STATE BANK OF BIKANER & JAIPUR, Jaipur V. ACIT, Jaipur

ITA 278/JPR/2009

• Counselvise Citation: 27823114 RSA 2009
• Duration Of Justice: 5 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 13-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K KHANDELWAL
• Assessee Lawyers: BARUN BANSAL
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Cost of acquisition
• Section: 14A; 139(5); 32; 145; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH: JAIPUR (BEFORE SHRI R.P. TOLANI AND SHRI T.R. MEENA) I.T.A. NO. 278/JP/2009 ASSTT. YEAR- 2004-05 PAN NO. AADCS 4750 R STATE BANK OF BIKANER & JAIPUR, THE A.C.I.T., TILAK MARG, C-SCHEME, VRS. CIRCLE-6, JAIPUR. JAIPUR. (APPELLANT) (RESPONDENT) I.T.A. NO. 436/JP/2009 ASSTT. YEAR- 2004-05 PAN NO. AADCS 4750 R THE A.C.I.T., STATE BANK OF BIKANER & JAIPUR, CIRCLE-6, JAIPUR. VRS. TILAK MARG, C-SCHEME, JAIPUR. ASSESSEE BY :- SHRI P.C. PARWAL & SHRI BARUN BANSAL DEPARTMENT BY :- SHRI A.K. KHANDELWAL. DATE OF HEARING : 15/07/2014 DATE OF PRONOUNCEMENT : 08/08/2014 O R D E R PER: T.R. MEENA, A.M. THE ITA NO. 278/JP/2009 FILED BY THE ASSESSEE AS WEL L AS CROSS APPEAL NO. 436/JP/2009 BY THE REVENUE ARE AGAINST THE ORDE R DATED 24/03/2009 OF THE LEARNED C.I.T.(A)-II, JAIPUR FOR THE A.Y. 2004-0 5. THE GROUNDS OF ASSESSEES APPEAL AS WELL AS THE REVENUE ARE AS UNDE R:- 2 GROUNDS OF ITA NO. 278/JP/2009 1(I) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE , LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN UPHOLDING THE APPLICABILITY OF THE PROVISION OF SEC TION 14A AND THEREBY UPHOLDING THE DISALLOWANCE OF PROPORTION ATE INTEREST AND ESTIMATED ADMINISTRATIVE EXPENDITURE O F THE BANKING BUSINESS OF THE APPELLANT BANK. (II) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN QUANTIFYING THE DISALLOWANCE U/S 14A AT A SUM OF RS. 11,21,00,000/-. (III) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE , LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS FURTHER ERR ED IN CALCULATING THE AMOUNT OF DISALLOWANCE U/S 14A IN T ERMS OF PROVISIONS OF RULE 8D. HE HAS ALSO ERRED IN APPLYIN G THESE PROVISIONS OF RULE 8D FOR THE YEAR UNDER CONSIDERAT ION AS THE SAME HAVE BEEN INTRODUCED ON 24/03/2008. 2. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, L EARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 6,98,07,032/- MADE B Y THE ASSESSING OFFICER BY DISALLOWING THE DEPRECIATION ON INVESTMENT IN RESPECT OF SECURITIES SHIFTED FROM H ELD FOR TRADING CATEGORY TO AVAILABLE FOR SALE CATEGORY. 3. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, L EARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 5,86,050/- BY REDUCI NG THE APPELLANTS CLAIM OF DEPRECIATION U/S 32. 4(I) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS. 3 34,23,944/-. HE HAS FURTHER ERRED IN NOT DIRECTING THE A.O. TO ALLOW THIS CLAIM IN THE PRECEDING RESPECTIVE ASSE SSMENT YEARS. (II) UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NO T ALLOWING THE RELIEF IN RESPECT OF DISALLOWANCE OF ALL EGED PRIOR PERIOD RENT AND OTHER MISCELLANEOUS EXPENSE OF RS. 28,85,358/- AND SENDING IT BACK TO A.O. FOR VERIFIC ATION. GROUND OF ITA NO. 436/JP/2009 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(APPEALS) HAS ERRED IN- DELETING THE ADDITION OF RS. 4,56,60,998/- MADE BY THE A.O. TAKING THE INTEREST INCOME ON GOVERNMENT AND OTHER SECURITIES ON ACCRUAL BASIS INSTEAD OF DUE BASIS AS SHOWN BY THE ASSESSEE. 2. GROUND NO. 1 OF THE ASSESSEES APPEAL IS AGAINST CONFIRMING THE DISALLOWANCE U/S 14A OF THE INCOME TAX ACT, 1961 (HER EINAFTER REFERRED AS THE ACT) READ WITH RULE 80D OF THE INCOME TAX RULES (IN S HORT THE RULES) OF RS. 11,21,00,000/-. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE IS AN ASSOCIATE BANK OF STATE BANK OF INDIA. IT IS ENGAGE D IN ALL BANKING OPERATIONS AND TRADING IN GOVERNMENT AND OTHER SECURITIES. THE ASSESSEE DERIVES INCOME FROM INTEREST, DIVIDEND, TRADING AND SECURITIES ETC . IT WAS FOUND DURING THE ASSESSMENT PROCEEDINGS THAT THE ASSESSEES INCOME I NCLUDES SUBSTANTIAL INCOME, WHICH IS NOT CHARGED TO TAX AS UNDER:- 4 (I) INTEREST ON TAX FREE DEBENTURES RS. 4,89,70,0 00 (II) INCOME FROM MUTUAL FUNDS RS. 11,61,95,541 (III) DIVIDEND INCOME RS. 1,16,90,795 (IV) INTEREST ON INFRASTRUCTURE LANDING RS. 7,63 ,48,432 TOTAL RS. 25,32,04,768 THE LEARNED ASSESSING OFFICER GAVE REASONABLE OPPORT UNITY OF BEING HEARD ON DIVIDEND INCOME OF RS. 17,11,94,151/-, WHICH WAS AVAI LED BY THE ASSESSEE VIDE LETTER DATED 26 TH DECEMBER, 2004. AFTER CONSIDERING THE ASSESSEES R EPLY, THE ASSESSING OFFICER HELD THAT SECTION 14A OF THE ACT IN CASE OF ASSESSEE IS APPLICABLE. THERE IS NO DISPUTE THAT THE ASSESSEE BA NK HAD EARNED DIVIDEND INCOME FROM MUTUAL FUND, INTEREST INCOME FROM TAX F REE BONDS, INCOME FROM INFRASTRUCTURE LENDING AND INCOME BY WAY OF DIVIDEN DS. THE CORRESPONDING INCOME IS EXEMPT U/S 10(33), 10(23G) AND SECTION 10 (34) OF CHAPTER-III OF THE ACT, WHICH PROVIDES DETAILS OF VARIOUS EXEMPTED INCOME, AND THOSE INCOME, WHICH HAD BEEN FORM PART OF TOTAL INCOME. WH EN THE ASSESSEE HAS TAXABLE AS WELL AS NON-TAXABLE INCOME, THE EXPENSES IS TO BE APPORTIONED ON THE BASIS OF TOTAL RECEIPTS UNDER BOTH THE HEADS AN D DISALLOWANCE U/S 14A OF THE ACT IS REQUIRED TO BE MADE BY THE ASSESSING OFF ICER. THE ASSESSEE HAD CLAIMED THAT ITS BUSINESS IS INDIVISIBLE BUT THE AS SESSEE RUNS VARIOUS DIVISIONS AND DIFFERENT BRANCHES AND THE EXPENDITURES USUALLY CAN BE WORKED OUT BY THE ASSESSEE. THE APPELLANT ARGUMENTS OF INTEREST FREE FUND AVAILABLE WITH HIM WERE NOT FOUND TENABLE TO THE ASSESSING OFFICER THAT THERE IS NO DIRECT NEXUS 5 HAS BEEN ESTABLISHED BY THE APPELLANT BETWEEN BOTH T HAT TAX FREE FUND WERE UTILIZED IN INVESTMENT IN SHARES. THE ASSESSING OFFI CER HELD THAT THERE IS NO DOUBT ABOUT THE FACT THAT PART OF THE INTEREST CAN CERTAINLY BE ATTRIBUTED TO THE TAX FREE INCOME. THE TOTAL INTEREST EARNED BY THE AS SESSEE IS RS. 1573,57,13,330/- AS AGAINST TOTAL INTEREST EXPENDIT URE INCURRED BY THE ASSESSEE AT RS. 857,13,41,288, THUS, HE CALCULATED THE RATIO OF TOTAL INTEREST EXPENDITURE OVER TOTAL INTEREST EARNED I.E. RS. .54 47. AS REGARD THE ADMINISTRATIVE EXPENSES, HE ESTIMATED 5% OF TAX FRE E INTEREST RECEIPT AS ADMINISTRATIVE EXPENSES. THUS, HE MADE ADDITION OF R S. 10,18,09,800/- U/S 14A OF THE ACT. 3. BEING AGGRIEVED BY THE ORDER OF THE LEARNED ASSE SSING OFFICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE LEARNED CIT(A ). THE LEARNED CIT(A) ENHANCED THE DISALLOWANCE U/S 14A OF THE ACT BY OBSE RVING AS UNDER:- I HAVE CONSIDERED FACTS OF THE CASE AND ARGUMENTS TAKEN BY SH. JHANWAR AND SH. PARWAL QUITE