH COURT IN THE CASE O F CIT VS. ORIENTAL STRUCTURAL ENGINEERS PVT. LTD., IN ITA NO. 605 OF 2012 DATED 15 TH JANUARY, 2013 HAS UPHELD THE DISALLOWANCE OF REASONABLE AMOUNT BASED ON THE FACTS OF THE CASE. F OLLOWING THE DECISION OF THE DELHI HIGH COURT WE DIRECT THE AO T O DISALLOW 2% EXPENDITURE AS RELATING TO EARNING OF THE EXEMPTED INCOME U/S 14A AS WE FIND IT REASONABLE LOOKING INTO THE FACTS OF THE CASE. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 41. THE SECOND GROUND OF APPEAL IS AGAINST THE DISA LLOWANCE OF DEDUCTION U/S 35D OF RS. 3,64,08,364/-. WE FIND THA T THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TR IBUNAL ASSESSEES OWN CASE IN ITA NOS. 615 TO 619/HYD/2007 AND 711/HYD/2008 DATED 22.5.2009 FOR THE ASSESSMENT YE ARS 2000- 01 TO 2004-05. IN THAT ORDER THE TRIBUNAL HAS OBSER VED AS FOLLOWS: 7. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND THE MATERIAL ON R ECORD. THE ASSESSEE HAS CLAIMED DEDUCTION UNDER S.35D (1) WHICH HAS BEEN DENIED TO IT BY THE DEPARTMENT. FOR IMMEDIATE REFERENCE, WE REPRODUCE THE PROVISION, AS IT STOOD AT THE RELEVAN T TIME, BELOW- '35D.(1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY, OF A PERSON, (OTHER THAN A COMPANY) WHO IS RESIDENT IN INDIA, LNCURS, AFTER THE 31 SAT DAY OF MARCH, 1970, ANY EXPENDITURE SPE CIFIED IN SUB- SECTION (2),- 23 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. (I) BEFORE (HE COMMENCEMENT OF HIS BUSINESS, OR (II ) AFTER THE COMMENCEMENT OF HIS BUSINESS IN CONNECTION WITH THE EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW INDUSTRIAL UNIT, THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE BUSINESS COMMENCES OR, AS THE CASE MAY BE, THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE INDUSTRIAL UNDERTAKING I S COMPLETED OR THE NEW INDUSTRIAL UNIT COMMENCES PRODUCTION OR OPERATION: PROVIDED THAT WHERE AN ASSESSEE INCURS AFTER THE 31 ST DAY OF MARCH 1998, ANY EXPENDITURE SPECIFIED IN SUB-SECTION (2), THE PROVISIONS OF THIS SUB-SECTION SHALL HAVE EFFECTED AS IF FOR THE WORDS. 'AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS', THE WORDS 'AN AMOUNT EQUAL TO ONE- FIFTH OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOUS YEARS' HAD BEEN SUBSTITUTED.' THE REASON GIVEN BY THE DEPARTMENT TO DENY THE DEDUCTION IS THAT SINCE THE ASSESSEE'S CASE FALLS UNDER CLAUSE (U), IT APPLIES ONLY TO AN INDUSTRIAL UNDERTAKING WHEREAS THE ASSESSEE IS IN THE BUSINESS OF PROVIDING BAN KING SERVICES. ON THE OTHER HAND, THE MAIN ARGUMENT OF THE LEARNED COUNSEL IS THAT THERE IS NO REASON TO BELIEVE THAT BEFORE COMMENCEMENT OF BUSINESS, ANY BUSINESS IS ELIGIBLE FOR DEDUCTION WHEREAS AFTER COMMENCEMENT OF BUSINESS ONLY AN INDUSTRIAL UNDERTAKING IS ELIGIBLE FOR DEDUCTION. EVEN IF THE PROVISION IS READ AS THE DEPARTMENT READS IT, IT IS CONTENDED THAT THE ASSESSEE SHOULD BE CONSIDERED TO BE CARRYING ON BANKING INDUSTRY AND I N THAT CASE ALSO, THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION. TO FURTHER BUTTRESS HIS ARGUMENT, THE LEARNED COUNSEL HAS ALSO DRAWN OUR ATTENTION TO THE WORDS 'THEY NEW INDUSTRIAL UNIT COMMENCES PRODUCTIO N OR OPERATION'. THE ARGUMENT IS THAT THE WORD 'PRODUCTION' IS USED IN CONNECTION WITH AN INDUSTRIAL UNDERTAKING WHEREAS THE WORD 'OPERATION' IS 24 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. USED IN CONNECTION WITH ANY BUSINESS OTHER THAN INDUSTRIAL UNDERTAKING. LET US CONSIDER BOTH THE ARGUMENTS. 