DCIT, Mangalore V. The Corporation Bank, Mangalore

ITA 496/BANG/2010

• Counselvise Citation: 49621114 RSA 2010
• Duration Of Justice: 4 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 20-10-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 12-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO CITIDR
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Wholly owned subsidiary; Bad and doubtful debts
• Section: 14A; 28; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.496/BANG/2010 ASSESSMENT YEAR : 2006-07 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1), MANGALORE. VS. THE CORPORATION BANK, HEAD OFFICE, P.B. NO.88, MANGALADEVI TEMPLE ROAD, PANDESHWAR, MANGALORE 575 001. PAN : AAACC 7425E APPELLANT RESPONDENT ITA NOS.815 & 816/BANG/2011 ASSESSMENT YEARS : 2008-09 & 2009-10 THE CORPORATION BANK, MANGALORE 575 001. PAN : AAACC 7425E VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1), MANGALORE. APPELLANT RESPONDENT REVENUE BY : SMT. G. APARNA RAO, CIT-I(DR) ASSESSEE BY : SHRI S. ANANTHAN, C.A. DATE OF HEARING : 20.10.2014 DATE OF PRONOUNCEMENT : 31.10.2014 ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 2 OF 38 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA 496/BANG/2010 IS AN APPEAL BY THE REVENUE AG AINST THE ORDER DATED 3.2.2010 OF THE CIT(APPEALS), MANGALORE RELAT ING TO A.Y. 2006-07. ITA NO. 815/BANG/2011 IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 27.1.2011 OF THE CIT(APPEALS), MYSORE RELATIN G TO A.Y. 2008-09 AND ITA NO.816/BANG/2011 IS ALSO AN APPEAL BY THE ASSES SEE AGAINST THE ORDER DATED 19.4.2011 OF THE CIT(APPEALS), MYSORE RELATIN G TO A.Y. 2009-10. ALL THESE APPEALS WERE HEARD TOGETHER. WE DEEM IT CONV ENIENT TO PASS A CONSOLIDATED ORDER. ITA NO.496/B/2010 (A.Y. 2006-07) 2. GROUNDS NO.1, 4.1 & 4.2 RAISED BY THE REVENUE AR E GENERAL IN NATURE AND CALL FOR NO SPECIFIC ADJUDICATION. 3. GROUNDS NO.2.1 TO 2.3 RAISED BY THE REVENUE READ S AS FOLLOWS:- 2.1 THE LEARNED CIT(A) FAILED TO APPRECIATE THE F ACT THAT THE DISTINCTION MADE BY THE ASSESSEE IN RESPECT OF URBA N BAD DEBTS DEDUCTIBLE U/S 36(1)(VII) AND FOR RURAL DEBTS U/S 3 6(1)(VIIA) IS NOT TENABLE AS THERE ARE NO SUCH DISTINCTIONS AS PER TH E SAID SECTIONS. 2.2 THE LD. CIT(A) HAS NOT TAKEN INTO COGNIZANCE T HE FACT THAT THE DEDUCTIONS U/S 36(1)(VII) ARE SUBJECT TO THE PR OVISIONS OF SEC 36(2)(V) WHICH IS OVERRIDING IN NATURE. 2.3 THE LEARNED CIT (A) ERRED IN NOT CONSIDERING T HE ACCOUNTING PRINCIPLE THAT BAD DEBTS ACTUALLY WRITTE N OFF U/S 36(1)(VII) HAS TO BE FIRST ADJUSTED AGAINST THE PRO VISION FOR BAD AND DOUBTFUL DEBTS CREATED U/S 36(1)(VIIA) AND THE BALANCE OF UNABSORBED BAD DEBTS ONLY CAN BE WRITTEN OFF. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 3 OF 38 4. THE ASSESSEE IS A NATIONALIZED BANK. IN THE COU RSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED DEDUCTION RS.131,78,25,000/- U/S. 36(1)(VII) OF THE INCOME TAX ACT, 1961 (ACT) AS AN ALLOWABLE DEDUCTION REGARDING THE BAD D EBTS WRITTEN OFF. ADDITIONALLY, THE ASSESSEE HAD ALSO CLAIMED DEDUCTI ON U/S. 36(1)(VIIA)(A) OF THE ACT AMOUNTING TO RS. 128,40,29,809/- ON ACCOUNT OF PROVISION FOR BAD & DOUBTFUL DEBTS. AS PER THE ANNEXURE ENCLOSED WITH THE RETURN OF INCOME, THE PROVISION FOR BAD DEBTS MADE AS PER THE BOOKS W AS RS. 187 CRORES OUT OF WHICH PROVISION FOR BAD DEBTS FOR RURAL BRANCHES WAS RS. 55,21,75,00B/- AND BALANCE RS. 131,78,25,000/- WAS CLAIMED AS BAD DEBTS WRITTEN OFF U/S.36(1)(VII) OF THE ACT. THE ASSESSEE VIDE ITS L ETTER DTD: 19-11-2008 SUBMITTED BEFORE THE AO THAT PROVISION FOR BAD & DO UBTFUL DEBTS FOR RURAL BRANCHES FOR THE ASST. YEAR 2006-07 WAS ONLY RS. 18 .03 CRORES AND NOT RS. 55.22 CRORES WHICH WAS INADVERTENTLY REPORTED I N THE RETURN OF INCOME. CONSEQUENTLY, THE ASSESSEE ENHANCED THEIR CLAIM FOR DEDUCTION U/S.36(1)(VII) TO RS. 168.97 CRORES INSTEAD OF RS 1 31.78 CRORES. 5. SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 (THE ACT) ALLOWS DEDUCTION IN COMPUTING THE INCOME REFERRED TO IN SE CTION 28 SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), THE AMOUNT OF ANY BA D DEBT OR PART THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUN TS OF THE ASSESSEE DURING THE PREVIOUS YEAR. PROVISO TO SEC.36(1)(VII) PROVID ES AS FOLLOWS: ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 4 OF 38 PROVIDED THAT IN THE CASE OF AN ASSESSEE TO WHICH CLAUSE (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO AN Y SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHIC H SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROV ISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE. EXPLANATION.FOR THE PURPOSE OF THIS CLAUSE, ANY BA D DEBT OR PART THEREOF WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT S OF THE ASSESSEE SHALL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFU L DEBTS MADE IN THE ACCOUNTS OF THE ASSESSEE. 6. SECTION 36(1)(VIIA)(A) OF THE ACT ALLOWS DEDUCTI ON IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHE DULED BANK NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA OR A NON- SCHEDULED BANK OR A CO-OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTUR AL AND RURAL DEVELOPMENT BANK:- AN AMOUNT NOT EXCEEDING SEVEN AND ONE-HALF PER CEN T (7.5%) OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCT ION UNDER THIS CLAUSE AND CHAPTER VIA) AND AN AMOUNT NOT EXCE EDING 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER. 7. A COMPARISON OF SEC.36(1)(VII) AND SEC.36(1)(VII A)(A) WOULD SHOW THAT SECTION 36(1)(VII) OF THE ACT PROVIDES DEDUCTI ONS IN RESPECT OF BAD DEBTS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE, WHILE SECTION 36(1)(VIIA)(A) PROVIDES THE DEDUCTION MEREL Y FOR MAKING PROVISION FOR BAD AND DOUBTFUL DEBTS UP TO THE PRESCRIBED LIM IT IN RESPECT OF AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES (AAAR) OF SUCH BANK. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 5 OF 38 8. IN THE LIGHT OF THE ABOVE PROVISIONS OF LAW APPL ICABLE TO BANKS WHICH CLAIM DEDUCTION U/S.36(1)(VIIA)(A) OF THE ACT, THE EXAMINED THE AFORESAID CLAIM MADE BY THE ASSESSEE. THE AO FOUND THAT AS PER ACTUAL PROVISION MADE AS PER THE BOOKS OF ACCOUNTS TOWARDS BAD & DOU BTFUL DEBTS WAS RS. 187,00,00,000/-. THE AO WAS OF THE VIEW THAT SINCE THE ASSESSEE HAD ALREADY CLAIMED RS. 128,40,29,809/- U/S. 36(1)(VIIA )(A) OF THE ACT TOWARDS PROVISION FOR BAD AND DOUBTFUL DEBTS, THE CLAIM FO R DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF U/S.36(1)(VII) OF THE ACT OF A SUM OF RS.168.97 CRORES COULD NOT BE ALLOWED. THE AO HELD THAT AS LAID DOW N IN THE PROVISO TO SEC.36(1)(VII) BAD DEBTS WRITTEN OFF SHOULD FIRST B E ADJUSTED TOWARDS PROVISION CREATED U/S.36(1)(VIIA) OF THE ACT AND ON LY IF THE BAD DEBTS WRITTEN OFF IS MORE THAN THE CREDIT BALANCE IN THE PBDD ACC OUNT CAN DEDUCTION U/S.36(1)(VII) BE ALLOWED TO THE EXTENT OF SUCH EXC ESS. THE AO WAS OF THE VIEW THAT SECTION 36(1)(VII) & 36(1)(VIIA)(A) OF TH E ACT CLEARLY STIPULATE THAT THE AMOUNT OF BAD DEBTS WRITTEN OFF AND CLAIMED U/S . 36(1)(VII) IS SUBSUMED IN THE PROVISION FOR BAD & DOUBTFUL DEBTS MADE IN T HE BOOKS OF ACCOUNTS AT RS.187,00,00,000. ACCORDING TO THE AO THEREFORE AS PER THE PROVISO TO SEC.36(1)(VII) AND ITS EXPLANATION REFERRED TO ABOV E, THE ASSESSEE IS NOT ELIGIBLE TO CLAIM BAD DEBTS U/S. 36(1)(VII) OF THE ACT. THEREFORE THE CLAIM WAS DISALLOWED AND RS.168.97 CRORES WAS ADDED TO TH E TOTAL INCOME. 