CAREFULLY. HOW THE CONTEN TION OF AR THAT NO EXPENDITURE IS RELATABLE TO SUCH EXEMPT INCOME T O BE DISALLOWED U/S 14A OF I.T. ACT IS NOT ACCEPTABLE HAS BEEN DISCUSSED IN DETAIL BY CIT(A)- II, JAIPUR IN PARA 3.5 AND PARA 3.6 OF THE APPELLAT E ORDER DATED 30/3/2005 FOR A.T. 2003-04 AND SINCE FACTS OF THE CA SE AND ARGUMENTS TAKEN BY THE AR ARE MORE OR LESS SIMILAR THEREFORE, FOR THE SIMILAR REASONS AS STATED IN THE AFORESAID APPELLATE ORDER OF THE APPELLANT BANK FOR A.Y. 2003-04 FOR THIS YEAR ALSO I HOLD THAT EXP ENDITURES ARE RELATABLE TO SUCH EXEMPT INCOME WHICH ARE TO BE DISALLOWED U/S 14A OF I.T. ACT. NOW THE QUESTION ARISES THAT WHAT SHOULD BE THE QUAN TUM OF DISALLOWANCE AND WHETHER SUCH DISALLOWANCE MADE BY A.O . IS JUSTIFIED. EARLIER, THERE WAS NO MECHANISM TO COMPUTE SUCH REL ATABLE EXPENDITURE 6 WITH REFERENCE TO EXEMPT INCOME AND BECAUSE OF THIS THE ASSESSING OFFICER AND CIT(A) HAS ADOPTED DIFFERENT FORMULAS TO WORK OUT SUCH EXPENDITURES TO BE DISALLOWED U/S 14A OF THE I.T. ACT . NOW RULE 8D IS INTRODUCED WHICH PRESCRIBES THE MECHANISM AND METHO D TO WORK OUT RELATABLE EXPENDITURES WITH REFERENCE TO EXEMPT INCO ME TO BE DISALLOWED U/S 14A OF I.T. ACT. WHEN THE MECHANISM IS PRESCRIBED IN THE INCOME TAX RULE THEN OBVIOUSLY IN MY CONSIDERED VIE W IT HAS TO BE FOLLOWED IN PREFERENCE TO ANY FORMULA ADOPTED BY ASS ESSING OFFICER AND BY EARLIER CIT(A) IN THEIR OWN WISDOM. AS FAR AS ARGUM ENT OF SH. PARWAL IS CONCERNED THAT COMMITTEE OF DISPUTE VIDE THEIR M EETING DATED 16/10/2008 HAS DENIED THE PERMISSION TO THE INCOME TAX DEPARTMENT TO FILE THE APPEAL BEFORE ITAT FOR A.Y. 2001-02 TO 2003 -04 IT HAS TO BE APPRECIATED THAT THE INSERTION OF RULE 8D ON THIS I SSUE WAS NOT BEFORE COD WHILE TAKING SAID DECISION AND KEEPING IN VIEW TH E FACT THAT NOW INCOME TAX RULES PRESCRIBES SUCH MECHANISM TO COMPU TE RELATABLE EXPENDITURE WITH REFERENCE TO EXEMPT INCOME TO BE DI SALLOWED U/S 14A OF I.T. ACT THEN ONLY AS PER THIS RULE THE DISALLOWAN CE HAS TO BE WORKED OUT. WITH THIS DISCUSSION AND BY REJECTING THE ARGU MENTS TAKEN BY SH. PARWAL WHICH WERE TAKEN IN RESPONSE TO OPPORTUNITY GIV EN I HEREBY DIRECT THE ASSESSING OFFICER TO ADOPT SUCH DISALLOWA NCE AT RS. 11,21,00,000/- AS AGAINST SUCH DISALLOWANCE ADOPTED BY ASSESSING OFFICER IN THE ASSESSMENT ORDER AT RS. 10,18,09,800 /-. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LEARNED A.R. FOR THE ASSESSEE HAS SUBMITTED T HAT THE LEARNED CIT(A) MADE DISALLOWANCE BY APPLYING RULE 8D OF THE RULES. RULE 8D IS APPLICABLE PROSPECTIVELY FROM A.Y. 2008-09 AS HELD BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. V S. DCIT 328 ITR 81, THEREFORE, THE DISALLOWANCE MADE BY THE LEARNED CIT( A) BY APPLYING RULE 8D OF THE RULES IS INCORRECT. HE FURTHER RELIED UPON T HE FOLLOWING CASE LAWS: 7 (I) CIT VS. WALFORT SHARE AND STOCK BROKERS (P) LTD . 326 ITR 1. (II) MAXOPP INVESTMENTS LTD. & ORS. VS. CIT 347 ITR 272 (DEL.). (III) DCIT VS. MAHARASHTRA SEAMLESS LTD. 52 DTR 005 (DEL.)(TRIB.). (IV) CIT VS. METALMAN AUTO (P) LTD. 199 TAXMAN 149 ( P&H) (MAG) (V) BUNGE AGRIBUSINESS (INDIA) (P) LTD. VS. DCIT 13 2 ITD 549 (MUM) (VI) CIT VS. HERO CYCLES LTD. 31 DTR 301 (P&H). (VII) ACIT VS. MOHAN EXPORTS (P) LTD. 138 ITD 108 (D EL.) (VIII) ACIT VS. SIL INVESTMENT 73 DTR (DEL.)(TRIB.) 233. HE HAS FURTHER DRAWN OUR ATTENTION ON ASSESSEES OW N CASE FOR A.Y. 2001-02 TO 2003-04 AND ARGUED THAT BY FOLLOWING THE HONBLE ITAT ORDER IN ASSESSEES OWN CASE, NO DISALLOWANCE OF INTEREST PERTAINING TO T HE INVESTMENT, WHICH HAS RELATED BOTH THE EXEMPTED AS WELL AS TAXABLE INCOME CAN BE MADE UNDER RULE 8D HAS BEEN ALLOWED. HE HAS ALSO WORKED OUT TOTAL DIS ALLOWANCE AS PER RULE 8D OF THE RULES AT RS. 7.06 CRORES. THEREFORE, HE RE QUESTED TO SET ASIDE THE ORDER OF THE LEARNED CIT(A) TO RECOMPUTED THE DISALL OWANCE U/S 14A OF THE ACT. 5. AT THE OUTSET, THE LEARNED D.R. HAS SUPPORTED TH E ORDER OF THE LEARNED CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES, PERUSED THE RELEVANT MATERIAL ON RECORD. THE HONBLE BOMBAY HIGH COURT IN CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT (SUPRA) HAS HELD THAT RULE 8D IS 8 APPLICATION FROM A.Y. 2008-09. IT IS FURTHER HELD T HAT DISALLOWANCE FOR EARLIER PERIOD TO BE DETERMINED ON REASONABLE BASIS U/S 14A . THUS, WE SET ASIDE THE ISSUE TO THE ASSESSING OFFICER TO RECOMPUTED THE DI SALLOWANCE U/S 14A OF THE ACT AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 7. THE SECOND GROUND OF ASSESSEES APPEAL IS AGAINST CONFIRMING THE ADDITION OF RS. 6,58,07,032/- BY THE ASSESSING OFFI CER BY DISALLOWING THE DEPRECIATION ON INVESTMENT IN RESPECT OF SECURITIES SHIFTED FROM HELD FOR TRADING CATEGORY TO AVAILABLE FOR SALE CATEGORY. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE BANK IS TRADING IN SECUR ITIES. FOR ARRIVING AT THE PROFIT FROM THE TRADING OF SECURITIES, VALUATION OF SECURITIES AT THE END OF FINANCIAL YEAR IS UNDERTAKEN. THE VALUATION METHOD D ID ON THE BASIS OF COST OR MARKET VALUE OF SECURITIES WHICHEVER IS LOWER AND MAR KET PRICE IS LOWER THAN COST PRICE. THE ASSESSEE IS DEBITING THE PROVISION F OR DEPRECIATION ON INVESTMENT IN PROFIT AND LOSS ACCOUNT BUT WHEN SECUR ITIES APPRECIATED IT IS IGNORED BY THE APPELLANT. IF THE PROVISION FOR DEPR ECIATION ON INVESTMENT AT THE BEGINNING OF THE YEAR IS HIGHER THAN THE PROVISION FOR DEPRECIATION ON INVESTMENT AT THE CLOSING OF THE YEAR THEN DEPRECIA TION BEING NEGATIVE IS OFFERED FOR TAXATION AT RS. 4,37,57,567/- DURING TH E YEAR UNDER CONSIDERATION. THE LEARNED ASSESSING OFFICER ANALYSED THE VALUATION METHOD OF SECURITIES UNDER THE HEAD INDIVIDUAL SCRIP METHOD, GLOBAL MET HOD AND CATEGORY WISE METHOD. THE ASSESSEE HAD FOLLOWED CATEGORY WISE METHO D OF VALUATION OF 9 SCRIPS AND IN A.Y. 2002-03, THE ASSESSEE HAD DEBITE D RS. 12.58 CRORES ON ACCOUNT OF DIFFERENCE IN PROVISION OF DEPRECIATION ON SECURITIES AT THE CLOSING AND THE BEGINNING OF THE YEAR IN PROFIT AND LOSS AC COUNT, BUT ON THE BASIS OF GLOBAL METHOD, THE ABOVE DIFFERENCE WAS ZERO. THE LEA RNED ASSESSING OFFICER HAD DISALLOWED THE ABOVE DEPRECIATION COMPUTED ON TH E BASIS OF CATEGORY WISE METHOD. THE LOGIC BEHIND THE ABOVE ADDITION WAS THAT CATEGORY WISE METHOD PRESCRIBED BY THE RESERVE BANK OF INDIA (RBI) WAS NO T BINDING ON THE INCOME TAX DEPARTMENT AND THE GLOBAL METHOD ADOPTED WAS ALSO IN ACCORDANCE WITH THE ACCOUNTING STANDARD EVEN AS IN THIS METHOD THE COSTING OF STOCK WAS BEING DONE AT COST OR MARKET VALUE WHICHEVER IS LOWER. IN A SSESSMENT YEAR 2003-04, THE DIFFERENCE IN PROVISION FOR DEPRECIATION ON SEC URITIES AT THE CLOSING AND THE BEGINNING OF THE YEAR WAS (-)3.03 CRORES, WHICH WAS OF FERED BY THE ASSESSEE IN PROFIT AND LOSS ACCOUNT AND ALSO FOR INCOME TAX PURPOSES IN ACCORDANCE WITH METHOD ADOPTED BY IT IN EARLIER YEAR. THE ASSESSING OFFICER HAD ALLOWED THE DIFFERENCE OF VALUATION METHOD ADOPTED BY THE ASSES SING OFFICER IN A.YS. 2002- 03 AND 2003-04. FOR ASSESSMENT YEAR 2004-05 ONCE AG AIN, THE DIFFERENCE IN PROVISION FOR DEPRECIATION ON SECURITIES AT THE C LOSING AND THE BEGINNING OF THE YEAR WAS (-) RS. 4,37,57,567/- WHICH WAS OFFERED BY ASSESSEE IN P&L ACCOUNT AND ALSO FOR INCOME TAX PURPOSES, IN ACCORD ANCE WITH METHOD ADOPTED BY IT IN EARLIER YEAR. SINCE THE CIT(A) HAS ALSO UPH ELD THE METHOD OF VALUATION OF STOCK ON THE BASIS OF CATEGORY WISE METHOD CORREC T, AGAINST WHICH NO 10 DECISION IS RECEIVED, THE ABOVE INCOME HAS TO BE IN CLUDED IN THE INCOME OF ASSESSEE WITHOUT PREJUDICE TO STAND TAKEN IN ASSESSM ENT YEAR 2002-03 BY THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS GIVEN REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE, WHICH WAS AVAILED BY THE A SSESSEE VIDE LETTER DATED 31/1/2005. AFTER CONSIDERING THE ASSESSEES REPLY, THE ASSESSING OFFICER HELD AS UNDER:- C. I HAVE CONSIDERED ARGUMENTS IN ASSESSEES REPLY , RBI GUIDELINES AND OTHER RELAVANT ASPECTS I HOLD THAT THE DEPRECIA TION OF RS. 6,98,07,032 IN RESPECT OF CENTRAL GOVERNMENT SECURI TIES SHIFTED FROM HELD FOR TRADING CATEGORY TO AVAILABLE FOR SALE CATEGORY SHOULD HAVE BEEN SET OFF AGAINST APPRECIATION OF RS . 289.717 CRORES AVAILABLE IN THE SAME CATEGORY AND BY NOT SE TTING IT OFF, THE INCOME OF ASSESSEE IS BEING UNDER STATED BY THE SAM E AMOUNT FOR INCOME TAX PURPOSES, FOR THE FOLLOWING REASONS: (A) ASSESSEE HAS JUSTIFIED ITS ACT OF NOT SETTING OFF T HE DEPRECIATION CREATED AT THE TIME OF SHIFTING OF CAT EGORY AGAINST APPRECIATION AVAILABLE IN SAME CATEGORY AT THE CLOSING OF THE YEAR BY CLAIMING THAT IT IS AS PER R BI GUIDELINES. THEREFORE, THE FIRST ISSUE IS WHETHER RB I GUIDELINE PERMIT ABOVE TREATMENT AND THE SECOND ISS UE IS EVEN IF THE RBI GUIDELINES PERMIT ABOVE TREATMENT, WHETHER IT WILL BE ALLOWABLE UNDER INCOME TAX ACT. (B) AS PER PRUDENTIAL NORMS FOR CLASSIFICATION, VAL UATION AND OPERATION OF INVESTMENT PORTFOLIOS BY BANK, ISSUED BY RBI VIDE DDOD NO. BP.BC.21/21.04.141/2003-04 DATED 2 ND SEPTEMBER, 2003, WHICH IS A COMPILATION OF INSTRUCTIONS/GUIDELINES ISSUED TO BANK UP TO JUNE, 2003 (PARA 2.3 WHICH PRESCRIBES GUIDELINES FOR SHIFTING O F SECURITIES AMONGST DIFFERENT CATEGORIES, 11 TRANSFER OF SCRIPS FROM ONE CATEGORY TO ANOTHER UN DER ALL CIRCUMSTANCES, SHOULD BE DONE AT THE ACQUISITION CO ST/BOOK VALUE/MARKET VALUE ON THE DATE OF TRANSFER, WHICHEVE R IS THE LEAST, AND THE DEPRECIATION, IF ANY, ON SUCH TRANSF ER SHOULD BE FULLY PROVIDED FOR. THUS, IT IS CLEAR THAT THOUGH, DEPRECIATION HAS TO B E PROVIDED AT THE TIME OF SHIFTING OF CATEGORY AS PER RBI GUIDELINES, IT NOWHERE SAYS THAT SUCH DEPRECIATION S HOULD NOT ALSO BE SET OFF AGAINST APPRECIATION IN THE SAM E CATEGORY ON THE CLOSING. (C) EVEN IF IT WOULD HAVE BEEN PERMISSIBLE UNDER RBI GUIDELINE, IT WOULD NOT MEAN THAT IT IS IN ACCORDANCE WITH ACCOU NTING STANDARDS AND THEREFORE, IT IS NOT BINDING ON THE DEPARTMENT UNDER SECTION 145 OF I.T. ACT. (D) IN FACT THE DBOD CIRCULAR DATED 06/9/2001, STAT ES, IT IS TO BE NOTED THAT THE ABOVE ACCOUNTING TREATMENT DOES N OT TAKE INTO ACCOUNT TAXATION IMPLICATIONS AND HENCE T HE BANKS SHOULD COMPLY WITH THE REQUIREMENTS OF INCOME TAX AUTHORITIES IN THE MANNER PRESCRIBED BY THEM. (E) NOW, IF WE GO ON MERITS AND FACTS AS TO WHAT HAS R EALLY HAPPENED THEN WE SEE THAT AS PER CATEGORY WISE METHOD , ON THE ONE HAND DEPRECIATION ON ALL SECURITIES OF T HE SAME CATEGORY CAN BE SET OFF AGAINST THE APPRECIATION IN THE SAME CATEGORY BUT IN THIS CASE DEPRECIATION ON SECURITIE S WHICH HAVE COME TO THE CATEGORY AVAILABLE FOR SALE TO T HE EXTENT OF RS. 6.98 CRORES IS NOT BEING SET OFF DESPITE AN APPRECIATION OF RS. 289.72 CRORES. THIS MEANS IN THI S CATEGORY, IF THE COST OF SECURITIES WAS SAY FOR EXAM PLE 1,000 CRORES THEN DESPITE COMPOSITE MARKET VALUE OF SECUR ITIES IN THIS CATEGORY BEING 1283.74 CRORES, THE VALUATION O F SECURITIES OF THIS CATEGORY IS BEING DONE AT 993.02 CRORES WHICH IS LESS THAN THE COST (WHICH IN TURN IS LESS T HAN THE 12 MARKET VALUE). THIS IS GOING AGAINST BASIC ACCOUNTIN G PRINCIPLES. (F) TO FURTHER ELABORATE THE ISSUE AND THE DISTORTIO NS WHICH ABOVE METHOD CAN BRING TO THE PROFIT, WE CAN TAKEN A N EXAMPLE OF A SECURITY VALUING RS. 10. IF THE MARKET VALUE OF THE SECURITY ON THE DATE OF SHIFTING WAS RS. 9 THEN DEPRECIATION OF 1 RUPEE HAS TO BE PROVIDED AS PER R BI GUIDELINE. IF ON THE CLOSING OF F.Y. THE MARKET VAL UE OF ABOVE SCRIP GOES TO RS. 11, APPRECIATION ON THIS SC RIP ITSELF WILL BE RS. 2 COMPARE TO THE VALUE AT WHICH SCRIP IS TRANSFERRED TO THIS CATEGORY AND DEPRECIATION WILL B E RS. 1 IN ASSESSEES BOOKS. HOWEVER, THE DEPRECIATION WILL NOT BE SET OFF EVEN AGAINST THE APPRECIATION OF RS. 2 ON THE S AME SCRIP AS PER INTERPRETATION AND METHOD ADOPTED BY ASSESSE E. SINCE THE APPRECIATION HAS TO BE IGNORED AND DEPREC IATION HAS TO BE PROVIDED FOR, IT WOULD MEAN THAT ASSESSEE WOULD BE PROVIDING DEPRECIATION OF RS. 1, THIS MEANS THE COST OF SECURITY BEING RS. 10 AND MARKET VALUE OF SECURITY BEING RS. 11 ON THE DATE OF CLOSING, STILL JUST BECAUSE ON TH E DATE OF TRANSFER OF CATEGORY ITS VALUE WAS RS. 9, IN THE VAL UATION OF STOCK, THE VALUATION OF SECURITY IS BEING DONE AT R S. 9. THUS, JUST BY SHIFTING THE CATEGORY DURING THE ACCOUNTING YEAR ONE WILL BE PERMITTED TO TAKE VALUATION OF STOCK AT A FI GURE WHICH IS LESS THAN BOTH COST AND MARKET VALUE. IT CLEARLY PROVES THAT THE RESULTS WILL BECOME ABSURD. THEREFORE, EVEN IF THE ABOVE TREATMENT IS CONSIDERED IN ACCORDANCE WITH RBI GUIDELINES (WHICH, IT IS NOT, AS ALREADY DISCUSSED) , IS DISTORTING THE PICTURE OF PROFITS AND IS THEREFORE, NOT PERMISSIBLE FOR COMPUTING THE PROFIT FOR PURPOSE OF INCOME TAX ACT. D. THEREFORE, DEPRECIATION OF RS. 6,98,07,032/- IN R ESPECT OF CENTRAL GOVERNMENT SECURITIES SHIFTED FROM HELD IN TRADING CATEGORY TO AVAILABLE FOR SALE CATEGORY, SHOULD HAVE BEEN SET OFF AGAINST APPRECIATION OF RS. 289.717 CRORES AVAILABLE IN THE SAME CATEGORY, 13 EVEN AS PER THE SYSTEM OF CATEGORY WISE VALUATION O F SCRIPS BEING ADOPTED AND FOLLOWED BY ASSESSEE. ACCORDINGLY, THE T OTAL DEPRECIATION ON SECURITIES AT THE CLOSING OF F.Y. S HOULD HAVE BEEN 12,83,07,884/- AS AGAINST 19,81,14,316/- COMPUTED BY THE ASSESSEE. SINCE DEPRECIATION AT THE BEGINNING OF F. Y. WAS RS. 24,18,71,884/-, THE DIFFERENCE RS. 11,35,64,599/- S HOULD HAVE BEEN OFFERED FOR TAXATION AS AGAINST AN AMOUNT OF R S. 4,37,57,567/- OFFERED BY ASSESSEE. THE ABOVE ADDITI ON WILL BE WITHOUT PREJUDICE TO THE STAND OF DEPARTMENT TAKEN F OR A.Y. 2002- 03, WHICH HAS NOT BEEN ACCEPTED BY THE CIT(A) AND IS BEING FURTHER CONTESTED, AS PER METHOD BEING FOLLOWED BY A SSESSEE AND CONFIRMED BY CIT(A), THEREBY RESULTING INTO AN ADDIT ION OF RS. 6,98,07,032/-. 