8. IT IS SAID THAT PARLIAMENT NEVER WASTES WORDS. IF THE ARGUMENT OF THE LEARNED COUNSEL IS TO BE ACCEPT ED, THERE WAS NO NEED TO SPLIT THE ELIGIBILITY CRITERIA INTO TWO CLAUSES. IT COULD HAVE WELL SAID THAT, ' .... A NY EXPENDITURE SPECIFIED IN SUB-SECTION (2) BEFORE OR AFTER THE COMMENCEMENT OF HIS BUSINESS/ THE ASSESSE E SHALL, ... '. THE DEDUCTION IS CONTEMPLATED IN TWO DIFFERENT TIME ZONES. ONE IS IN RESPECT OF EXPENDITURE INCURRED BEFORE THE COMMENCEMENT OF BUSINESS AND THE OTHER IS IN RESPECT OF EXPENDITURE INCURRED AFTER THE COMMENCEMENT OF BUSINESS. THE TWO CLAUSES ARE MEANT FOR TWO DIFFERENT' TIME ZONES AS MENTIONED ABOVE. THE SECOND CLAUSE IS QUALIFIED BY PROVIDING THAT AFTER THE COMMENCEMENT OF BUSINESS, THE DEDUCTION WOULD BE AVAILABLE ONLY IN RESPECT OF THE EXTENSION OF THE EXISTING INDUSTRIAL UNDERTAKING OR IN RESPECT OF SETTING UP OF A NEW INDUSTRIAL UNIT. WE REITERATE THAT IF THE DEDUCTION WAS TO BE MADE AVAILABLE TO ANY KIND OF BUSINESS IN BOTH THE TIME ZONES, THEN THE QUALIFICATION AS INSERTED IN CLAUSE (II) WOULD NOT HAVE BEEN N ECESSARY. IF CLAUSE (II) IS TO APPLY TO ANY BUSINESS, THEN IT AMOUNTS TO WASTE OF WORDS BY THE PARLIAMENT, WHICH IS EXPECTED, NOR INTENDED, NOR PRESUMED. HOWEVER, AGAINST THIS THE ARGUMENT OF THE LEARNED COUNSEL IS THAT THE 'INDUST RIAL UNDERTAKING' OR 'INDUSTRIAL UNIT' IS TO BE UNDERSTO OD IN A BROADER SENSE AND THE RESTRICTED MEANING AS GIVEN T O IT IN THE 80I GROUP OF SECTIONS IS NOT TO BE GIVEN. FURTHER, ACCORDING TO HIM, THE,' WORD 'OPERATION' IS USED IN CONNECTION WITH THAT BROADER MEANING ONLY. ON A VERY CAREFUL CONSIDERATION OF THE ARGUMENT, WE ARE UNABLE TO ACCEPT THE CONTENTION. IT IS TRUE THAT THE EXPRESSION 'INLDUSTRIAL UNDERTAKING' IS NOT DEFINED IN THE ACT. IN THAT CASE, TILE OPTIONS AVAI LABLE WITH US IS TO ADOPT EITHER THE DICTIONARY MEANING O R- THE POPULAR- MEANING OR THE MEANING ASCRIBED TO IT IN OTHER STATUTES OR THE MEANING IN WHICH THE SAID EXPRESSION HAS BEER) IL'~ IJ IN THE SAME STATUTE. IN OUR CONSIDERED VIEW, TILE ROUR APPEARS TO HE THE MO ST REASONABLE TO US. IT CANNOT BE FORGOTTEN WE ARE INTERPRETING A FISCAL STATUTE. IN A FISCAL STATUTE, LIKE TILE OLLE WITH WHICH WE ARE DEALING, THE NATURE OF ACTIV ITY 25 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. HAS A BEARING ON THE DETERMINATION OF THE TAX LIABILITY. MOREOVER, IT HAS ALSO BEEN THE ENDEAVOR OF ALL THE GOVERNMENTS TO ENCOURAGE INDUSTRIAL PRODUCTION OR T O ENCOURAGE SAVINGS OR TO ENCOURAGE CERTAIN SOCIAL OBJECTIVES, BY INCORPORATING APPROPRIATE PROVISIONS IN THE INCOME TAX ACT. THE IMPUGNED PROVISION WAS BROUGHT INTO TILE STATUTE BOOK BY THE TAXATION LAWS (AMENDMENT) ACT, 1970 WITH EFFECT FROM 1.4.1971 . THE NEED FOR INDUSTRIALIZATION WAS REALISED CIRCA SIXTIES AND EVERY SUCCESSIVE YEA R, WE HAVE SEEN AMENDMENTS IN THE INCOME TAX ACT, PROVIDING INCENTIVES FOR INDUSTRIALISATION. THEREFO RE, THERE IS A DEFINITE CONSCIOUS DECISION ON THE PART OF THE LEGISLATURE TO EXTEND THE DEDUCTION EVEN AFTER THE COMMENCEMENT OF BUSINESS IN CASE OF INDUSTRIAL UNDERTAKINGS. IT MAY BE ARGUED THAT IF IT WAS SO, I T COULD WELL HAVE BEEN A PART OF CHAPTER VIA OF THE A CT. PERHAPS, THE REASON FOR NOT GROUPING IT ALONG WITH OTHER DEDUCTIONS IN CHAPTER VIA, IN OUR VIEW, COULD BE THAT THE EXPENDITURE CONTEMPLATED UNDER THIS PROVISION ARE AS SUCH CAPITAL IN NATURE BUT AS A SPECIAL INCENTIVE. THE AMORTIZATION THEREOF HAS BEE N ALLOWED IN A PHASED MANNER. THEY ARE NOT INDUSTRY SPECIFIC OR ACTIVITY SPECIFIC AND THESE EXPENSES HA VE TO BE CLAIMED AS NORMAL REVENUE EXPENDITURE ONLY OVER THE SPECIFIED PERIOD. THEREFORE, IT FINDS PLAC E IN CHAPTER IV PERTAINING TO THE COMPUTATION OF BUSINES S INCOME. THE EXPRESSION 'INDUSTRIAL UNDERTAKING' HAS BEEN USED AT SEVERAL PLACES IN THE ACT. WHEREVER AN ACTIVITY OTHER THAN INDUSTRIAL IS ALSO TO BE COVERE D FOR DEDUCTION, SUCH OTHER ACTIVITY HAS BEEN SPECIFIED SEPARATELY. AS AN ILLUSTRATION, 5.80I PROVIDES FOR DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM AN INDUSTRIAL UNDERTAKING. BESIDES THIS, THE SAID DEDUCTION IS ALSO AVAILABLE TO PROFITS DERIVED FROM SHIPPING BUSINESS OR BY RUNNING A HOTEL. THE ACTIVI TIES OF SHIPPING AND HOTEL HAVE BEEN SEPARATELY SPECIFI ED OVER AND ABOVE PROFIT AND FROM INDUSTRIAL UNDERTAKING. IF INDUSTRIAL UNDERTAKING WAS MEANT TO COVER SHIPPING AND HOTEL INDUSTRY, AS IS SOMETIMES LOOSELY STATED, THEN SEPARATE MENTION OF THOSE ACTIVITIES WOULD NOT HAVE BEEN NECESSARY. MOREOVER, THE EXPRESSION 'INDUSTRIAL UNDERTAKING' IS ALL THRO UGH OUT THE STATUTE MEANT TO BE AN UNDERTAKING WHICH MANUFACTURES OR PRODUCES AN ARTICLE OR THING. MOVIN G FURTHER, WHEREVER A DEDUCTION IS NOT MEANT ONLY FOR 26 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. AN UNDERTAKING WHICH MANUFACTURES OR PRODUCES AN ARTICLE OR THING, THE WORD 'UNDERTAKING' IS ALONE U SED AS IS THE CASE IN 5.80IA. THEREFORE, THE USAGE OF T HE EXPRESSION 'INDUSTRIAL UNDERTAKING' IN 5.35D HAS A SPECIAL SIGNIFICANCE AND IT HAS TO BE UNDERSTOOD IN THE SAME MEANING AS IT IS UNDERSTOOD IN OTHER PROVISION S OF THE ACT. IT HAS TO BE AN UNDERTAKING WHICH MANUFACTURES OR PRODUCES AN ARTICLE OR THING. 