9. AGGRIEVED BY THE AFORESAID DISALLOWANCE, ASSESSE E PREFERRED APPEAL BEFORE THE CIT(APPEALS). WITH REGARD TO DEDUCTION U/S.36(1)(VII) OF THE ACT, THE ASSESSEE CONTENDED THAT PROVISO TO SEC.36(1)(VI I) IS APPLICABLE ONLY TO ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 6 OF 38 BAD DEBTS WRITTEN OFF OF RURAL DEBTS AND NOT TO NON -RURAL DEBTS. SINCE THE CLAIM OF DEDUCTION OF RS.168,97,00,000 MADE BY THE ASSESSEE U/S.36(1)(VII) OF THE ACT PERTAINED TO BAD DEBTS OF NON-RURAL DEBTS, THE CREDIT BALANCE IN THE PBDD ACCOUNT SHOULD NOT BE LOOKED IN TO AT ALL. IT WAS CONTENDED THAT BAD DEBTS WRITTEN OFF UNDER SECTION 36(1)(VII) AND PROVISION FOR BAD AND DOUBTFUL RURAL DEBTS UNDER SECTION 36(1 )(VIIA) ARE TWO DISTINCT AND SEPARATE CLASS OF DEBTS. THE BAD DEBTS REFERRED TO IN SECTION 36(1)(VII) ARE URBAN DEBTS, WHEREAS THE BAD DEBTS REFERRED TO IN SECTION 36(1)(VIIA) ARE RURAL DEBTS. PROVISO TO SECTION 36(1) PROVIDES THAT RURAL DEBTS CANNOT BE WRITTEN OFF IN EXCESS OF THE PROVISION MADE FOR SUC H DEBTS AND IS APPLICABLE ONLY IF THE WRITE-OFF AND THE PROVISION ARE IN RESP ECT OF THE SAME CLASS OF DEBTS. IT WAS ALSO POINTED OUT THAT BOTH THE ALLOW ANCES ENVISAGED UNDER SECTION 36(1)(VII) AND 36(1)(VIIA) ARE ADMISSIBLE D EDUCTIONS IN COMPUTING THE INCOME OF BANKS AND ARE INDEPENDENT OF EACH OTH ER IS CONFIRMED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT) CIRCULAR NO. 2 58, DATED 14.06.1979, WHICH IS STILL IN FORCE. PROVISIONS MADE UNDER SECT ION 36(1)(VIIA) ARE IN RESPECT OF AGGREGATE ADVANCES MADE BY RURAL BRANCHE S, WHEREAS THE WRITE- OFF UNDER SECTION 36(1)(VII) IS IN RESPECT OF A SEP ARATE SET OF URBAN BRANCHES DEBTS, I.E., OTHER THAN THE RURAL DEBTS C OVERED BY THE PROVISION MADE UNDER SECTION 36(1)(VIIA). THE PROVISO CLEARLY INDICATES THAT THE DEBTS FOR WHICH PROVISION HAS BEEN MADE UNDER SECTION 36( 1)(VIIA), IF WRITTEN OFF UNDER SECTION 36(1)(VII), WOULD NOT BE ALLOWED TO T HE EXTENT OF THE PROVISION MADE FOR SUCH DEBT. THE PROVISO DOES NOT APPLY TO DEBTS THAT ARE ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 7 OF 38 INDEPENDENT OF THE PROVISIONS UNDER SECTION 36(1)(V IIA), VIZ., URBAN DEBTS. THE RESTRICTION LAID DOWN BY THE PROVISO IS TO PREV ENT DOUBLE CLAIMS FOR DEDUCTION UNDER BOTH SECTIONS 36(1)(VII) AND 36(1)( VIIA) IN RESPECT OF RURAL DEBTS. IT WAS ALSO BROUGHT TO THE NOTICE OF THE CI T(A) THAT THE HONBLE HIGH COURT OF KARNATAKA HAS HELD IN DCIT (ASST.) SPECIAL RANGE, BANGALORE, VS. THE KARNATAKA BANK LTD. [2008 175 TA XMAN 325 , THAT DEDUCTION UNDER SECTION 36(1)(VII) IS ALLOWA BLE INDEPENDENTLY AND IRRESPECTIVE OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS CREATED BY THE ASSESSEE IN RELATION TO THE ADVANCES OF THE RURAL B RANCHES, SUBJECT TO THE LIMITATION THAT AN AMOUNT SHOULD NOT BE DEDUCTED TW ICE UNDER SECTION 36(1) (VII) AND 36(1) (VIA) SIMULTANEOUSLY. THE FACTS IN THAT CASE WERE THAT THE APPELLANT BANK HAD, IN THE RETURN FOR ASSESSMENT YE AR 1993-94 FILED ON 30- 12-1993, CLAIMED A SUM OF RS. 38,28,836 AS BAD DEBT S ACTUALLY WRITTEN OFF. IT HAD ALSO CLAIMED PROVISION FOR BAD AND DOUBTFUL DEBTS UNDER SECTION 36(1)(VIA) IN A SUM OF RS. 1,10,94,360. THE ASSESSI NG OFFICER DID NOT ALLOW THE CLAIM FOR DEDUCTION OF DEBTS AMOUNTING TO RS. 3 8,28,836 ACTUALLY WRITTEN OFF. THE CIT(A) REJECTED THE UPHELD THE ORDER OF AS SESSING OFFICER AND THE ITAT HELD THAT DEDUCTION UNDER SECTION 36(1)(VII) W AS ALLOWABLE INDEPENDENTLY AND IRRESPECTIVE OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS CREATED BY THE ASSESSEE IN RELATION TO ADVANCES OF RURAL BRANCHES, SUBJECT TO THE IMITATION THAT AN AMOUNT SHOULD NOT BE DEDUC TED TWICE UNDER SECTION 36(1)(VII) AND 36(1)(VIIA) SIMULTANEOUSLY. IT WAS POINTED OUT THAT THE HONBLE JURISDICTIONAL HIGH COURT CONSIDERED THE QU ESTIONS OF LAW ANSWERED ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 8 OF 38 BY TWO JUDGMENTS OF KERALA AND MADRAS HIGH COURTS I N SOUTH INDIAN BANK LTD. VS. CIT [2003 262 ITR 579 , AND IN CIT VS. CITY UNION BANK LTD. [20071 291 ITR 144 . THE RATIO OF THE CASE OF KERALA HIGH COURT, AFTER CONSIDERING THE PROVISIONS OF SECTION 36(1)(VII) AND (VIIA), WAS THAT A SCHEDULED BANK MIGHT BE HAVING BOTH URBAN AN D RURAL BRANCHES AND ADVANCES WERE GIVEN FROM BOTH BRANCHES. HAVING REGA RD TO THE HAZARDS INVOLVED IN REALISING THE ADVANCES MADE BY RURAL BR ANCHES, PARTICULARLY TO AGRICULTURISTS, CERTAINLY THE ASSESSEE-BANK WOULD P REFER TO MAKE PROVISION FOR BAD DEBT IN RESPECT OF ADVANCES MADE IN THE RUR AL BRANCHES. IF AN ASSESSEE MADE A PROVISION UNDER CLAUSE (VIIA) IN RE SPECT OF BAD DEBTS RELATING TO RURAL ADVANCES ONLY, TO DENY SUCH AN AS SESSEE THE BENEFIT PROVIDED UNDER CLAUSE (VII) WHICH WAS AVAILABLE TO ALL OTHER ASSESSEES WHO WERE ENGAGED IN MONEY LENDING BUSINESS WOULD RESULT IN DISCRIMINATION WITHOUT REASON. THE LEGISLATURE COULD NOT BE PRESU MED TO HAVE INTENDED SUCH A RESULT IN THE CASE OF SCHEDULED BANKS. THE I NTENTION OF THE LEGISLATURE IN ENACTING THE PROVISO TO CLAUSE (VII) OF SECTION 36(1) AND CLAUSE (V) TO SECTION 36(2) SIMULTANEOUSLY WAS ONLY TO SEE THAT A DOUBLE BENEFIT IN RESPECT OF THE SAME BAD DEBT IS NOT BEIN G GIVEN TO A SCHEDULED BANK. IT WAS ONLY FOR THE SAID PURPOSE THAT THE PRO VISO AND CLAUSE (V) WERE INTRODUCED SIMULTANEOUSLY BY THE AMENDMENT ACT, 198 5, WITH EFFECT FROM APRIL 1, 1985. THE SCOPE OF THE PROVISO TO CLAUSE ( VII) OF SECTION 36(1) OF THE ACT WAS ONLY TO DENY THE DEDUCTION TO THE EXTENT OF BAD DEBT WRITTEN OFF IN THE BOOKS WITH RESPECT TO WHICH PROVISION WAS MADE UNDER CLAUSE (VIIA) OF ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 9 OF 38 THE ACT. IF THE BAD DEBT WRITTEN OFF RELATED TO DEB TS OTHER THAN FOR WHICH THE PROVISION WAS MADE UNDER CLAUSE (VIIA), SUCH DEBTS WOULD FALL SQUARELY UNDER THE MAIN PART OF CLAUSE (VII) WHICH WAS ENTIT LED TO DEDUCTION, AND IN RESPECT OF THAT PART OF THE DEBT WITH REFERENCE TO WHICH A PROVISION WAS MADE UNDER CLAUSE (VIIA), THE PROVISO WOULD OPERATE TO LIMIT THE DEDUCTION TO THE EXTENT OF THE DIFFERENCE BETWEEN THAT PART O F DEBT WRITTEN OFF IN THE PREVIOUS YEAR AND THE CREDIT BALANCE IN THE PROVISI ON FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER CLAUSE (VIIA). IF THE BAD DEBT WRITTEN OFF RELATED TO DEBTS OTHER THAN THOSE FOR WHICH PROVISION WAS M ADE UNDER SECTION 36(1)(VIIA), SUCH DEBTS WOULD FALL SQUARELY UNDER T HE MAIN PART OF SUB- SECTION (VII) AND WOULD BE ENTITLED TO THE DEDUCTIO N. IN RESPECT OF THAT PART OF DEBT WITH REFERENCE TO WHICH A PROVISION WAS MADE U NDER CLAUSE (VIIA), THE PROVISO WOULD OPERATE TO LIMIT THE DEDUCTION TO THE EXTENT OF THE DIFFERENCE BETWEEN THAT PART OF THE DEBT WRITTEN OFF IN THE PR EVIOUS YEAR AND THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER CLAUSE (VIIA). 