8. BEING AGGRIEVED BY THE ORDER OF THE LEARNED ASS ESSING OFFICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE LEARNED CIT( A), WHO HAD CONFIRMED THE ADDITION BY OBSERVING AS UNDER:- I HAVE CONSIDERED FACTS OF THE CASE AND ARGUMENTS TAKEN BY SH. JHANWAR AND SH. PARWAL QUITE CAREFULLY. IT IS TRUE THAT AS PER RBI GUIDELINES THE BANKER HAS PROVIDED DEPRECIATION OF RS.6,98,07,032/- IN RESPECT OF SECURITIES SHIFTED FROM 'HELD FOR TRA DING' CATEGORY TO THE CATEGORY OF 'AVAILABLE FOR SALE'. FOR THIS PURPOSE THEY HAVE RELIED UPON MASTER CIRCULAR ISSUED BY RBI ON PRUDENTIAL NO RMS FOR CLASSIFICATION, VALUATION AND OPERATION OF INVESTME NT PORT FOLIO BY BANK DATED 2.9.2003. BESIDES THIS FOLLOWING CATEGOR Y WISE VALUATION SUCH DEPRECIATION AS ON 31.3.2003 WAS HELD AT RS. 2 4,18,71,884/-AND AS PER GUIDELINES CATEGORY WISE SUCH DEPRECIATION A S ON 31.3.2004 HAS BEEN WORKED OUT AT RS. 19,81,14,316/- AND SINCE , THERE WAS NO FURTHER REQUIREMENT TO CHARGE ANYTHING TO THE P&L A /C OF CURRENT YEAR THEREFORE, THE EXCESS SUM OF RS.4,37,57,567/- WAS C REDITED TO THE P&L A/C. FOLLOWING THE CIT(A)'S ORDER FOR A.Y.2002-03 I N THE CASE OF APPELLANT BANKER WHICH HAS BEEN DISCUSSED IN EARLIE R PART OF THIS APPELLATE ORDER I AGREE THAT AS PER RBI GUIDELINES THE BANKER HAS 14 CORRECTLY VALUED THE DEPRECIATION CATEGORY WISE AND ACCORDINGLY IN THE CORRECT MANNER THEY HAVE CREDITED THEIR P&L A/C OF THE YEAR BY RS.4,37,57,567/-. HOWEVER, ANOTHER DEVELOPM ENT FOR THE YEAR WAS THAT DURING THE YEAR ITSELF CERTAIN INVEST MENTS WERE SHIFTED FROM 'HELD FOR TRADING CATEGORY' TO THE CATEGORY OF 'AVAILABLE FOR SALE' AND IN RESPECT OF SUCH INVESTMENT FOR WHICH C ATEGORY HAS BEEN CHANGED THE DEPRECIATION IN THE VALUE AS ON TH E DATE OF SHIFTING HAS BEEN WORKED OUT AT RS.6,98,07,032/- AN D THE SAME WAS CLAIMED AS DEDUCTION EVEN THOUGH FOLLOWING THE CA TEGORY WISE METHOD OF VALUATION OVERALL IN THE SAID CATEGO RY THERE WAS NO NET DEPRECIATION. HOWEVER, FOLLOWING MASTER CIRCULAR ISSUED BY RBI ON 2.9.2003 THE BANKER HAS PROVIDED FOR AFOR ESAID DEPRECIATION OF RS.6,98,07,032/- FOR WHICH EVEN THE RBI VIDE THEIR LETTER DATED 23.12.2005 HAS CLARIFIED THAT THE DEPR ECIATION ON ACCOUNT OF SHIFTING OF SECURITIES HAS TO BE FULLY PROVIDED AND IT CANNOT BE NETTED OFF AGAINST THE APPRECIATION IN SAME CLASSIF ICATION AND CATEGORY AS ON THE VALUATION DATE OF INVESTMENT POR T FOLIO WHICH IN THE PRESENT CASE WAS 31.3.2004. IT IS A FACT THAT AS ON 31.3.2004 IN THE CATEGORY OF CENTRAL GOVERNMENT SECURITIES WH ICH ARE AVAILABLE FOR SALE THE TOTAL DEPRECIATION IS RS. 15.11 CRORE AS AGAINST THAT TOTAL APPRECIATION IN THIS CATEGORY IS OF RS.289.71 7 CRORES. FOLLOWING THE CONSISTENT METHOD OF VALUATION WHICH IS ALSO HE LD AS CORRECT IN THE FORM OF CATEGORY WISE VALUATION BY CIT(A) IN EARLIE R APPEALS WHICH IS DISCUSSED IN EARLIER PART OF APPELLATE ORDER THEN F OR THIS CATEGORY NO DEPRECATION IS REQUIRED TO BE ALLOWED, THOUGH, IT H AS BEEN WORKED OUT AS ON THE DATE OF SHIFTING OF SUCH INVESTMENT F ROM THE CATEGORY OF 'HELD FOR TRADING' TO CATEGORY OF 'AVAILABLE FOR SALE'. REASONABLY THE QUESTION OF APPRECIATION AND DEPRECI ATION IN THE VALUE OF SECURITIES HAS TO BE SEEN AS ON 31.3.2004 ONLY FOR THE PRESENT A.Y. AND UNDISPUTEDLY FOR THE SECURITIES AV AILABLE IN CATEGORY OF AVAILABLE FOR SALE SINCE APPRECIATION I S MORE AS COMPARED WITH DEPRECIATION THEREFORE THERE IS NO QU ESTION OF ALLOWING ANY FURTHER DEPRECIATION IN RESPECT OF SEC URITIES LYING IN THE SAID CATEGORY OF INVESTMENT. IN THIS RESPECT THE IN STRUCTION NO. 17/2008 ISSUED BY CBDT VIDE ITS LETTER F.NO.228/3/2 008 - ITA -III DATED 26.11.2008 WHICH WAS ISSUED AFTER THE REVIEW O F ASSESSMENT 15 OF BANK CARRIED OUT BY C&AG. CBDT VIDE AFORESAID IN STRUCTION HAS CLARIFIED THAT IN PARTICULAR DEDUCTIONS UNDER THE P ROVISIONS REFERRED TO BELOW SHOULD BE ALLOWED ONLY AFTER A THOROUGH EX AMINATION OF THE CLAIM ON FACTS AND ON LAW AS PER PROVISIONS OF THE I.T. ACT. THEREAFTER, IN ITEM NO. 2 (VII) OF THE INSTRUCTION THE RBI GUID ELINES DATED 16.10.2000 IN RESPECT OF INVESTMENT PORT FOLIO CLAS SIFICATION IN THREE DIFFERENT CATEGORIES HAS BEEN DISCUSSED AND HAS BEE N CLARIFIED THAT IN THE CASE OF 'HELD FOR TRADING' AND 'AVAILABLE FOR S ALE' CATEGORIES SECURITIES FORMING STOCK IN THE TRADE OF BANK, THE DEPRECIATION / APPRECIATION IS TO BE AGGREGATED SCRIP WISE AND ONL Y NET DEPREDATION IF ANY, IS REQUIRED TO BE PROVIDED FOR IN THE ACCOU NTS. IN MY CONSIDERED VIEW FOR THIS CATEGORY AS PER AFORESAID INSTRUCTION DATED 26.11.2008 THERE IS NO NET DEPRECATION SINCE THE AP PRECIATION OF SECURITIES IN THE CATEGORY OF 'AVAILABLE FOR SALE' IS MORE THAN THE DEPRECIATION OF SECURITIES IN THE SAME CATEGORY I.E . 'AVAILABLE FOR SALE' AND THEREFORE, IN MY CONSIDERED VIEW THE APPE LLANT BANK HAS WRONGLY CLAIMED DEDUCTION FOR DEPRECIATION IN RESPE CT OF SUCH SECURITIES WHICH WERE SHIFTED FROM THE CATEGORY OF 'HELD FOR TRADING' TO 'AVAILABLE FOR SALE' CATEGORY AND WITH THIS DISCUSS ION, THE DISALLOWANCE MADE BY AO IS CONFIRMED OF RS. 6,98,07 ,032/- BY REJECTING RELEVANT GROUND OF APPEAL. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 9. THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DEALS IN SECURITIES AND VALUE THEM AS AT THE END OF THE YEAR AS PER THE GUIDELINES PRESCRIBED FOR THIS PURPOSE BY THE RBI, WHICH ARE M ANDATORY TO BE FOLLOWED BY THE BANK. THE SAME GUIDELINES HAD BEEN FOLLOWED BY TH E ASSESSEE AS PER THE RBI GUIDELINES, THE SECURITIES ARE CLASSIFIED IN SI X CLASSIFICATIONS I.E. (I) GOVERNMENT SECURITIES, (II) OTHER APPROVED SECURITI ES, (III) SHARES, (IV) DEBENTURES AND BONDS, (V) SUBSIDIARIES AND JOINT VE NTURES, (VI) OTHERS. ALL 16 THESE SIX CLASSIFICATIONS OF SECURITIES ARE TO BE R ECOGNIZED IN HELD TO MATURITY (HTM), HELD FOR TRADING (HTF) AND AVAILABLE FOR SALE ( AFS), WHICH ARE HELD AS UNDER:- I) HELD TO MATURITY (HTM): TO BE CARRIED AT COST. HOWE VER, IF THE COST IS MORE THAN THE FACE VALUE, THE PREMIUM SHOUL D BE AMORTISED OVER THE PERIOD REMAINING TO MATURITY. II) AVAILABLE FOR SALE (AFS): AFTER GETTING THE MA RKET VALUE OF ALL THE SCRIPS NET DEPRECIATION UNDER EACH CLASSIFICATION S HOULD BE CHARGED TO PROFIT AND LOSS ACCOUNT BUT IF THE RESUL T IS NET APPRECIATION