9. THE NEXT CONTENTION OF THE LEARNED COUNSEL IS TH AT THE INDUSTRIAL' IS REMOVED FROM THE PROVISION WITH EFFECT FROM 1.4.2009. ACCORDING TO HIM, THIS AMENDMENT IS MEANT TO REMOVE THE HARDSHIP AND CLARIFY THE SITUATION, WHICH ALWAYS WAS AND HENCE. IT WAS RETROSPECTIVE IN OPERATION. WE ARE UNABLE TO ACCEPT THIS ARGUMENT AS WELL, FOR THE REASONS THAT FOLLOW. EARLIER, WE DREW ATTENTION TO THE GOVERNMEN T'S CONSCIOUSNESS ABOUT INDUSTRIALIZATION. WHEN THE IMPUGNED PROVISION WAS INTRODUCED ABOUT FOUR DECADES BACK, EXCEPT IN A FEW AREAS, THE SERVICE SECTOR HAD NOT DEVELOPED AND ITS IMPORTANCE WAS ALS O NEVER REALISED. IT IS SINCE LAST FEW YEARS THAT THE SERVICE SECTOR HAS SPREAD OUT IN VARIOUS FIELDS AND NOW, ITS IMPORTANCE HAS BEEN REALISED. THE TELECOM SECTOR, THE INFORMATION TECHNOLOGY SECTORS ARE BUT A FEW EXAMPLES. HAVING REALISED THE IMPORTANCE OF THE SERVICE SECTOR, THE GOVERNMENT THOUGHT IT PROPER TO EXTEND THE DEDUCTION TO THOSE SECTORS ALSO AND HENC E TILE REMOVAL OF THE WORD 'INDUSTRIAL'. THIS INTENTION, W E HAVE GATHERED FROM THE NOTES ON, CLAUSES TO FINANCE BILL, 2008, THROUGH WHICH THIS AMENDMENT WAS BROUGHT ABOUT. IT READS AS FOLLOWS- CLAUSE 6 SEEKS TO AMEND SECTION 35D OF THE INCOME-TAX ACT. RELATING TO AMORTISATION OF CERTAIN PRELIMINARY EXPENSES. UNDER THE EXISTING PROVISIONS OF THE SAID SECTION, DEDUCTION FOR CERTAIN SPECIFIED PRELIMINARY EXPENSES IN COMPUTING BUSINESS INCOME IS ALLOWED. THE DEDUCTION IS ALLOWED AT AN AMOUNT EQUAL TO 1/5 TH OF SUCH EXPENDITURE FOR FIVE SUCCESSIVE PREVIOUS YEARS. THE PRELIMINARY EXPENSES RELATE EITHER TO THE PERIOD BEFORE THE COMMENCEMENT OF BUSINESS OR AFTER. HOWEVER, IF PRELIMINARY 27 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. EXPENSES RELATE TO A PERIOD AFTER THE COMMENCEMENT OF BUSINESS, SUCH EXPENSES ARE ONLY ALLOWED IF THEY ARE IN RELATION TO THE EXTENSION OF AN I NDUSTRIAL UNDERTAKING OR THE SETTING UP OF A NEW INDUSTRIAL UNIT. THE PROPOSED AMENDMENT SEEKS TO SUBSTITUTE T HE WORDS 'INDUSTRIAL UNDERTAKING' WITH THE WORD 'UNDERTAKING' AND THE WORDS 'INDUSTRIAL UNITS' WITH THE WORD 'UNIT', WHEREVER THEY OCCUR IN THE SAID SECTION. THIS IS INTENDED TO PROVIDE BENEFIT OF AMORTIZATION OF SPECIFIED POST COMMENCEMENT PRELIMINARY EXPENSES TO ALL SECTORS F OR THE EXTENSION OF AN UNDERTAKING OR THE SETTING UP OF A NEW UNIT. THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL, WILL ACCORDINGLY APPLY IN RELATION TO THE YEAR 2009-10 AND SUBSEQUENT ASSESSMENT YEARS. THE ABOVE NOTE MAKES IT CLEAR THAT PRIOR- TO 1.4.2009, POST COMMENCEMENT EXPENDITURE WAS NOT ELIGIBLE FOR DEDUCTION IN ANY OTHER SECTOR OTHER- THAN INDUSTRIA L SECTOR. THUS, THE AMENDMENT BROUGHT ABOUT IS NOT TO REMOVE ANY HARDSHIP OR TO REMOVE AN Y AMBIGUITY. SO FAR AS THE LEGISLATURE IS CONCERNED, IT WAS CONSCIO US THAT POST COMMENCEMENT EXPENDITURE WAS TO BE ALLOWED ONLY IN THE CASE OF INDUSTRIAL SECTOR. THE JUDGMENT OF THE SUPREME COURT IN THE SURESH N .GUPTA (297 ITR 392) CANNOT APPLY HERE. IN THAT CASE, THERE WAS AN AMBIGUITY AS TO WHICH RATE OF SURCHARGE WOUL D BE APPLICABLE -WHETHER THE RATE PROVIDED FOR IN THE FINANCE ACT OF THE YEAR IN WHICH SEARCH WAS INITIAT ED OR THE YEAR IN WHICH THE SEARCH WAS CONCLUDED, OR THE YEAR IN WHICH THE BLOCK ASSESSMENT WAS INITIATED ON THE YEAR IN WHICH THE BLOCK ASSESSMENT ORDER WAS PASSED. THERE IS NO SUCH AMBIGUITY IN S.35D. SIMILARLY, IN THE CA SE OF OF AHMEDBHAI UMARBHAI (SUPRA) AND ANGLO FRENCH TEXTILE MILL (SUPRA), THE