10. THE LD. CIT(APPEALS) AGREED WITH THE CONTENTION S PUT FORTH BY THE ASSESSEE AND HE HELD AS FOLLOWS:- 7. I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. IN THE LATEST DECISION ON THE SUBJECT, THE HONBLE HIGH CO URT OF KARNATAKA HAS, IN THE CASE OF DCIT (ASST.) SPECIAL RANGE, BANGALORE, VS. THE KARNATAKA BANK LTD. (2008) 175 T AXMAN 325, FOR ASSESSMENT YEAR 1993-94, HELD THAT DEDUCTI ON UNDER SECTION 36(1) (VII) WAS ALLOWABLE INDEPENDENTLY AND IRRESPECTIVE OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS CREATED BY THE ASSESSEE IN RELATION TO THE ADVANCES OF THE RURAL B RANCHES, SUBJECT ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 10 OF 38 TO THE LIMITATION THAT AN AMOUNT SHOULD NOT BE DEDU CTED TWICE UNDER SECTION 36(1) (VII) AND 36(1)(VIA) SIMULTANEO USLY. 8. THE HONBLE JURISDICTIONAL HIGH COURT CONSIDERE D THE QUESTIONS OF LAW ANSWERED BY TWO JUDGMENTS OF KERAL A AND MADRAS HIGH COURTS IN SOUTH INDIAN BANK LTD. VS. CI T [2003] 262 ITR 579, AND IN CIT VS. CITY UNION BANK LTD. [2 007] 291 ITR 144. THE RATIO OF THE CASE OF KERALA HIGH COURT , AFTER CONSIDERING THE PROVISIONS OF SECTION 36(1)(VII) AN D (VIIA), WAS THAT A SCHEDULED BANK MIGHT BE HAVING BOTH URBAN AN D RURAL BRANCHES AND ADVANCES WERE GIVEN FROM BOTH BRANCHES . HAVING REGARD TO THE HAZARDS INVOLVED IN REALIZING THE ADV ANCES MADE BY RURAL BRANCHES, PARTICULARLY TO AGRICULTURISTS, CER TAINLY THE ASSESSEE-BANK WOULD PREFER TO MAKE PROVISION FOR BA D DEBT IN RESPECT OF ADVANCES MADE IN THE RURAL BRANCHES. IF AN ASSESSEE MADE A PROVISION UNDER CLAUSE (VIIA) IN RESPECT OF BAD DEBTS RELATING TO RURAL ADVANCES ONLY, TO DENY SUCH AN AS SESSEE THE BENEFIT PROVIDED UNDER CLAUSE (VII) WHICH WAS AVAIL ABLE TO ALL OTHER ASSESSEES WHO WERE ENGAGED IN MONEY LENDING B USINESS WOULD RESULT IN DISCRIMINATION WITHOUT REASON. 9. THE LEGISLATURE COULD NOT BE PRESUMED TO HAVE INTENDED SUCH A RESULT IN THE CASE OF SCHEDULED BANKS. THE I NTENTION OF THE LEGISLATURE IN ENACTING THE PROVISO TO CLAUSE (VII) OF SECTION 36(1) AND CLAUSE (V) TO SECTION 36(2) SIMULTANEOUSLY WAS ONLY TO SEE THAT A DOUBLE BENEFIT IN RESPECT OF THE SAME BAD DE BT IS NOT BEING GIVEN TO A SCHEDULED BANK. IT WAS ONLY FOR THE SAID PURPOSE THAT THE PROVISO AND CLAUSE (V) WERE INTRODUCED SIMULTAN EOUSLY BY THE AMENDMENT ACT, 1985, WITH EFFECT FROM APRIL 1, 1985 . 10. THE SCOPE OF THE PROVISO TO CLAUSE (VII) OF S ECTION 36(1) OF THE ACT WAS ONLY TO DENY THE DEDUCTION TO THE EXTEN T OF BAD DEBT WRITTEN OFF IN THE BOOKS WITH RESPECT TO WHICH PROV ISION WAS MADE UNDER CLAUSE (VIIA) OF THE ACT. IF THE BAD DEB T WRITTEN OFF RELATED TO DEBTS OTHER THAN FOR WHICH THE PROVISION WAS MADE UNDER CLAUSE (VIIA), SUCH DEBTS WOULD FALL SQUARELY UNDER THE MAIN PART OF CLAUSE (VII) WHICH WAS ENTITLED TO DEDUCTIO N, AND IN RESPECT OF THAT PART OF THE DEBT WITH REFERENCE TO WHICH A PROVISION WAS MADE UNDER CLAUSE (VIIA), THE PROVISO WOULD OPERATE TO LIMIT THE DEDUCTION TO THE EXTENT OF THE DIFFERENCE BETWEEN T HAT PART OF DEBT WRITTEN OFF IN THE PREVIOUS YEAR AND THE CREDIT BAL ANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE U NDER CLAUSE (VIIA). ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 11 OF 38 THE ADDITION MADE BY THE AO WAS DELETED BY THE CIT( A) ON THE ABOVE REASONING. 11. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS RAISED GROUNDS NO. 2.1 TO 2.3 BEFORE THE TRIBUNAL. THE LD . DR RELIED ON THE ORDER OF THE AO. THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK V. CIT, 343 ITR 270 (SC) , WHEREIN THE HONBLE SUPREME COURT HAS CLEARLY HEL D THAT DEDUCTION U/S. 36(1)(VII) OF THE ACT IS AN INDEPEND ENT DEDUCTION AND THE PROVISION FOR DOUBTFUL DEBTS MADE U/S. 36(1)(VIIA) OF THE ACT HAS NOTHING TO DO WITH THE CLAIM FOR DEDUCTION U/S. 36(1)(VII) OF THE ACT. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IDEN TICAL ISSUE RAISED BY THE REVENUE IN GROUNDS NO.2.1 TO 2.3 HAD COME FOR C ONSIDERATION BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA). THE FACTS OF THE CASE BEFORE THE HONBLE SUPREME CO URT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA ) WAS THAT THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF IN RESPECT OF N ON-RURAL BRANCHES U/S.36(1)(VII) OF THE ACT. THE AO NOTICED THAT THE RE WAS ALREADY CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT U/S.36(1)(VIIA) (A) OF THE ACT, WHICH WAS IN EXCESS OF THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS. THE AO AFTER M AKING REFERENCE TO PROVISO TO SEC.36(1)(VII) OF THE ACT AND ALSO SEC.3 6(2)(V) OF THE ACT WAS OF THE VIEW THAT THE ASSESSEE COULD NOT BE ALLOWED THE DEDUCTION CLAIMED ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 12 OF 38 BECAUSE (I) THE AMOUNT CLAIMED AS DEDUCTION ON ACCO UNT OF BAD DEBTS WAS NOT THE EXCESS AVAILABLE IN THE CREDIT OF THE PROVI SION FOR BAD AND DOUBTFUL DEBTS ACCOUNT CREATED U/S.36(1)(VIIA)(A) OF THE ACT AND (II) THAT U/S.36(2)(V) OF THE ACT THE AMOUNT OF BAD DEBTS WRITTEN OFF SHOU LD FIRST BE DEBITED IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT CREATE D U/S.36(1)(VIIA)(A) OF THE ACT. THE STAND OF THE ASSESSEE WAS THAT SINCE THE CLAIM OF DEDUCTION OF BAD DEBTS MADE BY THE ASSESSEE WAS U/S.36(1)(VII ) OF THE ACT AND PERTAINED TO BAD DEBTS OF NON-RURAL DEBTS, THE CRED IT BALANCE IN THE PBDD ACCOUNT SHOULD NOT BE LOOKED INTO AT ALL BECAUSE IT PERTAINS ONLY TO RURAL BRANCHES. THE HONBLE SUPREME COURT HELD: (I) THE PROVISIONS OF SECTION 36(1)(VII) AND 36(1)(VIIA ) ARE SEPARATE ITEMS OF DEDUCTION. THESE ARE INDEPENDENT PROVISIONS AND, THEREFORE, CANNOT BE INTERMINGLED OR READ INTO EACH OTHER. (II) CLEAR LEGISLATIVE INTENT OF THE RELEVANT PROVISIONS AND UNAMBIGUOUS LANGUAGE OF THE CIRCULARS WITH REFERENC E TO THE AMENDMENTS TO S. 36 DEMONSTRATE THAT THE DEDUCTION ON ACCOUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS UNDER S. 3 6(1)(VIIA) IS DISTINCT AND INDEPENDENT OF THE PROVISIONS OF S. 36 (1)(VII) RELATING TO ALLOWANCE OF THE BAD DEBTS. THE LEGISLA TIVE INTENT WAS TO ENCOURAGE RURAL ADVANCES AND THE MAKING OF P ROVISIONS FOR BAD DEBTS IN RELATION TO SUCH RURAL BRANCHES. (III) THE LANGUAGE OF S. 36(1)(VII) IS UNAMBIGUOUS AND DO ES NOT ADMIT OF TWO INTERPRETATIONS. IT APPLIES TO ALL BAN KS, COMMERCIAL OR RURAL, SCHEDULED OR UNSCHEDULED. IT GIVES A BENE FIT TO THE ASSESSEE TO CLAIM A DEDUCTION ON ANY BAD DEBT OR PA RT THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUN TS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THIS BENEFIT IS SUB JECT ONLY TO S. 36(2). IT IS OBLIGATORY UPON THE ASSESSEE TO PROVE TO THE AO THAT THE CASE SATISFIES THE INGREDIENTS OF S. 36(1)(VII) ON THE ONE HAND ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 13 OF 38 AND THAT IT SATISFIES THE REQUIREMENTS STATED IN S. 36(2) ON THE OTHER. THE PROVISO TO S. 36(1)(VII) DOES NOT, IN AB SOLUTE TERMS, CONTROL THE APPLICATION OF THIS PROVISION AS IT COM ES INTO OPERATION ONLY WHEN THE CASE OF THE ASSESSEE IS ONE WHICH FALLS SQUARELY UNDER S. 36(1)(VIIA). THE EXPLANATION TO S . 