UNDER ANY CLASSIFICATION, IT SHOULD BE IGNORED. III) HELD FOR TRADING (HTF): VALUATION IS REQUIRED T O BE DONE IN THE SAME MANNER AS REQUIRED AS IN THE CASE OF AVAILABLE FOR SALE. THE LEARNED A.R. FURTHER SUBMITTED AS UNDER: 1. THE RBI GUIDELINES PROVIDE FOR CATEGORY WISE VALU ATION OF THE SECURITIES. AS PER THIS RULES THE BANKS ARE TO LIQU IDATE THE SECURITIES HELD UNDER HELD FOR TRADING CATEGORY ON OR BEFORE 90 DAYS OF ITS PURCHASE. HOWEVER, WHERE THERE IS DIMINU TION IN THE MARKET VALUE OF THE SECURITIES, AS PRUDENT BUSINESS MEN THE BANKS DO NOT GENERALLY LIQUIDATE THESE SECURITIES ON LOSS . IN THESE CIRCUMSTANCES THE BANKS WITH THE APPROVAL OF BOARD O F DIRECTORS CAN SHIFT THESE SECURITIES IN THE CATEGORY OF AVAI LABLE FOR SALE. THE RBI GUIDELINES REQUIRES TO PROVIDE DEPRECIATION AT THE TIME OF SUCH TRANSFER FOR THE REASON THAT BANKS SHOULD NOT BE ALLOWED THE SET OFF OF THE DEPRECIATION OF THE SECURITIES ORIGI NALLY HELD AS HELD FOR TRADING CATEGORY WITH THE APPRECIATION IN THE SEC URITIES HELD AS AVAILABLE FOR SALE CATEGORY. THE BASIC PRINCIPLE BEH IND THIS GUIDELINE IS TO RETAIN THE DEPRECIATION AS PER THE ORIGINAL 17 CLASSIFICATION SO AS TO REGULATE THE ACT OF SHIFTIN G OF SECURITIES FROM ONE CATEGORY TO OTHER CATEGORY. 2. THE CBDT IN ITS INSTRUCTION NO. 17/2008 DATED 26/1 1/2008 IN PARA (VII) WITH REFERENCE TO ALLOWING THE DEPRECIATION ON THE SECURITIES HAS DIRECTED THAT THE LATEST GUIDELINES OF RBI IS T O BE TAKEN INTO CONSIDERATION FOR ALLOWING ANY SUCH CLAIM. IN RESPEC T OF SHIFTING OF SECURITIES FROM ONE CATEGORY TO ANOTHER, THE SAME S HOULD BE AT LOWER OF ACQUISITION COST/BOOK VALUE OR MARKET VALUE AND THE DEPRECIATION ON SUCH TRANSFER SHOULD BE FULLY PROVI DED FOR. ACCORDINGLY, THE ASSESSEE HAS CORRECTLY PROVIDED FO R THE DEPRECIATION OF RS. 6.98 CRORES ON SHIFTING OF SECU RITIES FROM HFT TO AFT CATEGORY. 3. THE CIT(A) THOUGH PRINCIPALLY ACCEPTING THE ABOVE CONTENTION HAS WRONGLY INFERRED THAT THE QUESTION OF APPRECIATION A ND DEPRECIATION IN THE VALUE OF SECURITIES IN A PARTIC ULAR CATEGORY IS TO BE SEEN ONLY AT THE YEAR END AND SINCE THE APPRECIA TION IN THE CATEGORY OF AVAILABLE FOR SALE IN MORE THAN THE DEP RECIATION OF THE SECURITIES IN THE SAME CATEGORY AT THE YEAR END, TH E DEDUCTION FOR DEPRECIATION AT THE TIME OF SHIFTING CANNOT BE ALLO WED. THIS VIEW OF CIT(A) IS APPARENTLY INCORRECT BECAUSE THE SECUR ITIES HELD FOR TRADING ARE ALLOWED TO BE SHIFTED AS AVAILABLE FOR SA LE ONLY IN EXCEPTIONAL CONDITIONS. HAD THIS SHIFTING NOT BEEN ALLOWED, THE ASSESSEE HAD TO DISPOSE OF THESE SECURITIES INCURRI NG THE LOSS. THEREFORE, ONCE SUCH SHIFTING IS ALLOWED, THE DEPRECI ATION IN THE VALUE OF THE SECURITIES WHICH IS SHIFTED TO ANOTHER CATEGORY IS REQUIRED TO BE FULLY PROVIDED FOR. THIS HAS NO RELAT IONSHIP 18 WHATSOEVER FOR VALUING THE SECURITY OF A PARTICULAR CATEGORY AT THE YEAR END. THIS IS CONSISTENTLY FOLLOWED BY ALL THE BA NKS. SINCE THE BOARD INSTRUCTION ALSO REQUIRES THAT RBI GUIDELINES IS TO BE FOLLOWED FOR ALLOWING THE CLAIM OF DEPRECIATION, THE CLAIM OF DEPRECIATION MADE BY THE ASSESSEE AT RS. 6.98 CRORE S BE DIRECTED TO BE ALLOWED. RELIANCE IS PLACED ON THE DECISION OF HONBLE ITAT BANGALORE BENCH IN THE CASE OF STATE BANK OF MYSORE VS. DCIT 33 SOT 7 WHEREIN IT WAS HELD THAT IN VIEW OF THE CLEAR CU T GUIDELINES OF THE RBI REGARDING TRANSFER OF AFS CATEGORY INVES TMENT INTO HTM CATEGORY INVESTMENT, THE CLAIM OF THE ASSESSEE B ANK TOWARDS PROVISIONS OF DEPRECIATION ON ACCOUNT OF TRANSFER O F SECURITIES FROM AFS CATEGORY TO HTM CATEGORY IS ALLOWED. 4. OTHERWISE ALSO IN CASE THE DEPRECIATION IS NOT AL LOWED IN THIS YEAR, THE VALUE OF INVENTORY FOR THE SUBSEQUENT YEAR WOULD INCREASE TO THAT EXTENT. IN THE NEXT YEAR, THE CIT(A) HAS ACCEPT ED THE VALUATION OF THE INVENTORY AT THE YEAR END AND THER EFORE THIS AMOUNT WOULD AUTOMATICALLY GET ALLOWED IN THE NEXT YE AR. FURTHER HAD THESE SECURITIES BEEN KEPT UNDER THE CATEGORY O F HELD FOR TRADING, THE DEPRECIATION ON SUCH SECURITIES WOULD HA VE INCREASED TO 7.17 CRORES AS ON 31 ST MARCH, 2004. 10. AT THE OUTSET, THE LEARNED D.R. SUPPORTED THE O RDER OF THE LEARNED CIT(A). 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOT H THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS PER PAPER BOOK S UBMITTED BY THE APPELLANT 19 AT PAGE NO. 53, TOTAL DEPRECIATION, WHICH WERE SHIFTE D FROM HFT CATEGORY TO AFS CATEGORY AT RS. 6,98,07,032/-. ALL THE BANKS AR E REGULATED BY THE RBI AND ALL INSTRUCTIONS ISSUED BY THE RBI ARE BINDING ON E VERY BANKS. THE RBI ISSUED CIRCULAR ON 2 ND SEPTEMBER, 2003 AND PRESCRIBED PRUDENTIAL NORMS FO R CLASSIFICATION, VALUATION AND OPERATION OF INVESTME NT PORTFOLIO BY BANKS IN MASTER CIRCULAR. THE PRUDENTIAL NORM CLASSIFIED THE INVESTMENT PORTFOLIO IN A TO F CATEGORIES. THESE INVESTMENTS ARE TO BE KEPT BY TH E BANK UNDER THE THREE HEADS NAMELY HELD TO MATURITY (HTM), HELD FOR TRADING (HTF) AND AVAILABLE FOR SALE (AFS). AS PER THIS NORM, THE BANK CAN SHIF T INVESTMENTS TO/FROM HELD TO MATURITY CATEGORY, AVAILABLE FOR SALE CATEGORY T O HELD FOR TRADING CATEGORY AND FROM HELD FOR TRADING CATEGORY TO AVAILABLE FOR SALE CATEGORY FOR CLARIFIED THESE TERMS, THE DEFINITION GIVEN IN THE CIRCULAR A S UNDER:- (I) HELD TO MATURITY: THE SECURITIES WHICH ARE ACQUI RED WITH AN INTENTION TO HELD UP THEIR MATURITY. (II) HELD FOR TRADING: TO TRADE BY TAKING ADVANTAGE OF SHIRT TERM PRICE/INTEREST RATE MOMENTS WILL BE CLASSIFIED UNDER HELD FOR TRADING. (III) AVAILABLE FOR SALE: THE SECURITY WHICH DO NOT FALL WITHIN THE ABOVE TWO CATEGORIES WILL BE CLASSIFIED UNDER AVAILABLE FOR SA LE. ON TRANSFER OF SCRIP FROM ONE CATEGORY TO ANOTHER. THE RBI ALSO PRESCRIBED THE VALUATION METHOD OF SECU RITIES AS PER THE CIRCULAR UNDER ALL CIRCUMSTANCES, SHOULD BE DONE AT THE ACQU ISITION COST/BOOK 20 VALUE/MARKET VALUE ON THE DATE OF TRANSFER, WHICH I S THE LEAST AND THE DEPRECIATION IF ANY ON SUCH TRANSFER SHOULD BE FULL Y PROVIDED FOR. IT IS FURTHER CLARIFIED THAT THERE IS A NOTE IN THE PRUDENTIAL NO RM IN POINT NO. 3.2 AVAILABLE FOR SALE: SECURITIES UNDER THIS CATEGORY SHALL BE VALUED SCRIP WISE AND DEPRECIATION/APPRECIATION SHALL BE AGGREGATED FOR E ACH CLASSIFICATION REFERRED TO IN ITEM 2(I) ABOVE. NET DEPRECIATION, IF ANY, SH ALL BE PROVIDED FOR. NET APPRECIATION, IF ANY, SHOULD BE IGNORED. NET DEPREC IATION REQUIRED TO BE PROVIDED FOR IN ANY ONE CLASSIFICATION SHOULD NOT B E REDUCED ON ACCOUNT OF NET APPRECIATION IN ANY OTHER CLASSIFICATION. THE APPEL LANT HAD CLAIMED DEPRECIATION ON THE BASIS OF MASTER CIRCULAR OF RBI , ON THE BASIS OF CATEGORY PRESCRIBED IN POINT NO. 2.1 