WORD 'OPERATION' HAS BEEN EXPLAINED IN THE CONTEXT OF THE MAIN ACTIVITY OF PRODUCTION IN THOSE CASES. IT IS, NO DOUBT TRUE THA T THE WORD OPERATION HAS BEEN EXPLAINED IN THE CONTEXT OF THE MAIN ACTIVITY OF PRODUCTION IN THOSE CASES. IT IS, NO DOUBT, TRUE THAT THE WORD 'OPERATION' HAS A BROAD 28 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. MEANING AND CAN BE USED WITH REFERENCE TO ANY ACTIVITY. HOWEVER, THE MEANING OF THE WORD DEPENDS ON THE COMPANY IT KEEPS AND IN S. 35D, SINCE IT IS USE D WITH REFERENCE TO INDUSTRIAL UNDERTAKING, IT HAS TO BE UNDERSTOOD TO BE AN OPERATION CONNECTED WITH INDUST RIAL UNDERTAKING ONLY AND NOTHING ELSE. THERE MAY BE CERTAIN ACTIVITIES PRIOR TO THE COMMENCEMENT OF ACT UAL PRODUCTION AND INCOME MAY ACCRUE FROM SUCH ACTIVITI ES. IT IS TO DESCRIBE THESE ACTIVITIES, THE WORD 'OPERA TION' HAS BEEN IN S.35D. THEREFORE, THE TWO JUDGMENTS REFERRED TO ABOVE, ALSO CANNOT HELP THE ASSESSEE. 10. BEFORE PARTING, IT MAY BE MENTIONED THAT WE HAV E INTERPRETED THE PROVISION AS PER THE ACTUAL LANGUAG E USED IN THE SECTION, SUPPORTED WITH THE INTENTION O F THE LEGISLATURE GATHERED FROM THE FINANCE BILL, 2008. I T WAS IN THE CASE OF KANNAILAL SUR V/S PARAMNIDHI SADHUKHAN (AIR 1957 SC 907 AT P. 910), THE SPUREME COURT SAID THAT THE FIRST AND PRIMARY RULE OF CONSTRUCTION IS THAT THE INTENTION OF THE LEGISLATURE MUST BE FOUND IN THE WORDS USED BY THE LEGISLATURE ITSELF. AGAIN, IN THE CASE OF KANTA GOEL (SMT.) VS. B.D. PATHAK (AIR 1977 SC 1599 AT P. 1661), THE SUPREME COURT SAID THAT THE INTERPRET ATIVE EFFORT MUST BE ILLUMINED BY THE GOAL THOUGH GUIDED BY THE WORD. WE HAVE KEPT THESE PRINCIPLES IN MIND WHILE DEALING WITH THE ISS UE. 11. IN THE LIGHT OF THE AFORESAID DISCUSSION, WE UP HOLD THE ORDERS OF THE CIT(A) IN CONFIRMING THE DISALLOWANCE. 42. RESPECTFULLY FOLLOWING THE DECISION OF THE COOR DINATE BENCH, WE UPHOLD THE ORDER OF THE LOWER AUTHORITIES DISALL OWING THE CLAIM OF DEDUCTION U/S 35D OF RS. 3,64,08,364/-. THE ASSE SSEES APPEAL ON THIS ISSUE IS DISMISSED. 43. THE NEXT GROUND OF APPEAL IS REGARDING DISALLOWANCE OF PROVISIONS FOR RS.38,50,26,716/- MADE ON STANDARD A SSETS AND CLAIMED AS A DEDUCTION UNDER SECTION 36(1)(VIIA). T HE ASSESSEE HAD MADE PROVISIONS FOR BAD AND DOUBTFUL DEBTS OF RS.40,00,03,838/- AND PROVISIONS OF RS.38,50,26,716 /- IN RESPECT OF STANDARD ASSETS AND CLAIMED THE SAME. THE CIT(A ) FOLLOWED THE DECISION OF THE ITAT IN THE ASSESSEES OWN CAS E OF THE 29 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. ASSESSMENT YEARS 2000-01 TO 2004-05 A BENCH IN IT A NOS.615 TO 619/ AND 711/ DATED 22.05.2009 WHEREIN IT WAS OB SERVED AS UNDER:- IT IS PRESCRIBED BY THE RBI THAT THE PROVISION FOR STANDARD ASSETS NEED NOT BE NETTED OUT FROM THE GROSS ADVANC ES BUT SHOULD BE SHOWN SEPARATELY AS CONTINGENT PROVISION S AGAINST STANDARD ASSETS. THE HEADING ITSELF IS IN DICATIVE OF THE FACT THAT THIS PROVISION IS CONTINGENT IN NATUR E WHEREAS THE PROVISION FOR NON PERFORMING ASSET IS TO GUARD AGAINST A LOSS WHICH IS LOOMING LARGE ON THE BANK OR FOR THE LOSS WHICH WAS ALREADY TAKEN PLACE. THEREFORE, THE RBI FURTHER PRESCRIBED THAT PROVISION ON STANDARD ASSETS SHOULD NOT BE RECKONED FOR ARRIVING AT NET NPAS. THE ACT ITSELF H AS GIVEN AN OPTION TO THE ASSESSEE TO MAKE PROVISION FOR ITS DOUBTFUL OR LOSS ASSETS FIRST PROVISO TO SECTION 36(1)(VIIA) . WE DO AGREE THAT THE BANK IS BOUND TO FOLLOW THE RBI GUID ELINES. BUT THE DEDUCTION AVAILABLE HAS TO BE AS PER THE PR OVISIONS OF THE ACT ONLY. ACCORDINGLY, WE UPHOLD THE ORDER OF THE CIT(A) DISALLOWING THE DEDUCTION IN RESPECT OF PROV ISION MADE FOR STANDARD ASSETS. ANOTHER PROVISION DISALL OWED BY THE REVENUE AUTHORITIES IS IN RESPECT OF BORDER LIN E PERFORMING ASSETS. NEITHER THE RBI HAS GIVEN SUCH CLASSIFICATION IN ITS GUIDELINES IN RESPECT OF SUCH ASSETS. THE VERY NOMENCLATURE USED BY THE BANK SUGGESTS THAT TH E ASSETS ARE SKILL PERFORMING, THAT IS, STILL GENERAT ING INCOME FOR THE BANK THROUGH THERE MAY BE SOME SIGNS OF CON CERN. HOWEVER, UNLESS SUCH ASSETS ARE NOT CLASSIFIED AS N ON PERFORMING ASSETS AND SUB-CLASSIFIED AS SUB-STANDAR D, DOUBTFUL OR LOSS ASSETS, NO DEDUCTION CAN BE PERMIT TED. THUS, THE DISALLOWANCE THEREOF BY THE REVENUE AUTHO RITIES IS UPHELD. THIS ISSUE, AS MENTIONED EARLIER IS IN RESP ECT OF ASSESSMENT YEAR 2003-04 AND 2004-05 ONLY 44. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 45. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE CONCEDED THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED B Y THE DECISION OF THE ITAT IN ITS OWN CASE FOR AY 2003-04 AND 2004 -05 IN ITA NOS. 618 & 619/HYD/2007 VIDE ORDER DATED 22/05/2009 . THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE ITAT IN THE 30 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. SAID ORDER, WE UPHOLD THE ORDER OF THE CIT(A) ON TH IS ISSUE AND DISMISS THE GROUND OF APPEAL OF THE ASSESSEE. 49. THE NEXT ISSUE ON APPEAL IS DISALLOWANCE OF RS.175,60,43,567/- BEING DEPRECIATION / FALL IN VAL UE OF INVESTMENT HELD TO MATURITY (HTM) CATEGORY ON THE G ROUND THAT INVESTMENT IN HTM CATEGORY CANNOT BE TREATED AS ST OCK IN TRADE AS PER RBI GUIDELINES AND HENCE NO DEPRECIATION IS TO BE PROVIDED ON THESE INVESTMENT. 50. THE CIT(A) AFTER ELABORATE DISCUSSIONS, HELD AS FOLLOWS: 14.1 CONSIDERING MY ABOVE OBSERVATIONS AND ALSO AS PER THE GUIDELINES PROVIDED BY THE CBDT IN CIRCULAR NO. 665 AND ALSO ON THE BASIS OF THE ABOVE MENTIONED UNDISP UTED FACTS, I FIND THAT THE SECURITIES HELD BY THE APPEL LANT IN HTM CATEGORY CONSTITUTE INVESTMENT AND NOT STOCK-IN-TRA DE. ACCORDINGLY, THE APPELLANT IS NOT ENTITLED TO CLAIM DEPRECIATION/FALL IN VALUE OF SECURITIES UNDER HTM CATEGORY. THIS GROUNDS OF APPEAL IS DISMISSED. 51. THE LEARNED COUNSEL FOR THE ASSESSEE CITED THE FOLLOWING DECISIONS IN SUPPORT OF ASSESSEES CASE: A) UCO BANK LTD VS CIT REPORTED IN 240 ITR 355 B) ANDHRA BANK VS DCIT IN ITA NOS.880 AND 881 AND 2075/HYD/96 DATED 29.11.2004 C) STATE BANK OF HYDRABAD VS DCIT ITA NO 1232/HYD/06 DATED 28.11.2008 D) CIT VS KARUR VYSYA BANK LTD TC(A) NO.2139/08 DATE D 13.07.2009 (MAD) - SLP DISMISSED BY THE SUPREME CO URT E) ACIT VS CORPORATION BANK IN ITA NO. 710/BANG/2010 D ATED 31.05.2011 F) ACIT VS VIJAYA BANK ITA NO.225 & 253/BANG/07 DATED 24.01.2008 31 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. 50. WE ARE OF THE OPINION THAT THE ASSESSEE BANK IS HOLDING VARIOUS GOVERNMENT SECURITIES IN ORDER TO COMPLY WI TH THE STATUTORY LIQUIDATED RATIO. THE BANK WOULD HAVE TO HOLD REQUISITE PERCENTAGE OF DEPOSITS IN THE FORM OF CASH, GOLD, G OVERNMENT OR APPROVED SECURITIES. THE GOVERNMENT SECURITIES HELD FOR THE PURPOSE OF COMPLY WITH THE SLR HAS BEEN HELD TO BE STOCK IN TRADE AND THEREFORE VALUE OF THE SAME AS ON 31 ST MARCH HAS TO BE MADE AND THERE IS ANY DEPRECIATION THE SAME SHOULD BE ALLOWED AS A REVENUE DEDUCTION. HOWEVER, THE RBI HAS ISSUE D CIRCULAR WHEREIN THEY HAVE CLASSIFIED THE INVESTMENT MADE TO COMPLY WITH SLR REQUIREMENT AS `HELD TO MATURITY (HTM), `AVAIL ABLE FOR SALE (AFS) AND `HELD FOR TRADE (HFT). BASED ON THE RBI CIRCULAR LOWER AUTHORITIES CAME TO THE CONCLUSION THAT INVES TMENT IN GOVERNMENT SECURITIES WHICH ARE CLASSIFIED UNDER TH E HEAD HTM CANNOT BE CONSIDERED AS STOCK IN TRADE AND THEREFOR E DEPRECIATION IN VALUE OF SUCH SECURITIES CANNOT BE ALLOWED AS A DEDUCTION. THE APEX COURT IN THE CASE OF UCO BANK LTD VS CIT REPOR TED IN 240 ITR 355 HAS HELD THAT VALUE OF THE SECURITIES AT CO ST OR MARKET VALUE WHICHEVER IS LESS SHOULD BE ACCEPTED FOR INCO ME TAX EVEN IF THE BANKS IN THEIR BOOKS DO NOT VALUE ON THAT BASIS . THEREFORE, IT IS AN ACCEPTED PROPORTION THAT INVESTMENT MADE BY T HE BANK TO COMPLY WITH THE SLR REQUIREMENT WOULD CONSTITUTE TH EIR STOCK IN TRADE AND DEPRECIATION IN VALUE OF THE SAME IS AN A LLOWABLE DEDUCTION. 51. RESPECTFULLY FOLLOWING THE DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE UPHOLD THE CLA IM OF THE ASSESSEE AND DIRECT THE AO TO ALLOW DEPRECIATION / FALL IN VALUE OF INVESTMENT IN GOVERNMENT SECURITIES INCLUDING TH OSE CLASSIFIED UNDER HTM CATEGORY. NO DOUBT THE VALUE I N OPENING 32 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. STOCK IN THE NEXT YEAR WOULD CORRESPONDINGLY BE ADJ USTED. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 52. THE NEXT GROUND OF APPEAL IS AGAINST THE DISALLOWAN CE OF RS.5,07,12,515/- REPRESENTING BROKEN PERIOD EXPENSE S (NET) AT THE TIME OF PURCHASE OF HTM SECURITIES. THE ASSESSE E BANK PURCHASED GOVERNMENT SECURITIES IN ORDER TO COMPLY WITH STATUTORY REQUIREMENT TO MAINTAIN THE SLR. THE PUR CHASE PRICE OF THE GOVERNMENT SECURITIES WOULD INCLUDE ELEMENT OF INTEREST FOR THE BROKEN PERIOD FROM THE DATE OF LAST PAYMENT OF THE INTEREST TILL THE DATE OF PURCHASE OF THE GOVERNMENT SECURIT IES. THIS PORTION IS SEGREGATED AND CLAIMED AS A DEDUCTION BY THE ASSESSEE. THE REASON FOR THE SAME IS THAT INTEREST EARNED ON THESE SECURITIES ARE ASSESSED AS BUSINESS INCOME AT THE T IME OF RECEIPT OF THE INTEREST. THEREFORE THAT PORTION OF THE INT EREST WHICH BELONGS TO THE EARLIER HOLDER TILL THE DATE OF PURC HASE OF THE SECURITIES BY THE ASSESSEE SHOULD BE DEDUCTED AS EX PENSES FROM THE TOTAL INTEREST EARNED. THE ASSESSEE HAS ON THE SAME BASIS EARNED BROKEN PERIOD INTEREST IN RESPECT OF SECURIT IES WHICH IT HAS SOLD AGGREGATING TO RS.516305643/- WHEREAS BROKEN P ERIOD INTEREST EXTENDED ON PURCHASE OF SECURITIES AGGREGA TING TO RS.70,53,59,446/-. THE ASSESSEE HAS OFFERED THE BR OKEN PERIOD INTEREST IT HAS EARNED AS INCOME AND CLAIMED THE BR OKEN PERIOD INTEREST IT HAS PAID AS DEDUCTION. 53. HOWEVER THE AO HAD DISALLOWED THE ENTIRE AMOUNT OF BROKEN PERIOD INTEREST ON THE PURCHASE OF SECURITIES AGGRE GATING TO RS.70,53,59,446/- AS A DEDUCTION BUT HAS NOT DISTUR BED THE BROKEN PERIOD INTEREST ON SALE OF SECURITIES OFFERE D AS INCOME. 33 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. 54. THE CIT(A) HAS ALLOWED BROKEN PERIOD INTEREST I N RESPECT OF SECURITIES PURCHASED WHICH ARE HELD FOR TRADING AND AVAILABLE FOR SALE AS THEY ARE TO BE TREATED AS STOCK IN TRADE AN D THEREFORE BROKEN PERIOD INTEREST FOR THESE PERIOD ARE TO BE A LLOWED. HOWEVER, THE CIT(A) HELD THAT BROKEN PERIOD INTERES T RELATABLE TO SECURITIES WHICH ARE CLASSIFIED IN `HELD TO MATURIT Y CATEGORY CANNOT BE ALLOWED AS THESE ARE NOT STOCK IN TRADE. 55. EARLIER IN THE ORDER WHILE CONSIDERING THE ALLO WABILITY OF DEPRECIATION OR REDUCTION IN VALUATION OF THE GOVER NMENT SECURITIES HELD TO COMPLY WITH THE SLR RATIO, WE HA VE HELD THAT THE ENTIRE SUCH INVESTMENT IN ORDER TO COMPLY WITH SLR WOULD CONSTITUTE STOCK IN TRADE AND CLASSIFICATION OF THE SE ASSETS BY THE RBI IS NOT BINDING ON THE INCOME TAX AUTHORITIES. S UCH CLASSIFICATION WOULD NOT ALTER THE CHARACTERISTIC O F THE INVESTMENTS TO COMPLY WITH SLR REQUIREMENT AS STOCK IN TRADE. 56. AS HELD BY THE SUPREME COURT IN THE CASE OF SOU THERN TECHNOLOGIES LTD V JCIT (320 ITR577), DIRECTIONS OF THE RBI ARE NOT BINDING FOR DECIDING THE ISSUE UNDER THE INCOME TAX ACT. SECURITIES WHICH ARE HELD FOR COMPLY WITH SLR HAS C ONSISTENTLY BEEN HELD TO BE STOCK IN TRADE. THAT BEING SO THERE CAN BE NO FURTHER DISTINCTION AND NO PART SUCH HOLDING WILL C EASE TO BE STOCK IN TRADE MERELY BECAUSE RBI HAS CLASSIFIED THE SAME AS `HELD TO MATURITY. 57. THE BOMBAY HIGH COURT IN THE CASE OF AMERICAN E XPRESS INTERNATIONAL LTD VS CIT REPORTED IN 258 ITR 601 (B OM) AND THE MADRAS HIGH COURT IN THE CASE OF KARUR VYSYA BANK L TD IN TC(A) NO 2139 OF 2009 DATED 13.07.2007 HAS HELD THAT THE BROKEN PERIOD INTEREST INCLUDED IN THE PURCHASE PRICE OF G OVERNMENT 34 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. SECURITIES HELD BY THE BANKING COMPANY TO COMPLY WI TH SLR REQUIREMENT IS ENTITLED TO DEDUCTION. 58. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER TO ALLOW A SUM OF RS.5,07,02,515/- BEING BR OKEN PERIOD INTEREST (NET) INCLUDED IN THE PURCHASE VALUE OF HT M SECURITIES AS REVENUE DEDUCTION. THE ASSESSEE APPEAL ON THIS ISSU E IS ALLOWED. 