36(1)(VII) SPECIFICALLY EXCLUDED ANY PROVISION FOR BAD AND DOU BTFUL DEBTS MADE IN THE ACCOUNT OF THE ASSESSEE FROM THE AMBIT AND SCOPE OF 'ANY BAD DEBT, OR PART THEREOF, WRITTEN OFF AS I RRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE'. THUS, THE CONCEPT OF MAKING A PROVISION FOR BAD AND DOUBTFUL DEBTS WILL FALL OUTS IDE THE SCOPE OF S. 36(1)(VII) SIMPLICITER. (IV) AS PER THE PROVISO TO CL. (VII) OF S. 36(1), THE DE DUCTION ON ACCOUNT OF THE ACTUAL WRITE OFF OF BAD DEBTS WOULD BE LIMITED TO EXCESS OF THE AMOUNT WRITTEN OFF OVER THE AMOUNT OF THE PROVISION WHICH HAD ALREADY BEEN ALLOWED UNDER CL. (VIIA). THE PROVISO BY AND LARGE PROTECTS THE INTERESTS OF THE REVENUE. IN CASE OF RURAL ADVANCES WHICH ARE COVERED BY CL. (VI IA), THERE WOULD BE NO SUCH DOUBLE DEDUCTION. THE PROVISO, IN ITS TERMS, LIMITS ITS APPLICATION TO THE CASE OF A BANK TO WHI CH CL. (VIIA) APPLIES. INDISPUTABLY, CL. (VIIA)(A) APPLIES ONLY T O RURAL ADVANCES. THE HONBLE CHIEF JUSTICE, HIS LORDSHIP MR. S.H. KA PADIA, IN HIS CONCURRING JUDGMENT HAD SUMMED UP THE POSITION IN THE FOLLOWIN G WORDS: THE PROVISIONS OF CL. (VIIA) OF S. 36(1) RELATING TO THE DEDUCTION ON ACCOUNT OF THE PROVISION FOR BAD AND DOUBTFUL DE BT(S) IS DISTINCT AND INDEPENDENT OF THE PROVISIONS OF S. 36 (1)(VII) RELATING TO ALLOWANCE OF THE BAD DEBT(S). IN OTHER WORDS, TH E SCHEDULED COMMERCIAL BANKS WOULD CONTINUE TO GET THE FULL BEN EFIT OF THE WRITE OFF OF THE IRRECOVERABLE DEBT(S) UNDER S. 36( 1)(VII) IN ADDITION TO THE BENEFIT OF DEDUCTION FOR THE PROVIS ION MADE FOR BAD AND DOUBTFUL DEBT(S) UNDER S. 36(1)(VIIA). A RE ADING OF THE CIRCULARS ISSUED BY CBDT INDICATES THAT NORMALLY A DEDUCTION FOR BAD DEBT(S) CAN BE ALLOWED ONLY IF THE DEBT IS WRIT TEN OFF IN THE BOOKS AS BAD DEBT(S). NO DEDUCTION IS ALLOWABLE IN RESPECT OF A MERE PROVISION FOR BAD AND DOUBTFUL DEBT(S). BUT IN THE CASE OF ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 14 OF 38 RURAL ADVANCES, A DEDUCTION WOULD BE ALLOWED EVEN I N RESPECT OF A MERE PROVISION WITHOUT INSISTING ON AN ACTUAL WRITE OFF. HOWEVER, THIS MAY RESULT IN DOUBLE ALLOWANCE IN THE SENSE TH AT IN RESPECT OF SAME RURAL ADVANCE THE BANK MAY GET ALLOWANCE ON TH E BASIS OF CL. (VIIA) AND ALSO ON THE BASIS OF ACTUAL WRITE OFF UN DER CL. (VII). THIS SITUATION IS TAKEN CARE OF BY THE PROVISO TO CL. (V II) WHICH LIMITS THE ALLOWANCE ON THE BASIS OF THE ACTUAL WRITE OFF TO THE EXCESS, IF ANY, OF THE WRITE OFF OVER THE AMOUNT STANDING TO T HE CREDIT OF THE ACCOUNT CREATED UNDER CL. (VIIA). CBDT ITSELF HAS R ECOGNIZED THE POSITION THAT A BANK WOULD BE ENTITLED TO BOTH THE DEDUCTIONS, ONE UNDER CL. (VII) OF S. 36(1) ON THE BASIS OF ACTUAL WRITE OFF AND ANOTHER, ON THE BASIS OF CL. (VIIA) IN RESPECT OF A MERE PROVISION. FURTHER, TO PREVENT DOUBLE DEDUCTION, THE PROVISO T O CL. (VII) WAS INSERTED WHICH SAYS THAT IN RESPECT OF BAD DEBT(S) ARISING OUT OF RURAL ADVANCES, THE DEDUCTION ON ACCOUNT OF ACTUAL WRITE OFF WOULD BE LIMITED TO THE EXCESS OF THE AMOUNT WRITTE N OFF OVER THE AMOUNT OF THE PROVISION ALLOWED UNDER CL. (VIIA). T HUS, THE PROVISO TO CL. (VII) STOOD INTRODUCED IN ORDER TO P ROTECT THE REVENUE. IT WOULD BE MEANINGLESS TO INVOKE THE SAID PROVISO WHERE THERE IS NO THREAT OF DOUBLE DEDUCTION. IN CA SE OF RURAL ADVANCES, WHICH ARE COVERED BY THE PROVISIONS OF CL . (VIIA), THERE WOULD BE NO SUCH DOUBLE DEDUCTION. THE PROVISO LIMI TS ITS APPLICATION TO THE CASE OF A BANK TO WHICH CL. (VII A) APPLIES. CLAUSE (VIIA) APPLIES ONLY TO RURAL ADVANCES. THIS HAS BEEN EXPLAINED BY THE CIRCULARS ISSUED BY CBDT. THUS, TH E PROVISO INDICATES THAT IT IS LIMITED IN ITS APPLICATION TO BAD DEBT(S) ARISING OUT OF RURAL ADVANCES OF A BANK. IT FOLLOWS THAT IF THE AMOUNT OF BAD DEBT(S) ACTUALLY WRITTEN OFF IN THE ACCOUNTS OF THE BANK REPRESENTS ONLY DEBT(S) ARISING OUT OF URBAN ADVANC ES, THE ALLOWANCE THEREOF IN THE ASSESSMENT IS NOT AFFECTED , CONTROLLED OR LIMITED IN ANY WAY BY THE PROVISO TO CL. (VII). 13. THE RATIO LAID DOWN BY THE HONBLE SUPREME COUR T CAN BE SUMMED UP AS FOLLOWS:- (1) DEDUCTION UNDER SECTION 36(1)(VII) OF THE ACT I S AVAILABLE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF PERTA INING TO NON-RURAL DEBTS. THIS DEDUCTION IS ALLOWED ONLY WHEN THE AMO UNT OF BAD DEBT IS ACTUALLY WRITTEN OFF IN THE BOOKS AND DEBITED TO PROFIT & LOSS ACCOUNT. DEDUCTION CANNOT BE CLAIMED FOR CREATING P ROVISION FOR BAD ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 15 OF 38 AND DOUBTFUL DEBTS OF NON-RURAL BRANCHES. IT IS LI KE ANY OTHER BAD DEBT WRITTEN OFF WHICH IS ALLOWED AS DEDUCTION IN T HE CASE OF ASSESSEES WHO ARE NOT IN BANKING BUSINESS. (2) DEDUCTION U/S.36(1)(VIIA)(A) IS ALLOWED WHEN A PROVISION FOR BAD AND DOUBTFUL DEBTS RELATING TO RURAL ADVANCES IS MADE I N THE BOOKS OF ACCOUNT SUBJECT TO THE LIMIT LAID DOWN THEREIN. (3) WHEN A DEDUCTION IS ALLOWED U/S.36(1)(VIIA)(A ) OF THE ACT BY WAY OF PROVISION, THERE WILL BE NO DEDUCTION UNDER CLAUSE (VII) FOR ACTUAL WRITE OFF OF BAD DEBTS RELATING TO RURAL ADVANCES, UNTIL OR UNLESS THERE IS A BALANCE LYING IN THE PROVISION ACCOUNT MADE UN DER CLAUSE (VIIA). THIS SO BECAUSE OF THE PROVISO TO SECTION 36(1)(VII ) OF THE ACT WHICH PROVIDES THAT IN THE CASE OF AN ASSESSEE TO WHICH C LAUSE (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO AN Y SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHIC H SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE. THU S THE PROVISO ENSURES THAT THERE IS NO DOUBLE DEDUCTION, I.E., FI RSTLY GETTING A DEDUCTION WHEN A PROVISION IS CREATED AND SECONDLY GETTING A DEDUCTION WHEN BAD DEBTS ARE WRITTEN OFF. 14. IN VIEW OF THE AFORESAID DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA ), WE ARE OF THE VIEW THAT THE CIT(A) WAS RIGHT IN DIRECTING THE AO TO ALLOW THE C LAIM FOR DEDUCTION MADE U/S.36(1)(VII) OF THE ACT. WE THEREFORE DISMISS GR .NO.2.1 TO 2.3 RAISED BY THE REVENUE. WE MAY ALSO ADD THAT THE AO HAS PASSE D ORDER GIVING EFFECT TO DIRECTIONS OF CIT(APPEALS), IN WHICH HE HAS CONS IDERED THE CLAIM OF THE ASSESSEE AND FOUND THAT DEBTS HAVE BEEN ACTUALLY WR ITTEN OFF IN THE BOOKS OF ACCOUNT. ORDER OF THE AO GIVING EFFECT TO DIREC TIONS OF THE CIT(APPEALS) DATED 9.2.2010 WAS ALSO FILED BEFORE US. 15. GROUNDS 3.1 TO 3.3 RAISED BY THE REVENUE READ AS FOLLOWS:- ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 16 OF 38 3.1 THE LEARNED C1T(A) ERRED IN ALLOWING THE ASSE SSEES CLAIM OF DEPRECIATION ON VALUATION OF INVESTMENT PORTFOLI O BY TREATING THE INVESTMENTS HELD BY THE BANK AS STOCK-IN-TRADE. 3.2 THE LD. CIT(A) HAS FAILED TO APPRECIATE THE FA CT THAT THE ASSESSEE BANK HAS FOLLOWED THE RBI GUIDELINES FOR V ALUATION OF INVESTMENT PORTFOLIO FOR THE PURPOSE OF BOOKS BUT H AS TREATED THE ENTIRE INVESTMENTS AS STOCK-IN-TRADE AND VALUED THE SAME AS PER LEAST OF COST OR MARKET VALUE, VALUES FOR INCOME TA X PURPOSE ONLY THEREBY MAKING A CLAIM FOR A NOTIONAL LOSS. 3.3 THE CBDT CIRCULAR NO.665 DIRECTS THE ASSESSING OFFICERS TO APPROACH THE ISSUE OF VALUATION OF INVESTMENT PO RTFOLIO HELD BY THE BANKS IN LINE WITH THE RBI GUIDELINES ISSUED FR OM TIME-TO- TIME. THE LD. CIT(A) HAS NOT CONSIDERED THIS CIRCUL AR PROPERLY. 16. THE ASSESSEE CLAIMED DEDUCTION OF A SUM OF RS.6 6,24,90,750 AND RS.148,58,25,576 IN RESPECT OF DIMUNITION IN THE VA LUE OF INVESTMENTS HELD BY THE ASSESSEE IN THE AVAILABLE FOR SALE (AFS) A ND HELD TO MATURITY (HTM) CATEGORY OF INVESTMENTS RESPECTIVELY. ACCORD ING TO THE ASSESSING OFFICER, AS PER THE RBI'S MASTER CIRCULAR PRUDENT IAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF INVESTME NT PORTFOLIO BY BANKS VIDE NO.DBOD BP BC.21/21.04.141/2003-04 DTD. 02.09. 