OF THIS CIRCULAR. ACCOR DING TO THE CALCULATED DEPRECIATION AT RS. 6,98,07,032/-, THE LEARNED CIT(A ) HAD CONSIDERED HIS PREDECESSORS ORDER IN EARLIER YEARS APPEAL BUT THE RBI HAS CHANGED THE VALUATION METHOD ON SECURITIES IN YEAR UNDER CONSID ERATION, WHICH IS BINDING ON THE BANK. THE APPELLANT CAN TRANSFER THE SECURIT IES DURING THE YEAR AS PER THIS CIRCULAR. DURING THE YEAR AS WELL AS 31 ST MARCH, 2004 AND APPRECIATION OF ANY CATEGORY IS TO BE IGNORED AS PER THIS CIRCULAR, WHICH HAS BEEN FOLLOWED BY THE APPELLANT. THE LEARNED CIT(A) REFERRED THE CBDT I NSTRUCTION NO. 17/2008 VIDE LETTER NO. F.NO.228/3/2008-ITA-III DATED 26/11 /2008 WHEREIN RBI GUIDELINE DATED 26/10/2000 HAD BEEN CLARIFIED. THE L EARNED CIT(A) HAS NOT CONTROVERTED THE CALCULATION MADE AND CLAIMED BY TH E APPELLANT THAT THERE IS 21 NO NET DEPRECIATION. SINCE THE APPRECIATION OF SECU RITIES IN THE CATEGORY OF AVAILABLE FOR SALE IS MORE THAN THE DEPRECIATION OF SECURITIES IN THE SAME CATEGORY I.E. AVAILABLE FOR SALE. THEREFORE, WE ARE O F THE CONSIDERED VIEW THAT THE APPELLANT HAD RIGHTLY CLAIMED DEPRECIATION ON T RANSFER FROM SECURITIES HELD FOR TRADING CATEGORY TO AVAILABLE FOR SALE CATEGORY AT RS. 6,98,07,032/-. THE CASE LAW RELIED UPON BY THE APPELLANT IN CASE OF STA TE BANK OF MYSORE VS. DCIT AND ITAT BANGALORE B BENCH IS SQUARELY APPLICA BLE BEING AN IDENTICAL FACT OF THE CASE WHEREIN DENOMINATION IN VALUE OF S ECURITIES CONSEQUENT TO CONVERSION OF SECURITIES FROM AFS CATEGORY TO HTM CA TEGORY HELD ALLOWABLE. THE ASSESSEES APPEAL IS ALLOWED ON THIS GROUND. 12. GROUND NO. 3 OF ASSESSEES APPEAL IS AGAINST CO NFIRMING THE ADDITION OF RS. 5,86,050/- BY REDUCING THE APPELLANTS CLAIM OF DEPRECIATION U/S 32 OF THE ACT. AS PER AUDIT REPORT, THE ALLOWABLE DEPRECIATION WAS RS. 36,80,29,161/-. HOWEVER, THE ASSESSEE HAD CLAIMED DEPRECIATION OF RS . 36,86,15,211/-, THE ASSESSING OFFICER GAVE REASONABLE OPPORTUNITY OF BE ING HEARD ON THIS ISSUE. AFTER CONSIDERING THE ASSESSEES REPLY, IT HAS BEEN HELD BY THE ASSESSING OFFICER THAT DEPRECIATION WAS ALLOWED ONLY TO THE EXT ENT AS IT WAS COMPUTED BY THE AUDITOR IN A.Y. 2003-04 AND THE ADDITION HAS BE EN CONTESTED BY THE ASSESSEE BEFORE THE LEARNED CIT(A), WHERE THE APPEA L IS STILL PENDING. ON THE SAME LINE, CLAIM OF DEPRECIATION IS ALLOWED AT RS. 3 6,80,29,161/- AS AGAINST CLAIM OF RS. 36,86,15,211/- BY ALLOWING DEPRECIATION ON ELECTRIC FITTINGS AT THE 22 PRESCRIBED RATE OF 15% INSTEAD OF ALLOWING DEPRECIAT ION @ 25% JUST BECAUSE THESE ASSETS WERE PART OF PLANT AND MACHINERY OF BLO CK ASSETS IN EARLIER ASSESSMENT YEAR. ACCORDINGLY HE MADE THE ADDITION O F RS. 5,86,050/-. 13. BEING AGGRIEVED BY THE ORDER OF THE LEARNED AS SESSING OFFICER, THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A), WHO HAD CONFIRMED THE ORDER BY OBSERVING AS UNDER:- I HAVE CONSIDERED FACTS OF THE CASE AND ARGUMENTS TAKEN BY SH. JHANWAR AND SH. PARWAL QUITE CAREFULLY. THIS ISSUE HAS ALSO BEEN DISPOSED OFF AGAINST THE APPELLANT BY CIT(A) FOR A.Y . 2003-04 VIDE APPELLATE ORDER DATED 30/3/2005 IN WHICH THE CIT(A) HAS CONFIRMED THE ASSESSING OFFICERS STAND ON THE ISSUE OF ALLOWABILI TY OF DEPRECIATION. UNDER THESE CIRCUMSTANCES FOLLOWING THE AFORESAID CI T(A) ORDER IN THIS CASE FOR A.Y. 2003-04, I HEREBY CONFIRM THE DISALLO WANCE OF DEPRECIATION CLAIM TO THE EXTENT OF RS. 5,86,050/-. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 14. THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT DEPRECIATION RATE U/S 32 OF THE ACT HAS BEEN AMENDED W.E.F. A.Y. 2003-04. AS PER NEW RULES, ELECTRIC FITTING INCLUDING FANS ARE TO BE INCLUDED IN THE BLOCK OF FURNITURE AND FITTINGS (15% DEPRECIATION). EARLIER, FANS ETC. WERE INCLUDED IN PLANT AND MACHINERY (25% DEPRECIATION). THE TAX AUDITOR ALTERE D THE OPENING WRITTEN DOWN VALUE ( WDV) OF THE BLOCKS OF FURNITURE FITTING S AND THE PLANT AND MACHINERY TO SHIFT THE AMOUNT RELATING TO FANS ETC. FROM PLANT AND MACHINERY TO FURNITURE AND FITTINGS. IT IS ARGUED THAT WHEN TH E ASSETS HAD BEEN INCLUDED IN THE BLOCK OF ASSETS, IT LOST IS INDIVIDUAL IDENT ITY. SECTION 43(6) OF THE ACT 23 DEFINES WDV FOR THE BLOCK OF ASSETS. AS PER THIS DE FINITION, THE CALCULATION OF WDV START WITH WDV OF PREVIOUS YEAR, CANNOT BE CHANG ED AS PER THE PROVISIONS OF THE ACT. SECTION 2(11) OF THE ACT DEF INES BLOCK OF ASSETS IN TANGIBLE ASSETS AND INTANGIBLE ASSETS. AS PER PROVI SIONS OF THE ACT, CHANGE IN BLOCK OF PARTICULAR ASSETS FOR THE REASONS OF CHANG E IN DEPRECIATION OF RATE DOES NOT AFFECT THE WDV OF PREVIOUS YEAR. IN CASE O F CHANGE IN THE RATE OF DEPRECIATION OF PARTICULAR ASSETS FROM A PARTICULAR YEAR, THESE ASSETS SHALL BE INCLUDED IN THE BLOCK APPLICABLE FOR THE NEW RATE F ROM THE YEAR IN WHICH, CHANGE TOOK PLACE. THE WDV FOR THE PREVIOUS YEAR, HO WEVER, CANNOT BE CHANGED IN ANY CASE. THE LEARNED A.R. FURTHER DRAWN O UR ATTENTION ON IDENTICAL ISSUE DECIDED BY THE HONBLE ITAT B BENCH, JAIPUR IN ITA NO. 329/JP/2009 FOR THE A.Y. 2003-04 ORDER DATED 30/10/2009 WHEREIN IDENTICAL ISSUE HAS BEEN DECIDED BY THE HONBLE BENCH IN FAVOUR OF THE ASSES SEE. 15. AT THE OUTSET, THE LEARNED D.R. SUPPORTED THE O RDER OF THE LEARNED CIT(A). 16. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE COORDINATE B B ENCH OF ITAT, JAIPUR DECIDED IDENTICAL ISSUE IN A.Y. 2003-04 IN FAVOUR O F THE ASSESSEE WHEREIN THE COORDINATE BENCH HAS ACCEPTED THE ASSESSEES SUBMIS SION AND ASSESSING OFFICER WAS DIRECTED TO WORK OUT THE DEPRECIATION WITH OUT SHIFTING THE OPENING WRITTEN DOWN VALUE OF PLANT AND MACHINERY TO THE WRIT TEN DOWN VALUE OF 24 FURNITURE AND FIXTURE. ACCORDINGLY, WE ALLOW THE ASSE SSEES APPEAL ON THIS GROUND. 17. GROUND NO. 4 IN ASSESSEES APPEAL IS AGAINST CO NFIRMING THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS. 34,23,9 44/- AND OTHER MISC. EXPENSES OF RS. 28,85,358/-. THE ASSESSING OFFICER O BSERVED THAT AS PER AUDIT REPORT, PRIOR PERIOD EXPENSES OF RS. 1,23,94,487 HA D BEEN DEBITED IN PROFIT AND LOSS ACCOUNT. THE ASSESSING OFFICER GAVE REASONA BLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE, WHICH WAS AVAILED BY THE ASSESSE E. AFTER CONSIDERING THE ASSESSEES REPLY, THE LEARNED ASSESSING OFFICER PAR TLY ACCEPTED THE ASSESSEES SUBMISSION BUT INTEREST EXPENSES OF RS. 34,23,944/- HAD BEEN CLAIMED AS WRONG CALCULATION OF EARLIER YEAR I.E. FOR A.Y. 2003 -04. AS THE ASSESSEE HAS NOT REVISED ITS RETURN U/S 139(5) OF THE ACT FOR CLAIMI NG THESE EXPENSES IN RESPECTIVE YEARS. LEASE RENT OF RS. 14,40,086/- OF OFFICE BUILDING AND RS. 28,300/- FOR RESIDENCE HAD BEEN CLAIMED ON THE BAS IS OF SETTLEMENT OF LEASE ENHANCEMENT BUT THE TERMS AND CONDITIONS OF THE LEA SE AGREEMENT DO NOT SHOW CLAUSE OF ENHANCEMENT OF RENT ON EXPIRY OF CER TAIN PERIOD, THEREFORE, TOTAL EXPENSE UNDER THIS HEAD WAS RS. 14,68,386/-. TH E MISC. EXPENSES OF RS. 5,30,283/- WAS ALSO NOT FOUND ALLOWABLE, THUS HE MADE TOTAL ADDITION OF RS. 63,09,302/- IN THE INCOME OF THE ASSESSEE. 