59. THE NEXT IS REGARDING DEDUCTION OF RS.23600000 BEING UNREALISED INTEREST ON NPA WHICH IS REDUCED FROM TH E INTEREST INCOME. THE ASSESSEE HAD RECOGNISED INTEREST OF RS. 23600000/- ON CERTAIN ACCOUNTS DURING THE ASSESSMENT YEAR 2005 -06 THE SAME WAS OFFERED TO TAX ALSO. THESE ACCOUNTS BECAM E NPA DURING THE ASSESSMENT YEAR 2006-07 THE ASSESSEE THEREFORE REVERSED INTEREST OF RS.2.36 CRORES AND REDUCED THE SAME FRO M THE INTEREST INCOME FOR THE ASSESSMENT YEAR 2006-07. THE SAME WA S DISALLOWED BY THE AO AND CONFIRMED BY THE CIT(A). 60. THE ASSESSEE SUBMITS THAT THESE ISSUE IS COVERE D BY THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VS INDUSTRIAL FINANCE CORPORATION REPORTED IN 201 TAXMANN 75. IN THAT CASE ALSO THE ASSESSEE REVERSED THE INCOME OFFERED TO IT FOR TAX IN THE EARLIER YEARS ON THE GROUND THAT ACCOUNTS ARE BECOM E NPAS. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND, WH ICH IS AS FOLLOWS: 1. WITHOUT PREJUDICE TO GROUND NO. 7 THE LEARNED CI T(A) OUGHT TO HAVE ALLOWED THE UNREALIZED INTEREST OF RS . 236,00,000/- ON NON-PERFORMING ASSETS AS DEDUCTION U/S 36(1)(VII) OF THE ACT BY TREATING THE SAME AS BAD D EBTS WRITTEN OFF. 35 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. 61. THE DELHI HIGH COURT HELD THAT INCOME WHICH WAS EARLIER RECOGNISED IS NOT TO BE ALLOWED IN THE SUBSEQUENT Y EAR IN CASE IT IS PERMISSIBLE FOR THE ASSESSEE TO WRITE OFF SUCH I NCOME IN CONCERNED ASSESSMENT YEAR WHEN IT WAS FOUND THAT IT WAS NOT RECOVERABLE. IN THIS CONNECTION THEY HAVE ALSO REF ERRED TO THE DECISION OF THE APEX COURT IN THE CASE OF VIJAYA BA NK REPORTED IN 323 ITR 166 AND TRF LTD REPORTED IN 323 ITR 397. TH E DELHI HIGH COURT UPHELD THE CLAIM OF THE ASSESSEE FOR DEDUCTIO N OF INTEREST REVERSED. 62. RESPECTFULLY FOLLOWING THE ABOVE WE DIRECT THE AO TO ALLOW DEDUCTION OF RS.2.36 CRORES BEING UNREALISED INTERE ST OFFERED FOR TAX IN THE EARLIER YEAR NOW REVERSED BY THE ASSESSE E. 63. THE NEXT GROUND OF APPEAL IS AGAINST DISALLOWAN CE OF PROVISION FOR LEAVE ENCASHMENT. THE ASSESSEE HAS PR OVIDED LEAVE ENCASHMENT AND CLAIMED IT AS DEDUCTION. HOWEVER, A MOUNT CLAIMED FOR RS.105691015/- , THE SAME WAS DISALLOWE D IN VIEW OF THE AMENDMENT TO SECTION 43B BY THE INTRODUCTION OF SUB SECTION (F) WHICH PROVIDES FOR ALLOWING DEDUCTION ON LEAVE ENCASHMENT ONLY ON THE ACTUAL PAYMENT. THERE IS NOTHING ON RE CORD TO SHOW THAT THE ASSESSEE HAS PARTED WITH THE AMOUNT FOR MA KING PAYMENT FOR THE LEAVE ENCASHMENT. THIS WAS MERELY A PROVISIONS MADE BY THE ASSESSEE. NO DOUBT, THE CALCUTTA HIGH C OURT IN THE CASE OF EXIDE INDUSTRIES LTD VS UNION OF INDIA (292 ITR 470) HELD THAT THEY HAVE STRUCK DOWN THE SECTION 43B IN A WRI T PETITION FILED. BUT THAT DECISION WHICH IS APPLICABLE TO PAR TIES TO THE WRIT PETITION AND THE SAME WILL NOT BE APPLICABLE TO THE ASSESSEE IN THE APPELLATE PROCEEDINGS. THE ITAT WHICH IS CREATURE O F THE INCOME TAX ACT IS BOUND BY THE PROVISIONS OF THE ACT AND T HEREFORE IN VIEW OF THE SPECIFIC PROVISIONS OF SUB-CLAUSE (F) T O SECTION 43B 36 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS.10569 11015/- TOWARDS PROVISIONS FOR LEAVE ENCASHMENT CANNOT BE A LLOWED. 64. THE APPEAL OF THE ASSESSEE ON THIS ISSUE IS DIS MISSED. 65. THE ASSESSEE FILED AN ADDITIONAL GROUND BEFORE THE TRIBUNAL REGARDING DEDUCTION UNDER SECTION 36(1)(VIIA) IN RESPECT OF BAD DEBTS WRITTEN OFF BY THE RURAL BRANCH OF THE ASSESS EE BANK. AS THIS IS A LEGAL ISSUE AND THE FACTS ARE AVAILABLE WITH T HE LOWER AUTHORITIES, WE ADMIT THE ADDITIONAL GROUNDS. 66. WE FIND THAT THIS ISSUE IS COVERED BY THE DECIS ION OF THE APEX COURT CATHOLIC SYRIAN BANK LTD REPORTED IN 343 ITR 270. WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OF FICER FOR DEALING WITH THE SAME IN LINE WITH THE DECISION OF THE APEX COURT IN THE CASE OF CATHOLIC SYRIAN BANK LTD, SUPRA. 