2003 AND CIRCULAR OF THE CBDT, INVESTMENT PORTFOLIO OF BANKS CANNOT B E TREATED AS STOCK IN TRADE WHERE THE INVESTMENTS ARE HELD ON THE BASIS O F 'HELD TO MATURITY' CATEGORY OR AVAILABLE FOR SALE CATEGORY. THE ASS ESSING OFFICER WAS ALSO OF THE VIEW THAT THE ASSESSEE HAS VALUED THE SECURI TIES AS PER THE GUIDELINES OF RBI WHILE PREPARING THE BALANCE SHEET , BUT FOR IT PURPOSES IT HAD CHOSEN TO TREAT ALL INVESTMENTS AS STOCK IN TRA DE AND CLAIMED DIMINUTION IN VALUE OF STOCK IN TRADE (CLOSING STOC K) AS LOSS. ACCORDING TO ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 17 OF 38 ASSESSING OFFICER, SUCH A COURSE OF ACTION CANNOT B E PERMITTED. THE AO ALSO REFERRED TO CBDT CIRCULAR NO.665 DATED 5/10/93 WHEREIN THE CBDT HAD CLARIFIED THAT WHETHER A PARTICULAR INVESTMENT CONSTITUTES INVESTMENT OR STOCK-IN-TRADE IS A QUESTION OF FACT AND THE AOS S HOULD BE GUIDED BY RBI CIRCULARS ISSUED FROM TIME TO TIME IN THIS REGARD. THE ASSESSING OFFICER ACCORDINGLY HELD THAT MASTER CIRCULAR ISSUED BY THE RBI HAD TO BE FOLLOWED. ACCORDINGLY, THE LOSS ON DIMINUTION VALUE OF INVEST MENTS WAS RECOMPUTED BY THE ASSESSING OFFICER AS FOLLOWS :- AS DISCUSSED ABOVE, WHEN INVESTMENT UNDER THE CLAS SIFICATION AVAILABLE FOR SALE AND HELD TO MATURITY ARE NOT STOCK-IN-TRADE, THERE IS NO POSSIBILITY OF ALLOWING NO DEPRECIATION ON THEIR VALUE AT THE END OF THE ACCOUNTING YEAR EVEN IF THE ASSESSEE BAN K CLAIMS THAT THEY ARE CONSISTENTLY VALUING IT AS STOCK-IN-TRADE. AS T HEY ARE NOT CONSIDERED AS FORMING PART OF STOCK-IN-TRADE OF THE BANK, THE DEPRECIATIONS CLAIMED BY THE ASSESSEE BANK AS ON 31.3.2006 UNDER THE CLAS SIFICATION AVAILABLE FOR SALE OF RS.66,24,90,750/- AND HELD TO MATURITY OF RS.148,58,25,576/- WERE PROPOSED TO BE DISALLOWED IN COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINES S OR PROFESSION FOR THE A.Y 2006-07. IN RESPONSE TO THIS PROPOSAL, THE ASSESSEE BANK, VIDE LETTER DTD: 12-12-2008, HAS CONTENDED THAT THEY HAVE DISALLOWED THE DEPRECIATION COMPUTED AS PER RBI GUIDELINES IN RESPECT OF AFS CA TEGORY AMOUNTING TO RS. 49,38,98,040/- AND ALSO HAVE DEBIT ED AMORTIZATION AMOUNTING TO RS.97,89,95,197/- IN HTM CATEGORY IN T HEIR P&L ACCOUNT. THUS, THE TOTAL DISALLOWANCE MADE BY THE ASSESSEE BANK THEMSELVES IN THEIR INCOME-TAX MEMO WORKS OUT O RS. 147,28,93,237/. THE SAME HAS BEEN VERIFIED FROM THE ANNEXURES TO RE TURN OF INCOME FILED BY THE ASSESSEE BANK. ACCORDINGLY, THE DISALL OWANCE OF DEPRECIATION CLAIMED UNDER INVESTMENT PORTFOLIO IS WORKED OUT AS UNDER: ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 18 OF 38 A) DEPRECIATION CLAIMED UNDER LCM METHOD IN RESPECT OF AVAILABLE FOR SALE : RS. 66,2 4,90,750 B) DEPRECIATION CLAIMED UNDER LCM METHOD IN RESPECT OF HELD TO MATURITY :RS. 148,58, 25,576 RS. 214,83,16,326 LESS: DEPRECIATION DISALLOWED BY ASSESSEE BANK IN THE I.T.MEMO UNDER AFS RS.49,38,98,040 AMORTIZATION UNDER HTM CATEGORY RS.97,89,95,197 RS.147,28,93,237 RS.67,54,23,089 ADD: APPRECIATION UNDER HFT CATEGORY RS.55,78,535 DISALLOWANCE RS.68,10,01,624 DISALLOWANCE UNDER THE HEAD DEPRECIATION ON INVES TMENT PORTFOLIO IS RS.68,10,01,624/-. 17. ON APPEAL BY THE ASSESSEE; THE CIT (A), FOLLOW ING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF UCO BANK 240 ITR 355(SC) AND DECISION OF ITAT IN ASSESSEES OWN CASE IN AY 0 4-05 IN ITA NO.112/BANG/08 DATED 3/12/2008, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ORDER OF T HE CIT (A), REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 18. THE LEARNED DR RELIED ON THE ORDER OF THE ASSES SING OFFICER. 19. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF THE HON'BLE ITAT, BANGALORE BENCH ON SI MILAR ISSUE IN THE CASE OF SYNDICATE BANK V. DCIT (2013) 38 TAXMANN.COM 25 ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 19 OF 38 (BANGALORE TRIB.) AND THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA BANK LTD., V. ACIT (356 ITR 549) . 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIMI LAR ISSUE AS TO WHETHER DEPRECIATION ON INVESTMENTS HELD UNDER THE CATEGORY HELD TO MATURITY OR AVAILABLE FOR SALE CAN BE ALLOWED A S DEDUCTION CAME UP FOR CONSIDERATION IN ASSESSEES OWN CASE IN AY 10-11 IN ITA NO.1310/BANG/2012 AND THIS TRIBUNAL UPHELD SIMILAR ORDER OF CIT(A). THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRI BUNAL: 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIM ILAR ISSUE AS TO WHETHER DEPRECIATION ON INVESTMENTS HEL D UNDER THE CATEGORY HELD TO MATURITY CAN BE ALLOWED AS DEDUC TION CAME UP FOR CONSIDERATION IN THE CASE OF SYNDICATE BANK (SUPRA) BEFORE THE ITAT BANGALORE BENCH. THE TRIBUNAL ON T HE ISSUE HELD AS FOLLOWS: 58. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR A ND THE LD. COUNSEL FOR THE ASSESSEE. THE LD. DR RELIE D ON THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. ING VYSYA BANK LTD. IN ITA NO.2886/2005 DATED 06.06.2012. IN THE AFORESAID DECISION, THE HONBLE HIGH COURT OF KARNATAKA TOOK A VIEW THAT THE GUIDELINES ISSUED BY THE RBI WILL NOT BE RELEVANT WHILE COMPUTING INCOME UNDER THE INCOME-TA X ACT. THE HONBLE COURT FURTHER TOOK THE VIEW THAT EVERY INVESTMENT HELD BY A BANK CANNOT BE CONSIDERED AS S TOCK- IN-TRADE. THE HONBLE HIGH COURT FINALLY CONCLUDED THAT 30% OF THE INVESTMENTS CAN BE CLOTHED TO THE CHARAC TER OF STOCK-IN-TRADE AND THAT THE REMAINING AMOUNTS WILL BE INVESTMENTS AND THEREFORE DIMINUTION IN THEIR VALUE CANNOT BE ALLOWED AS A DEDUCTION. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 20 OF 38 59. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, SUBMITTED THAT IN THE ASSESSEES OWN CASE FOR THE A .Y. 2005-06, THIS TRIBUNAL HAS CONFIRMED THE ORDER OF T HE CIT(A), DELETING IDENTICAL ADDITION MADE BY THE AO. OUR ATTENTION WAS ALSO DRAWN TO THE ORDER OF THE TRIBUN AL IN ASSESSEES OWN CASE IN ITA NO.492/BANG/2009 FOR THE A.Y. 2005-06, ORDER DATED 13.01.2012, WHEREIN THE TRIBUNAL HAD TO DEAL WITH IDENTICAL ISSUE AS TO WHE THER THE CIT(A) WAS CORRECT IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF PROFIT ON SALE OF INVESTMENTS OF RS.200,77,13,662/- AND DELETING THE ACTION OF THE A O IN DISALLOWING LOSS CLAIMED ON TREATING INVESTMENTS AS STOCK-IN-TRADE BY DRAWING THE INVESTMENT TRADING AC COUNT OF RS.775,96,55,047. THE TRIBUNAL HELD 16. WE HAVE HEARD BOTH SIDES AND FIND THAT THE SUPREME COURT IN THE CASE OF UCO BANK IN 240 ITR 355 HAS HELD AS UNDER : 'IN OUR VIEW, AS STATED ABOVE, CONSISTENTLY FOR 30 YEARS, THE ASSESSEE WAS VALUING THE STOCK-IN-TRADE AT COST FOR THE PURPOSE OF STATUTORY BALANCE-SHEET, AND FOR THE INCOME-TAX RETURN, VALUATION WAS AT COST OR MARKET VALUE, WHICHEVER WAS LOWER. THAT PRACTICE WAS ACCEPTED BY THE DEPARTMENT AND THERE WAS NO JUSTIFIABLE REASON FOR NOT ACCEPTING THE SAME. PREPARATION OF THE BALANCE-SHEET IN ACCORDANCE WITH THE STATUTORY PROVISION WOULD NOT DISENTITLE THE ASSESSEE IN SUBMITTING THE INCOME-TAX RETURN ON THE REAL TAXABLE INCOME IN ACCORDANCE WITH THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE CONSISTENTLY AND REGULARLY. THAT CANNOT BE DISCARDED BY THE DEPARTMENTAL AUTHORITIES ON THE GROUND THAT THE ASSESSEE WAS MAINTAINING THE BALANCE- SHEET IN THE STATUTORY FORM ON THE BASIS OF THE COST OF THE INVESTMENTS. IN SUCH CASES, ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 21 OF 38 THERE IS NO QUESTION OF FOLLOWING TWO DIFFERENT METHODS FOR VALUING ITS STOCK-IN- TRADE (INVESTMENTS) BECAUSE THE BANK WAS REQUIRED TO PREPARE THE BALANCE-SHEET IN THE PRESCRIBED FORM AND IT HAD NO OPTION TO CHANGE IT. FOR THE PURPOSE OF INCOME TAX AS STATED EARLIER, WHAT IS TO BE TAXED IS THE REAL INCOME WHICH IS TO BE DEDUCED ON THE BASIS OF THE ACCOUNTING SYSTEM REGULARLY MAINTAINED BY THE ASSESSEE AND THAT WAS DONE BY THE ASSESSEE IN THE PRESENT CASE.' THE BANGALORE BENCH OF ITAT IN CORPORATION BANK (SUPRA) HAS ALSO FOLLOWED THE ABOVE DECISION OF THE HON'BLE SUPREME COURT AS ALSO THE ITAT, MUMBAI AND ITAT, CHENNAI. FOLLOWING THE ABOVE DECISIONS, WE ARE DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE. THIS GROUND OF APPEAL BY THE REVENUE IS DISMISSED. 