25 18. BEING AGGRIEVED BY THE ORDER OF THE ASSESSING O FFICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE LEARNED CIT(A), WHO HA S ALLOWED THE APPEAL PARTIALLY BY OBSERVING AS UNDER:- I HAVE CONSIDERED FACTS OF THE CASE AND ARGUMENTS TAKEN BY SH. JHAWAR AND SH. PARWAL QUITE CAREFULLY. CIT(A)-II, JAIPUR WHIL E DISPOSING THE APPEAL OF THE APPELLANT FOR A.Y. 2003-04 VIDE ORDER DATED 30/3/2005 IN PARA 9.2 OF THE APPELLATE ORDER HAS HELD THAT SUCH CLAIM FOR INTEREST PAYMENT WAS NOT ALLOWABLE IN ABSENCE OF COGENT REASON S. SINCE, THERE IS NO CHANGE IN THE CIRCUMSTANCES, FOR THE PRESENT A.Y . THEREFORE, FOLLOWING THE SAME REASONING I ALSO HEREBY CONFIRM S UCH DISALLOWANCE OF INTEREST EXPENSES PERTAINING TO PRIOR PERIOD OF RS. 34,23,944/-. FURTHER, REGARDING REMAINING CLAIM OF RS. 28,85,358/- WHICH I S IN RESPECT OF RENT OF OFFICE BUILDING AND FOR MISC. EXPENSES FOLLOWING THE VIEW TAKEN BY CIT(A)-II, JAIPUR IN PARA 9.3 OF THE APPELLATE ORDER FOR A.Y. 2003-04 FOR THIS YEAR ALSO IN MY CONSIDERED VIEW, THE A.O. WAS PA RTIALLY CORRECT THAT THE APPELLANT WAS AWARE OF THE LIABILITY OF THE LEASE RENT ON EXPIRY OF EXISTING LEASE AGREEMENT ON THE BASIS OF CERTAIN IN CREASE IN THE RENT SCHEDULE BUT SETTLEMENT OF LEASE RENT TAKE SOME REA SONABLE TIME AND THEREFORE, THE A.O. IS DIRECTED TO VERIFY THE CLAIM OF THE APPELLANT AND HE IS DIRECTED TO ALLOW THE AMOUNT OF SUCH CLAIM FOR WHICH THE APPELLANT HAS FURNISHED THE DETAILS WHICH COULD NOT BE PAID IN EARLIER YEARS ON ACCOUNT OF NON AVAILABILITY OF THE BILLS AND BECAUS E OF CERTAIN FORMALITIES TO BE COMPLETED REGARDING APPROVAL OF MANAGEMENT ET C. WITH THIS DISCUSSION, THE SAME CLAIM OF RS. 28,85,358/- IS AL LOWED SUBJECT TO COMPLETE VERIFICATION FROM THE DETAILS FURNISHED AN D PAYMENT MADE DURING THE YEAR IN RESPECT OF ELECTRICITY/WATER/RENT EXPENSES/AUDIT FEE/TAXES/BUSINESS DEVELOPMENT/LAW CHARGES/STATUTORY /NEWS PAPER IN VIEW OF ITAT JAIPUR BENCH DECISION IN THE CASE OF RII CO WHICH HAS BEEN REFERRED BY CIT(A). NOW THE ASSESSEE IS IN APPEAL BEFORE US. 19. THE LEARNED A.R. FOR THE ASSESSEE HAS SUBMITTED THAT EXPENDITURE TO THE TUNE OF RS. 34,23,944/- PERTAINING TO WAIVER OF PEN AL INTEREST, REALIZATION OF 26 INTEREST DUE TO CHANGE OF COMPUTER SYSTEM, FOR OVER DRAFT CHARGES RECEIVED AFTER CLOSING OF BOOKS. THE EXPENDITURE TO THE TUNE OF RS. 14,68,386/- WAS PERTAINED TO PREVIOUS YEAR BUT CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. MOSTLY PERTAINED TO ENHANCEMENT OF RENT OF VARIOUS BRANCHES. THE OTHER EXPENSES WERE BOOKED AS AND WHEN CLAIMS ARE MADE AGAINST THE BANK TO PAY THE SAME. THE ACCOUNTS OF THE BRANCH GET S FINALIZED WITHIN A WEEK OF ANY OF THE YEAR AND THEREFORE, THE CLAIMS FOR TH ESE EXPENSES MADE THEREAFTER ARE TAKEN IN THE YEAR OF CLAIM ONLY. THES E EXPENSES ARE NATURE OF ELECTRICITY/WATER/RENT/AUDIT FEES/TAXES, WHICH HAS B EEN ALLOWED BY THE CIT(A) BUT SUBJECT TO VERIFICATION BY THE ASSESSING OFFICE R. BY FOLLOWING THE DECISION OF THE JAIPUR ITAT BENCH DECISION IN THE CASE OF RIICO AND EVEN THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. EXCEL INDUSTRIE S LTD. 93 DTR 457 HAS HELD THAT WHEN THE RATE OF TAX REMAINED THE SAME IN PRESENT ASSESSMENT YEAR AS WELL AS SUBSEQUENT ASSESSMENT YEAR, THE DISPUTE R AISED BY THE REVENUE IS ENTIRELY ACADEMIC OR AT BEST MAY HAVE A MINOR TAX E FFECT. THEREFORE, HE REQUESTED TO DELETE THE ADDITION MADE BY THE ASSESS ING OFFICER AND CONFIRMED BY THE CIT(A). HE FURTHER ARGUED THAT IN A.Y. 2003-0 4, IDENTICAL ISSUE HAS BEEN DECIDED BY THE ITAT JAIPUR BENCH IN ASSESSEES OWN C ASE IN ITA NO. 329/JP/2005 FOR A.Y. 2003-04. 20. AT THE OUTSET, THE LEARNED DR SUPPORTED THE ORD ER OF THE LEARNED ASSESSING OFFICER. 27 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOT H THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE PERIOD EXPENSES WERE CLAIMED BY THE ASSESSEE HAVE BEEN CRYSTALLIZED DURING THE YEAR UND ER CONSIDERATION. THE ASSESSEE HAS NUMBER OF BRANCHES IN ALL OVER THE IND IA AND CERTAIN EXPENSES OF PREVIOUS YEAR WERE CLAIMED AFTER THE CLOSING OF BOOK S OF ACCOUNT, WHICH HAS BEEN CLARIFIED BY THE AUDITOR IN AUDIT REPORT. THE G ENUINENESS OF THE EXPENSES HAS NOT BEEN DOUBTED BY THE LOWER AUTHORITIES. THUS, THESE EXPENSES WERE ALLOWABLE IN RESPECTIVE YEAR TO WHICH THEY PERTAINED BUT INFORMATION OF EXPENSES WITH EVIDENCE RECEIVED BY THE APPELLANT FRO M THE VARIOUS BRANCHES AFTER CLOSING OF BOOKS OF ACCOUNT. THE COORDINATE BE NCH HAS CONSIDERED THIS ISSUE IN A.Y. 2003-04 IN ASSESSEES OWN CASE. THE OP ERATIVE FINDING IS AS UNDER:- CONSIDERING THE ABOVE SUBMISSIONS WE FIND SUBSTANCE IN THE ARGUMENT OF THE LD. AR. PRIOR PERIOD EXPENDITURE REFERS TO T HOSE EXPENSES WHICH ARISE AS A RESULT OF ERROR OR OMISSION IN PREPARATI ON OF THE FINANCIAL STATEMENT OF EARLIER YEARS AS EXPLAINED IN ACCOUNTI NG STANDARD-5 ISSUED BY ICAI. IT IS NOT THE CASE OF THE A.O. THAT IN EAR LIER YEARS INTEREST ON FDR WAS NOT PROVIDED. SUCH INTEREST WAS PROVIDED MAN UALLY AND THE DIFFERENCE HAS ARISEN BECAUSE OF THE CALCULATION OF INTEREST ON COMPUTERIZATION. SUCH DIFFERENCE CANNOT BE CATEGORI ZED AS AN ERROR OR OMISSION. OTHERWISE ALSO THE EARLIER YEARS APPEAL WER E PENDING BEFORE US AND IF IT IS NOT ALLOWED IN THIS YEAR THE CLAIM O F THE ASSESSEE THAT IT SHOULD BE ALLOWED IN EARLIER YEARS IS REASONABLE AND PERMISSIBLE IN VIEW OF THE DECISION CITED BY LEARNED AR. WE THEREFORE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF PRIOR PERIOD EXPENSES OF RS. 36,46,004/-. THIS GROUND IS ALLOWED. 28 BY RESPECTIVE FOLLOWING THE COORDINATE BENCH DECISIO N IN ASSESSEES OWN CASE, WE ALSO HAVE CONSIDERED VIEW THAT THESE EXPENSES ARE ALLOWABLE DURING THE YEAR UNDER CONSIDERATION. THUS, THE ASSESSEE GETS RE LIEF FULLY ON THIS ISSUE. 22. GROUND NO. 4(II) OF THE ASSESSEES APPEAL IS AG AINST DISALLOWANCE OF MISC. EXPENSES OF RS. 28,85,358/-, WHICH HAS NOT BE EN PRESSED AS CLAIMED BY THE APPELLANT. THE ASSESSING OFFICER HIMSELF ALLOWED THE EXPENSES. 