67. IN THE RESULT APPEAL OF THE ASSESSEE BEING ITA NO. 97/HYD/10 IS PARTLY ALLOWED. ANDHRA BANK- ITA NO 218/H/10- AY 2006-07 DEPARTMENT AL APPEAL 68. THE ONLY ISSUE IN THE REVENUES APPEAL IS AGAIN ST THE DISALLOWANCE U/S 14A BEING RESTRICTED TO 0.5% OF TH E INVESTMENTS AND DELETION OF INTEREST PAYMENTS WHICH THE AO HELD TO BE RELATABLE TO INVESTMENT IN TAX FREE SECURITIES. AO DISALLOWED INTEREST PAYABLE BY THE ASSESSEE TO THE EXTENT OF R S. 30,47,08,129/- AND OF RS. 3,17,01,996/- TOWARDS ADM INISTRATIVE EXPENSES CALCULATED AT 5% OF THE TAX FREE INCOME OF RS. 63,40,39,912/- . ON APPEAL THE CIT(A) DELETED THE D ISALLOWANCE 37 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. OF INTEREST AS HE FOUND THAT THE ASSESSEE HAD HUGE SURPLUS OF NON INTEREST BEARING WHICH WAS SUFFICIENT TO MAKE INVES TMENTS IN INTEREST FREE BONDS. THE ASSESSEE BANK HAD APPROXIM ATELY RS. 5800 CRORES AS CAPITAL AND RESERVES AMOUNTING TO RS . 2803.94 CRORES AND CURRENT DEPOSITS OF RS. 2906 CRORES WHIC H CARRY NO INTEREST BURDEN. AGAINST THIS THE ASSESSEE BANK HAD MADE AN INVESTMENT OF RS. 1145.13 CRORES IN BONDS AND ADVAN CES, INCOME FROM WHICH IS EXEMPT FROM TAX. THE ASSESSEE HAS GIV EN A TABLE OF INTEREST FREE FUNDS AVAILABLE AND THE INVESTMENT IN TAX FREE SECURITIES FROM 31.3.2002 ONWARDS AND WE FIND THAT FOR ALL THE YEARS, INTEREST FREE FUNDS WERE MORE THAN THE INVES TMENTS IN TAX FREE SECURITIES. AS ON 31ST MARCH: 2006 2005 2004 2003 2002 FREE FUNDS 5800.62 4369.72 3671.52 2720.81 2279.08 INVESTMENT 1145.12 795.31 1021.73 649.84 594.08 69. IT IS THE CONTENTION OF THE ASSESSEE THAT THE E NTIRE INVESTMENT OF TAX FREE SECURITIES WERE MADE OUT OF INTEREST FREE FUNDS. THEY RELIED ON THE DECISIONS OF MUNJAL SALES CORPORATION V CIT (298 ITR 298 SC): CIT V RELIANCE UTILITIES &POW ER LTD ( 313 ITR 340 BOM). IT HAS BEEN HELD IN THESE DECISIONS T HAT WHEN THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS, THE IN VESTMENTS SHOULD BE CONSIDERED TO HAVE BEEN MADE OUT OF THOSE FUNDS AND NOT INTEREST BEARING BORROWALS. IT IS ONLY WITH THE INTRODUCTION OF RULE 8D, INTEREST EXPENDITURE WAS APPORTIONED ON TH E BASIS OF INVESTMENT, EVEN THOUGH THERE WAS NO DIRECT NEXUS B ETWEEN THE BORROWALS AND THE INVESTMENTS. RULE 8D IS NOT APPLI CABLE TO THE AY UNDER APPEAL ( GODREJ & BOYCE MFG CO LTD (328 IT R 81 BOM). HOWEVER IT WAS HELD BY THE BOMBAY HIGH COURT A REAS ONABLE AMOUNT SHOULD BE DISALLOWED UNDER 14A. IN VIEW OF T HE ABOVE, WE 38 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. UPHOLD THE ORDER OF THE CIT(A) DELETING THE DISALLO WANCE OF INTEREST DISALLOWANCE OF RS.30,47,08,129/- U/S 14A. 70. AS REGARDS DISALLOWANCE OF ADMINISTRATIVE EXPEN SES, THE CIT(A) UPHELD THE DISALLOWANCE OF RS. 3,17,01,996/- AT 5% OF THE TAX EXEMPT INCOME. WE HAVE HELD IN THE APPEAL BY TH E ASSESSEE THAT THEIR CONTENTION THAT NO EXPENSES WERE INCURRE D CANNOT BE ACCEPTED. THE EXPENDITURE TO BE DISALLOWED IS TO BE NECESSARILY TO BE MADE ON AN ESTIMATE BASIS. WE FIND THAT THE DELH I HIGH COURT IN THE CASE OF CIT VS. ORIENTAL STRUCTURAL ENGINEE RS PVT. LTD., IN ITA NO. 605 OF 2012 DATED 15 TH JANUARY, 2013 HAS UPHELD THE DISALLOWANCE OF REASONABLE AMOUNT BASED ON THE FACT S OF THE CASE. WE FOLLOW THE SAID DECISION OF THE DELHI HIGH COURT AND REDUCE THE DISALLOWANCE TO 2% EXPENDITURE AS RELATING TO EARNI NG OF THE EXEMPTED INCOME U/S 14A, WHICH HAS BEEN ALREADY DEC IDED IN THE ASSESSEES APPEAL IN ITA 97/H/10 SUPRA. IN VIEW OF THIS DECISION THE APPEAL BY THE REVENUE FOR A HIGHER DIS ALLOWANCE U/S 14A IS PARTLY ALLOWED. 71. IN THE RESULT, APPEAL BEING ITA NO. 218/HYD/10 IS PARTLY ALLOWED. 72. TO SUM UP, APPEALS BEING ITA NOS. 95 & 96/HYD/1 0 ARE ALLOWED, AND APPEALS BEING ITA NO. 97/HYD/10 & ITA NO. 218/HYD/10 ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 04/04/2013. SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGH AVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R HYDERABAD, DATED: 4 TH APRIL, 2013. 39 ITA NOS. 95 TO 97 & 218/HYD/10 ANDHRA BANK LTD. KV COPY TO:- 1) M/S ANDHRA BANK LTD., HEAD OFFICE, DR. PATTABHI BHAVAN, SAIFABAD, HYDERABAD. 2) DCIT, CIRCLE 1(1), HYDERABAD. 3) THE CIT (A)-II, HYDERABAD 4) THE CIT-I, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., YDE RABAD.