60. APART FROM THE ABOVE, THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF ING VYSYA BANK (SUPRA) IS PER INCURIAM THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK V. CI T, 240 ITR 355 (SC). HE BROUGHT TO OUR NOTICE THAT TH E HONBLE SUPREME COURT APPROVED THE PRACTICE OF NATIONALIZED BANK GOVERNED BY BANKING REGULATION AC T, FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BOTH FOR BOOK KEEPING AS WELL FOR INCOME-TAX PURPOSES. THE HON BLE APEX COURT UPHELD THE METHOD ADOPTED BY THE BANKS VALUING STOCK-IN-TRADE (INVESTMENTS) AT COST IN BAL ANCE SHEET IN ACCORDANCE WITH THE BANKING REGULATION ACT AND VALUING THE SAME AT COST OR MARKET VALUE, WHICHEVER WAS LOWER FOR INCOME-TAX PURPOSES. THE HONBLE COURT TOOK THE VIEW THAT ALL INVESTMENTS HELD BY A BANK ARE TO BE REGARDED AS STOCK-IN-TRADE. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 22 OF 38 61. THE LD. COUNSEL FOR THE ASSESSEE FURTHER DREW OUR ATTENTION TO A VERY RECENT DECISION OF THE HONBLE HIGH COURT OF KARNATAKA RENDERED ON 11.03.2013 IN THE CA SE OF CIT V. VIJAYA BANK, ITA NO.687/2008. THE HONBLE HIGH COURT OF KARNATAKA IN THE AFORESAID CASE FOLLO WED ITS OWN DECISION RENDERED IN THE CASE OF KARNATAKA BANK LTD. V. CIT IN ITA NO.172/2009 RENDERED ON 11.01.2013, WHEREIN THE COURT TOOK THE VIEW THAT DEPRECIATION CLAIMED ON INVESTMENTS HELD ON MATURI TY BY A BANK HAS TO BE TREATED AS STOCK-IN-TRADE IN ACCORDANCE WITH RBI GUIDELINES AND CBDT CIRCULAR. IT WAS HIS SUBMISSION THAT THE LATER DECISION OF THE H ONBLE KARNATAKA HIGH COURT HAS TO BE FOLLOWED. 62. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE CONTENTION S PUT FORTH ON BEHALF OF THE ASSESSEE DESERVE TO BE ACCEP TED. THE TRIBUNAL IN ASSESSEES OWN CASE ON AN IDENTICAL ISSUE FOR THE A.Y. 2005-06 HAS UPHELD THE CLAIM OF THE ASSESSEE. THE LATER DECISION OF THE HONBLE HIGH C OURT OF KARNATAKA IS ALSO IN FAVOUR OF THE ASSESSEE. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ISSUE RA ISED BY THE REVENUE IN ITS APPEAL IS WITHOUT MERIT. CONSEQ UENTLY, THE SAME IS DISMISSED. 22. THE ABOVE DECISION SQUARELY COVERS THE ISSUE I N FAVOUR OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE RELEVANT GROUND S OF APPEAL OF THE REVENUE. 21. THE ABOVE DECISION SQUARELY COVERS THE ISSUE IN FAVOUR OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE SAME, WE UPHO LD THE ORDER OF THE CIT(A) AND DISMISS THE RELEVANT GROUNDS OF APPEAL O F THE REVENUE. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 23 OF 38 22. THE REVENUE HAS FILED AN APPLICATION SEEKING T O RAISE THE FOLLOWING ADDITIONAL GROUNDS:- 1. LD. CIT(A) HAS ERRED IN HOLDING THAT RS. 128.40 CRORES IS THE AMOUNT OF PROVISION IN RESPECT OF RURAL BAD AND DOUBTFUL DEBTS, MADE DURING THE YEAR, WHEREAS THE ASSESSEE H AS MADE PROVISION FOR RURAL BAD AND DOUBTFUL DEBTS AMOUNTIN G TO RS. 18.03 CRORES ONLY (OUT OF TOTAL PROVISION OF RS. 187 CROR ES), WHICH COULD BE ALLOWED UNDER CLAUSE (VIIA) OF S.36(1), AS HELD BY THE HONBLE SUPREME COURT IN 343 ITR 270. NO PROVISION WHICH I S MADE FOR NON-RURAL/URBAN DOUBTFUL DEBTS COULD BE ALLOWED, AS DEDUCTION U/S 36(1)(VIIA) IS APPLICABLE ONLY IN RESPECT OF BA D DEBTS OF RURAL BRANCHES. SUCH URBAN BAD AND DOUBTFUL DEBTS HAVE TO BE ALLOWED SEPARATELY AND INDEPENDENTLY, AS AND WHEN THE DEBTS BECOME BAD AND ARE WRITTEN OFF IN THE ACCOUNTS OF ASSESSEE BAN K IN ACCORDANCE WITH PROVISION OF SEC.36( 1)(VII). 2. LD. CIT(A) HAS ERRED IN NOT ENHANCING THE INCOM E BY ABOUT RS.423 CRORES, (SUBJECT TO VERIFICATION OF DE TAILS FURNISHED BY THE ASSESSEE), ON ACCOUNT OF EXCESS PROVISION FO R BAD AND DOUBTFUL DEBTS MADE IN EARLIER YEARS, ALLOWED U/S 3 6(1)(VIIA) IN AYS 2002-03 TO AY 2005-06 (RS. 450 CRORES), WHICH H AS NOT BEEN USED FOR THE SPECIFIED PURPOSE, AND IS NO LONG ER REQUIRED TO BE PROVIDED FOR. THE ASSESSEE HAS A CLOSING BALANCE OF RS. 472.62 CRORES AS ON 31.3.2006 INCLUDING RS.187 CRORES PROV IDED DURING THE YEAR FOR THE ENTIRE BANK ADVANCES OF RS. 23962. 42 CRORES, INCLUDING ABOUT RS. 1000 CRORES OF RURAL ADVANCES. SUCH UNUTILIZED PROVISIONS RENDERED EXCESS BEING NEITHER SET OFF NOR ADJUSTED AGAINST URBAN BAD DEBTS WRITTEN OFF, ARE R EQUIRED TO BE WRITTEN BACK AS PER THE ACCOUNTING PRINCIPLES (AS - 29) AND BROUGHT TO TAX, IN VIEW OF THE CLEAR FINDING OF HON BLE SUPREME COURT IN 343 ITR 270. 3. LD. CIT(A) HAS ERRED IN ALLOWING DEDUCTION U/S 3 6(1) (VII) OF RS. 168.97 CRORES WHEN NO SUCH AMOUNT OF BAD DEB TS HAS BEEN WRITTEN OFF BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT S NOR DEBITED TO THE P&L ACCOUNT OR CLAIMED IN THE RETURN. THIS AMOU NT IS MERELY A PROVISION FOR NON-RURAL BAD & DOUBTFUL DEBTS OUT OF A TOTAL PROVISION OF RS. 187 CRORES WHICH IS NOT ALLOWABLE UNDER CLAUSE (VII) OF S.36(1). ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 24 OF 38 23. SIMILAR ADDITIONAL GROUNDS WERE ALSO FILED BY THE REVENUE IN ITA NO.1393/B/2012 FOR A.Y. 2010-11. THE TRIBUNAL CONS IDERED THE ADMISSIBILITY OF THE ADDITIONAL GROUNDS AND DISMISS ED THE SAME, OBSERVING AS FOLLOWS:- 24. AS FAR AS ADDITIONAL GROUND NOS.1 & 2 SOUGHT T O BE RAISED BY THE REVENUE ARE CONCERNED, THE FACTS ARE AS FOLL OWS. IN ITS COMPUTATION OF INCOME THE ASSESSEE HAS CLAIMED DEDU CTION U/S.36(1)(VIIA) OF THE ACT OF A SUM OF RS.336,96,38 ,872/-. SINCE THE TOTAL INCOME OF THE ASSESSEE BANK WAS ASSESSED HIGHER THAN WHAT THE ASSESSEE HAD FILED IN THE RETURN OF INCOME THE ELIGIBLE PROVISION FOR BAD DEBTS HAD TO BE REWORKED. THE AS SESSEE BANK HAS MADE A PROVISION FOR BAD DEBTS OF RS.345,25,00, 000/- AS REFLECTED IN THE BOOKS OF ACCOUNTS. THE RE-COMPUTA TION OF ELIGIBLE DEDUCTION U/S.36(1)(VIIA) WAS DONE BY THE AO AS BELOW : A. TOTAL INCOME BEFORE DEDUCTION U/S.36(1)(VIIA) AND CHAPTER VI-A DEDUCTIONS RS.1669,40,72,790/- B. ADD : DEDUCTION MADE FOR PROVISION FOR BAD DEBTS RS. 336,96,38,872/- C. ADD : DEDUCTION U/S. CHAPTER VIA RS. 33,23,33 4/- D. TOTAL RS.2006,70,34,996/- E. 10% OF AVERAGE RURAL ADVANCE OF RS.2513,19,12,300/- RS.251,31,91,230/- F. 7.5% OF D ABOVE RS.150,50,27,625/- TOTAL OF E & F RS. 401,82,18,855/- SINCE PROVISION FOR BAD DEBTS MADE IN BOOKS WAS RS.345,25,00,000/- THE CLAIM FOR PROVISION FOR BAD DEBTS WAS RESTRICTED TO RS.345,25,00,000/- BY THE AO AS PER T HE ASSESSEE'S ELIGIBILITY. THE TOTAL ASSESSED INCOME AS PER ORDE R U/S.143(3) INCLUDED PROVISION FOR BAD DEBTS AMOUNTING TO RS.336,96,38,872/-. THE DIFFERENCE AMOUNT OF RS.8, 28,61,128/- HAD TO BE REDUCED FROM THE TOTAL INCOME AND WAS DO NE ACCORDINGLY BY THE AO. THE ASSESSEE ACCEPTED THE ABOVE COMPUTATION OF DEDUCTION U/S.36(1)(VIIA) OF THE ACT AND DID NOT CHALLENGE THE SAME BEFORE THE CIT (A). THUS THE DE DUCTION ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 25 OF 38 U/S.36(1)(VIIA) OF THE ACT WAS NEVER THE SUBJECT MA TTER OF APPEAL BEFORE THE CIT (A). IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT ADDITIONAL GROUNDS 1 & 2 SOUGHT TO BE RAISED B Y THE REVENUE DOES NOT ARISE OUT OF THE ORDER OF THE CIT (A). 25. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FILED BEFORE US AN ORDER OF THE ITAT, BANGALORE BENCH IN THE CASE O F SYNDICATE BANK (SUPRA) WHEREIN IDENTICAL ADDITIONAL GROUND SO UGHT TO BE RAISED BY THE REVENUE WAS REJECTED BY THE TRIBUNAL. THE ADDITIONAL GROUND SOUGHT TO BE RAISED BY THE REVENU E IN THE AFORESAID DECISION WAS AS FOLLOWS: 3. THE REVENUE SOUGHT TO RAISE THREE ADDITIONAL G ROUNDS AND THESE ARE CONNECTED TO GROUND NO.3 RAISED BY TH E REVENUE IN ITS ORIGINAL GROUNDS OF APPEAL VIDE LETT ER DATED 11.06.2012. THESE GROUNDS READ AS FOLLOWS: THE APPELLANT SEEKS PERMISSION TO RAISE THE FOLLOWING ADDITIONAL GROUNDS FOR THE KIND AND FAVOURABLE CONSIDERATION OF THE HONBLE TRIBUNAL: (I) ASSESSEES CLAIM OF DEDUCTION U/S 36(1)(VIIA) OF RS. 503.49 CRORES IS NOT IN ACCORDANCE WITH THE PROVISIONS UNDER THE ACT, READ WITH RULE 6ABA OF THE IT RULES, 1962, AND HENCE NOT ALLOWABLE TO THAT EXTENT? (II) SINCE (A) NON-RURAL BAD AND DOUBTFUL DEBTS MAY BE WRITTEN OFF AND ALLOWABLE U/S 36(I)(VII) INDEPENDENTLY, AND (B) ONLY RURAL DEBTS WRITTEN OFF CAN BE SET OFF/DEBITED AGAINST THE PROVISIONS MADE U/S 36(1)(VIIA) IN PREVIOUS YEARS, AND/OR TO BE MADE DURING THE YEAR, AMOUNT OF DEDUCTION SHOULD BE COMPUTED ONLY WITH REFERENCE TO THE AVERAGE ANNUAL ADVANCES OF THE RURAL BRANCHES, AND RESTRICTED TO 10% THEREOF, SUBJECT TO AVAILABLE CREDIT BALANCE TO THIS ACCOUNT. (III) ALTERNATIVELY, AND WITHOUT PREJUDICE TO THE GROUNDS ABOVE, IF THE COMPUTATION OF THE PROVISION HAS TO ALSO INCLUDE ANY AMOUNT NOT ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 26 OF 38 EXCEEDING 7.5% OF THE TOTAL INCOME, SUCH INCOME SHOULD BE RESTRICTED TO THE TOTAL INCOME OF RURAL BRANCHES, OR TO THE AMOUNT AS PRESCRIBED UNDER THE RBI PRUDENTIAL NORMS. SINCE THE GROUNDS RAISED ARE LEGAL GROUNDS, WHICH G O TO THE ROOT OF THE MATTER RELATING TO ALLOWANCE OF DED UCTION U/S 36(1)(VIIA), THE SAME MAY KINDLY BE ADMITTED. D ELAY MAY KINDLY BE CONDONED, IN VIEW OF THE LEGAL POSITI ON CLARIFIED BY THE HONBLE SUPREME COURT VIDE THEIR LORDSHIP& ORDER DATED 17.02.2012, IN CASE OF CATHOL IC SYRIAN BANK AND OTHERS (CIVIL APPEAL NO. 1143/2011 AND OTHERS), REPORTED IN 2012-TIOL-16-SC-LT-LB. 26. THE TRIBUNAL DEALT WITH THE ADMISSIBILITY OF T HE AFORESAID GROUNDS OF APPEAL AND REFUSED TO ADMIT THE SAME FOR ADJUDICATION OBSERVING AS FOLLOWS: 42. NOW WITH REGARD TO ADDITIONAL GROUND NO.(I) SOUGHT TO BE RAISED BY THE REVENUE, THERE IS NO DIS PUTE BY THE AO IN THE ORDER OF ASSESSMENT THAT THE PROVISIO N OF RS.503.49 CRORES IS NOT IN ACCORDANCE WITH RULE 6AB A OF THE RULES. THE CASE OF THE AO WAS THAT (I) DEDUCTI ON U/S.36(1)(VIIA)(A) WILL BE ALLOWED ONLY TO THE EXTE NT PROVISION IS CREATED IN THE BOOKS; (II) EVEN WHEN SUCH PROVISION IS CREATED IN THE BOOKS, IF THERE IS OPEN ING BALANCE IN THE PBDD A/C. THAT HAS TO BE TAKEN INTO ACCOUNT AND IT IS ONLY WHERE THE PROVISION MADE IS IN EXCESS OF THE OPENING BALANCE OF PROVISION AVAILABL E IN PBDD A/C., SUBJECT TO THE LIMITS PRESCRIBED IN SEC.36(1)(VIIA)(A) OF THE ACT THAT WILL BE ALLOWED AS DEDUCTION. THEREFORE THE ADDITIONAL GR.NO.(I) SOU GHT TO BE RAISED BY THE REVENUE DOES NOT ARISE OUT OF THE ORDER OF THE AO OR THE CIT(A) AND THE SAME CANNOT BE THEREFORE ADMITTED FOR ADJUDICATION. EVEN ASSUMING THERE WAS AN ERROR ON THE PART OF THE AO IN THIS REGARD T HAT COULD HAVE BEEN SET RIGHT EITHER IN PROCEEDINGS U/S .263 OF THE ACT OR BY THE CIT(A) IN EXERCISE OF HIS POWERS OF ENHANCEMENT. THE REVENUE CANNOT SEEK TO RAISE AN I SSUE CONCLUDED IN THE ASSESSMENT IN THE FORM OF AN ADDIT IONAL GROUND BEFORE THE TRIBUNAL. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 27 OF 38 27. IN OUR VIEW, THE AFORESAID OBSERVATIONS OF THE TRIBUNAL WILL APPLY TO THE FACTS OF THE PRESENT CASE ALSO. WE ARE OF THE VIEW THAT ADDITIONAL GROUNDS NOS.1 & 2 THEREFORE CA NNOT BE ADMITTED FOR CONSIDERATION. 24. IN THE PRESENT CASE, THE REVENUE BY WAY OF ADDI TIONAL GROUND HAS SOUGHT TO DISPUTE THE WRITING OFF OF THE NON-RURAL DOUBTFUL DEBTS IN THE BOOKS OF ACCOUNT OF ASSESSEE. AS WE HAVE ALREADY SEEN, T HE AO CONSEQUENT TO THE DIRECTIONS GIVEN BY THE CIT(A) HAS LOOKED INTO THE CLAIM OF ASSESSEE AND FOUND THAT THERE HAS BEEN AN ACTUAL WRITE OFF O F BAD DEBTS (NON-RURAL) IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. AS FAR AS AD DL.GRD.NO.1 IS CONCERNED THE SAME IS SOUGHT TO BE RAISED WITHOUT A NY BASIS. FACTUALLY THE AO IN THE ORDER GIVING EFFECT TO THE DIRECTIONS OF THE CIT(A) HAS FOUND THAT THE CLAIM FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRI TTEN OFF U/S.36(1)((VII) HAS ACTUALLY BEEN WRITTEN OFF IN THE BOOKS. THE PR OVISION FOR BAD AND DOUBTFUL DEBTS MADE U/S.36(1)(VIIA)(A) OF THE ACT I N THE BOOKS OF ACCOUNTS OF THE ASSESSEE HAS NOTHING TO DO WITH THE CLAIM FO R BAD DEBTS MADE U/S.36(1)(VII) OF THE ACT AS WE HAVE ALREADY HELD W HILE DECIDING GR.NO.2.1 TO 2.3 OF THE GROUNDS OF APPEAL. AS FAR AS ADDL.GRD.N O.2 RAISED BY THE REVENUE IS CONCERNED, THE SAME IS FACTUALLY INCORRE CT BESIDES BEING AN ALTOGETHER NEW ISSUE SOUGHT TO BE RAISED BY THE REV ENUE WHICH WAS NEITHER RAISED BY THE AO OR CIT(A) IN EXERCISE OF H IS POWERS OF ENHANCEMENT. EVEN THIS ADDITIONAL GROUND PROCEEDS ON A FACTUALLY INCORRECT BASIS THAT THE PROVISION FOR BAD AND DOUB TFUL DEBTS AS PER BOOKS OF ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 28 OF 38 ACCOUNTS AND THAT CLAIMED AS DEDUCTION IN ASSESSMEN T OF INCOME UNDER THE ACT ARE ONE AND THE SAME. THE REFERENCE OF FIGURES IN THE ADDITIONAL GROUND NO.2 IS TO THE PBDD MADE IN THE BOOKS OF ACC OUNTS WHICH WERE NEVER CLAIMED OR ALLOWED AS DEDUCTION IN THE PAST A SSESSMENT. SIMILAR ADDITIONAL GROUNDS SOUGHT TO BE RAISED BY THE REVEN UE IN THE CASE OF SYNDICATE BANK IN ITA NO.708 & 709/BANG/2010 WAS NO T ALLOWED AND THE ADDITIONAL GROUNDS WERE NOT ADMITTED FOR ADJUDICATI ON ON THE OBSERVATION THAT THE ADDITIONAL GROUND SOUGHT TO BE RAISED WERE ON MISAPPRECIATION OF FACTS. SUFFICE IT TO SAY THAT THE ADDITIONAL GROUN D NO.2 SOUGHT TO BE RAISED BY THE REVENUE IS FRIVOLOUS. ADDITIONAL GROUND NO. 3 IS AGAIN FRIVOLOUS AS THE AO IN THE ORDER GIVING EFFECT TO THE ORDER OF THE C IT(A) HAS FACTUALLY FOUND THAT THE BAD DEBTS CLAIMED AS DEDUCTION U/S.36(1)(V II) OF THE ACT HAS ACTUALLY BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. THERE IS, THEREFORE, NO BASIS FOR THE REVENUE TO RAISE TH E AFORESAID ADDITIONAL GROUNDS BEFORE THE TRIBUNAL. THE ADDITIONAL GROUN D SOUGHT TO BE RAISED IS THEREFORE NOT ADMITTED FOR ADJUDICATION. IN THIS R EGARD, WE ARE ALSO OF THE VIEW THAT DECISION RENDERED BY THE TRIBUNAL IN ASSE SSEES OWN CASE FOR THE A.Y. 2010-11 IN ITA NO.1393/BANG/2012 ON AN IDENTIC AL ADDITIONAL GROUND, WILL ALSO BE APPLICABLE IN THE PRESENT CASE. THE A DDITIONAL GROUND SOUGHT TO BE RAISED ARE THEREFORE DISMISSED AS NOT ADMITTED F OR ADJUDICATION. 