23. THE CROSS APPEAL I.E. ITA NO. 436/JP/2009 FILED BY THE REVENUE IS AGAINST DELETING THE ADDITION OF RS. 4,56,60,998/- BY TAKING THE INTEREST INCOME ON GOVERNMENT AND OTHER SECURITIES ON ACCRUA L BASIS INSTEAD OF DUE BASIS AS SHOWN BY THE ASSESSEE. THE ASSESSING OFFICE R OBSERVED THAT AS PER AUDIT REPORT AND PROFIT AND LOSS ACCOUNT AND BALANC E SHEET, THE ASSESSEE HAD APPLIED METHOD OF ACCOUNTANCY ACCRUAL BASIS FOR INT EREST INCOME. HOWEVER, IN COMPUTATION OF INCOME, THE INTEREST INCOME HAD BEEN OFFERED ON DUE BASIS. THE DETAILS ARE AS UNDER:- S.NO PARTICULARS INTEREST ON DUE BASIS INTEREST ON ACCRUED BASIS (I) INTEREST ON GOVERNMENT AND OTHER TRUSTEE SECURITIES 7,23,69,47,396 7,31,43,59,653 (II) INTEREST ON DEBENTURES 53,49,43,915 50,68,11,7 08 (III) DISCOUNT ON TREASURY BILLS 28,17,000 3,43,03, 242 (IV) INCOME ON OTHER INVESTMENTS 12,28,30,781 8,77, 25,486 TOTAL 7,89,75,39,092 7,94,32,00,090 THE ASSESSING OFFICER GAVE REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE, WHICH WAS CONSIDERED BY THE LEARNED ASSESSING OFFICER. HE CONSIDERED 29 THE COORDINATE ITAT BENCH DECISION IN ASSESSEES OWN CASE FOR A.YS. 1989-90, 1991-92 TO 1996-97 AND ALSO ANALYSED SECTION 145 OF THE ACT. THE LEARNED ASSESSING OFFICER HELD THAT THERE IS NO DISPUTE THA T THE ASSESSEE HAD ACCOUNTED FOR THE INTEREST ON ACCRUAL BASIS BY FOLL OWING THE MERCANTILE SYSTEM OF ACCOUNTING. AS PER SECTION 145 OF THE ACT, THE A SSESSEE HAD TO FOLLOW ACCOUNTING SYSTEM REGULARLY. COMPUTATION OF INCOME DOES NOT DEROGATE FROM THE PROVISIONS OF CHARGING SECTION. AS PER PROVISIO NS OF SECTION 2(45) OF THE ACT, THE TOTAL INCOME MEANS THE TOTAL AMOUNT OF INC OME REFERRED TO IN SECTION 5 COMPUTED IN THE MANNER LAID DOWN IN THIS ACT. THERE ARE LARGE NUMBER OF COURT PRONOUNCEMENTS WHEREIN IT HAS BEEN HELD THAT THE PROVISIONS OF SECTION 145(1) OF THE ACT ARE MANDATORY AND THE PROPER METH OD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE IS BINDING FOR TH E COMPUTATION OF TOTAL INCOME OF THE ASSESSEE. HE RELIED UPON IN THE CASE OF CIT VS. SAHARANPUR COTTON MANUFACTURING COMPANY LIMITED 6 ITR 36. THE AS SESSEE PREPARED ITS ACCOUNT OF MERCANTILE SYSTEM INCLUDES THE ACCRUAL I NTEREST IN TOTAL INCOME AND CLAIMED ENTIRE COST WHETHER ON PURCHASE OF SECURITIE S OR BROKEN PERIOD INTEREST AS EXPENDITURE. IT HAS BEEN CONCLUDED THAT ACCRUAL IS RULE OF BANKING. THE CLAIM OF UNCERTAINTY, WHICH HAS NOT BEEN REPORTED IN THE NOTES TO THE ANNUAL ACCOUNTS NOR THERE IS ANY ADVERSE COMMENT FOR THE S AME WAS FOUND IN AUDITORS REPORT. ANY ADJUSTMENT IN COMMERCIALLY CO MPUTED INCOME COULD BE ALLOWED IF THERE IS A LEGAL FICTION AVAILABLE UNDER THE LAW, OTHERWISE NO SUCH 30 ADJUSTMENT SHOULD BE MADE. THE SAME PRINCIPLE WAS ALS O CONFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. GOVERDH AN LIMITED 69 ITR 675 S.C. THE LEARNED CIT(A) HAS CONFIRMED THE ADDITION F OR A.Y. 1999-2000 TO A.Y. 2001-02 UNDER THE SAME HEAD. ACCORDINGLY, THE ADDIT ION OF RS. 4,56,60,998/- WAS MADE BY THE ASSESSING OFFICER. 24. BEING AGGRIEVED BY THE ORDER OF THE ASSESSING O FFICER, THE ASSESSEE CARRIED THE MATTER TO THE LEARNED CIT(A), WHO HAD ALLOWED THE APPEAL BY OBSERVING AS UNDER:- I HAVE CONSIDERED FACTS OF THE CASE AND ARGUMENTS TAKEN BY SH. JHAWAR AND SH. PARWAL QUITE CAREFULLY. IT IS A FACT THAT RI GHT FROM A.Y. 1991-92 TO A.Y. 2001-02 THIS ISSUE HAS BEEN DECIDED BY HON BLE ITAT JAIPUR BENCH IN FAVO8UR OF THE APPELLANT BANK. HONBLE ITA T HAS UPHELD THE VIEW TAKEN BY THE BANK THAT IT HAS RIGHTLY OFFERED T HE INTEREST INCOME ON DUE BASIS. THEREAFTER, ON PERUSAL OF THE MINUTES OF THE MEETING OF COD HELD ON 06/12/2007 FORWARDED BY CABINET SECRETARIAT VIDE THEIR LETTER DATED 26/12/2007 IN WHICH FOR ITEM NO. 23 TO 26 WHICH WERE WITH REFERENCE TO ITA NO. 617, 618, 619 AND 620/JP/2003 DATED 7/11/2006 A DECISION HAS BEEN CONVEYED THAT THE DISPUTE RELATES TO THE ACCOUNTING PRINCIPLE TO BE FOLLOWED FOR ACCOUNTING FOR INTEREST ON GOVERNMENT SECURITIES AND DEBENTURES DIE NOT INVOLVE ANY LOSS OF REVENUE TO THE DEPARTMENT AND THEREFORE, IT HAS DECLINED PERMISSIO N TO THE CBDT TO PERUSE APPEALS IN AFORESAID 4 CASES BEFORE THE HIGH COURT. FURTHER, ON PERUSAL OF CASES LISTED AT S.NO. 23 TO 26 THE ISSUE INVOLVED WAS THAT WHETHER ITAT HAS ERRED IN HOLDING THAT INTEREST ON GO VERNMENT SECURITIES AND DEBENTURES IS TO BE INCLUDED IN THE INCOME OF ASSESSEE ON ACTUAL AND NOT ON ACCRUAL BASIS DESPITE THE FACT TH AT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. WITH THIS DISCUSSION AND CONSIDERING ITAT JAIPUR BENCH DECISION ON THIS ISSUE IN THE CASE OF APPELLANT FOR EARLIER A.YRS. AS WELL AS CONSIDERING THE DECLINING OF THE PERMISSION TO THE CBDT TO PERUSE APPEALS AGAINST ITA T ORDERS BEFORE 31 HIGH COURT, THE SAID ADDITION MADE BY A.O. ON THIS ISSUE OF RS. 4,56,60,998/- IS NOT SUSTAINABLE AND A.O. IS DIRECT ED TO DELETE THE SAME. NOW THE REVENUE IS IN APPEAL BEFORE US. 25. THE LEARNED D.R. RELIED UPON THE ORDER OF THE AS SESSING OFFICER. AT THE OUTSET, THE LEARNED A.R. FOR THE ASSESSEE ARGUED TH AT THIS ISSUE HAS BEEN DECIDED BY THE HONBLE ITAT, JAIPUR BENCH, JAIPUR IN FAVOUR OF THE ASSESSEE RIGHT FROM A.Y. 1991-92 TO 2001-02. HE ALSO RELIED UPON THE FOLLOWING CASE LAWS:- (I) CIT VS. CITY UNION BANK LTD. 291 ITR 144 (MAD.). (II) CIT VS. FEDERAL BANK LTD. 301 ITR 188 (KER.) (III) CANARA BANK VS. JCIT 84 ITD 310 (BANG.) (TRIB.) THE ISSUE IS IDENTICAL, THEREFORE, THE REVENUES APP EAL MAY BE DISMISSED. 26. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE FACTS ARE IDENTICAL FOR A.Y. 2001-02. THE COORDINATE BENCH IN ITA NO. 578/JP/2009 HAS DECIDED THIS ISSUE AS UNDER:- CONSIDERING THE DECISION OF THIS BENCH IN ASSESSEE S OWN CASE, THE TWO DECISIONS OF THE HONBLE HIGH COURTS REFERRED BY TH E ASSESSEE, THE REFUSAL TO THE DEPARTMENT BY THE COMMITTEE OF DISPU TE TO PURSUE THIS MATTER IN THE HONBLE HIGH COURT IN EARLIER YEARS A S ALSO THE DISMISSAL OF SPECIAL LEAVE PETITION OF THE DEPARTMENT BY THE HON 'BLE SUPREME COURT IN CASE OF CIT VS. FEDERAL BANK REPORTED IN 313 ITR 2 6 (STATUTE), WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. THE INC OME FROM INTEREST ON GOVERNMENT SECURITIES/DEBENTURES ETC. IS THUS DIREC TED TO BE TAXED ON DUE BASIS. THE EFFECT OF THIS FOR THE YEAR, HOWEVER, BE THAT THE INCOME 32 ASSESSED BY THE A.O. WOULD INCREASE BY RS. 2,26,89,8 80/-. THUS ON PRINCIPLE THE GROUND OF THE ASSESSEE IS ALLOWED. BY RESPECTFULLY FOLLOWING THE DECISION OF THE COORDI NATE BENCH ON IDENTICAL ISSUE, WE ALSO DISMISS THE REVENUES APPEAL. 27. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 08/08/2014. SD/- SD/- (R.P. TOLANI) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR, DATED : 08 TH AUGUST, 2014 * RANJAN COPY FORWARDED TO :- 1. STATE BANK OF BIKANER & JAIPUR, TILAK MARG, C-SCH EME, JAIPUR. 2. THE A.C.I.T., CIRCLE-6, JAIPUR 3. THE CIT (A) 4. THE CIT 5. THE D/R GUARD FILE (I.T.A. NO. 278 & 436/JP/2009) BY ORDER, AR ITAT JAIPUR.