25. IN THE RESULT, ITA NO.496/B/2010 IS DISMISSED. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 29 OF 38 ITA NO.815/BANG/2012 (A.Y. 2008-09) 26. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 27. GROUND NOS. 2 TO 4 RAISED BY THE ASSESSEE READ S AS FOLLOWS:- 2. LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN UPHOLDING THE DISALLOWANCE OF RS.23,99,63,931/- U/S 14A OF THE ACT. 3. LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FA ILED TO APPRECIATE THE FACT THAT NO DISALLOWANCE OF INTERES T CAN BE MADE. 4. LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FA ILED TO APPRECIATE THE FACT THAT THE LEARNED AO HAS NOT REC ORDED ANY DISSATISFACTION ABOUT THE CLAIM OF THE APPELLANT AN D THE DISALLOWANCE WAS MADE BASED ON NOTIONAL COST. 28. THE ASSESSEE EARNED TAX FREE INCOME OF RS.23,9 9,66,931. THE AO INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE RULES, DISALLOWED A SUM OF RS.23,99,64,931 AS EXPENDITURE INCURRED IN EARNING TAX FREE INCOME. FOLLOWING WAS THE COMPUTATION MADE BY THE AO:- (I) AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCO ME WHICH DOES NOT FORM PART OF TOTAL INCOME NIL (II)A AMOUNT OF EXPENDITURE BY WAY OF INTEREST RS.30,73, 23,56,379 (II)B AVERAGE VALUE OF INVESTMENT AS ON THE FIRST DAY AND LAST DAY OF PREVIOUS YEAR (RS.850,21,85,309 489,83,75,229)/2 RS.670,02,80,269 (II)C AVERAGE OF TOTAL ASSETS AS ON THE FIRST AND LAST DAY OF PREVIOUS YEAR (RS.665,97,68,14,118 + RS.527,20,64,35,762)/2 RS.596,59,16,24,940 (III) % OF AVERAGE VALUE OF INVESTMENT ( % OF RS.670,02,80,269) RS.3,35,01,401 EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME = (I) + AXB/C+(III) RS.37,86,54,421 ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 30 OF 38 29. AS CAN BE SEEN FROM THE ABOVE COMPUTATION, DIS ALLOWANCE WORKED OUT BY THE AO WAS RS.37,86,54,421. HE HOWEVER REST RICTED THE DISALLOWANCE U/S. 14A TO THE TAX FREE INCOME EARNED BY THE ASSESSEE I.E., RS.23,99,64,931. 30. ON APPEAL, THE CIT(APPEALS) CONFIRMED THE ORDE R OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A), ASSESSEE HAS RAISED GROUNDS NO.2 TO 4 BEFORE THE TRIBUNAL. 31. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNS EL FOR THE ASSESSEE, WHO BROUGHT TO OUR NOTICE THE DETAILS OF INVESTMEN TS AND THE DETAILS OF INTEREST FREE FUNDS WHICH IS ENCLOSED AS ANNEXURE-I TO THIS ORDER AND BALANCE SHEET AS ON 31 ST MARCH, 2009 ENCLOSED AS ANNEXURE-I TO THIS ORDER . IT WAS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAD ENOUGH OWN FUNDS OUT OF WHICH IT CAN B E SAID THAT INVESTMENTS YIELDING TAX FREE INCOME WERE MADE. HI S SUBMISSION WAS THAT DISALLOWANCE U/S. 14A R.W. RULE 8D(2)(I) & (II) OF THE RULES SHOULD BE DELETED. 32. WITH REGARD TO OTHER EXPENSES IN RESPECT OF WH ICH RULE 8D(2)(III) OF THE RULES WILL APPLY, IT WAS HIS SUBMISSION THAT SI MILAR ISSUE WAS CONSIDERED IN ASSESSEES OWN CASE AND 5% OF TAX FRE E INCOME WAS CONSIDERED TO BE A JUST AND PROPER DISALLOWANCE U/S . 14A OF THE ACT. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO ORDER OF THE TRI BUNAL IN ITA ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 31 OF 38 NO.1310/BANG/2012 FOR THE A.Y. 2010-11 DATED 19.9.2 014, WHEREIN SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL. 33. THE LD. DR RELIED ON THE ORDER OF THE REVENUE AUTHORITIES. 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. PER USAL OF THE FINANCIAL STATEMENTS OF THE ASSESSEE FOR THE RELEVANT FINANCI AL YEAR SHOWS THAT INVESTMENTS OF THE ASSESSEE IN TAX FREE SECURITIES AS ON 31.3.2007 WAS RS.592.48 CRORES AND THE SAME AS ON 31.3.2008 WAS R S.850.23 CRORES. OWN INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE 31.3.2007 WAS RS.10,542.77 CRORES AND THE SAME AS ON 31.3.2008 W AS RS.14,734.64 CRORES. THEREFORE, AVAILABLE OF INTEREST FREE FUND S FOR MAKING THE INVESTMENTS WHICH YIELDED TAX FREE INCOME CANNOT BE DISPUTED BY THE REVENUE. IT IS CLEAR FROM THE STATEMENT OF AVAILAB LE OWN FUNDS AND BALANCE SHEET THAT THE ASSESSEE HAD ENOUGH FUNDS OUT OF WHI CH INVESTMENTS YIELDING TAX FREE INCOME WERE MADE. THEREFORE, NO DISALLOWANCE OF INTEREST EXPENSES CAN BE MADE APPLYING RULE 8D(2)(I) OR (II) OF THE RULES. 35. WITH REGARD TO DISALLOWANCE UNDER RULE 8D(2)( III) OF THE RULES, THIS TRIBUNAL HELD DISALLOWANCE OF 5% OF THE TAX FREE IN COME WOULD BE JUST AND PROPER. FOLLOWING WERE THE RELEVANT OBSERVATIONS O F THE TRIBUNAL:- 13. WITH REGARD TO DISALLOWANCE UNDER RULE 8D(2)(I II) OF THE RULES, IT IS SEEN THAT EVEN IN ASSESSEE'S OWN CASE IN THE PAST, THE DISALLOWANCE OF 5% OF THE EXEMPT INCOME WAS CONSIDE RED AS APPROPRIATE DISALLOWANCE U/S.14A OF THE ACT. THE H ON'BLE ITAT IN A. YS. 2001-02 AND 2003-04 HAS UPHELD SUCH DISAL LOWANCE AS REASONABLE. THE ASSESSING OFFICER HAS HOWEVER PROC EEDED TO ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 32 OF 38 APPLY THE PROVISIONS OF RULE 8D WITHOUT HAVING REGA RD TO THE CLAIM OF THE ASSESSEE THAT PROVISIONS OF RULE 8D(2) (III) OF THE RULES COULD NOT BE APPLIED. AS LAID DOWN BY THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD., (328 ITR 81), A CLAIM MADE BY THE ASSESSEE WITH REGARD TO DISALLOWANCE U/S.14A OF THE ACT HAD TO BE OBJECTIVELY EXAMINED BY THE ASSESSING OFFICER. IT IS NOT NECESSARY FOR THE ASSESSING OFFICER TO RESORT TO RU LE 8D OF THE RULES WHEN A REASONABLE AND PROPER BASIS FOR DISALL OWANCE U/S.14A OF THE ACT EXISTS. IN THE PRESENT CASE, SU CH BASIS EXISTED IN THE FORM OF ACCEPTANCE OF THE SIMILAR CLAIM OF T HE ASSESSEE IN THE PAST BY THE TRIBUNAL. THE ASSESSING OFFICER HA S NOT BROUGHT ON RECORD ANY FACTS TO JUSTIFY A HIGHER DISALLOWANC E THAN WHAT IS CLAIMED BY THE ASSESSEE. THE BANGALORE BENCH OF TH E ITAT IN THE CASE OF BHARATIYA RESERVE BANK NOTE MUDRAN PRIV ATE LTD (SUPRA) HAS TAKEN THE VIEW THAT RESORT TO RULE 8D(2 ) CANNOT BE HAD AS A MATTER OF COURSE AND IT IS ONLY WHEN NO REASON ABLE AND PROPER PARAMETER FOR MAKING DISALLOWANCE U/S.14A OF THE ACT EXISTS, RESORT TO RULE 8D(2) CAN BE HAD BY THE ASSE SSING OFFICER. WE ARE OF THE VIEW THAT IN THE PRESENT CASE, THE AS SESSING OFFICER HAS COMPLETELY IGNORED THE SUBMISSIONS MADE BY THE ASSESSEE IN THIS REGARD AND HAS BLINDLY APPLIED RULE 8D(2)(III) OF THE RULES AND MADE DISALLOWANCE U/S.14A OF THE ACT. IN OUR V IEW, SUCH AN ACTION CANNOT BE SUSTAINED. WE ARE ALSO OF THE VIE W THAT THE BASIS OF DISALLOWANCE MADE BY THE ASSESSEE IN THE LIGHT O F EXPLANATION PROVIDED BY THE ASSESSEE BEFORE THE ASSESSING OFFIC ER IS REASONABLE AND THE SAME DESERVES TO BE ACCEPTED. F OR THE REASONS GIVEN ABOVE, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S.14A OF THE ACT. 36. THE ABOVE OBSERVATIONS OF THE TRIBUNAL IN ASSES SEES OWN CASE IN AY 2010-11 WOULD BE EQUALLY APPLICABLE TO THE PRESE NT ASSESSMENT YEAR ALSO, AS THE FACTS AND CIRCUMSTANCES ARE IDENTICAL. IN THE PRESENT ASSESSMENT YEAR, ASSESSEE HAS NOT MADE ANY DISALLOW ANCE ON HIS OWN U/S. 14A OF THE ACT. UNDER THE CIRCUMSTANCES, IT W OULD BE JUST AND PROPER ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 33 OF 38 TO SUSTAIN DISALLOWANCE OF 5% OF THE TAX FREE INCOM E. WE HOLD AND DIRECT ACCORDINGLY. 37. GROUND NO.5 RAISED BY THE REVENUE READS AS FOL LOWS:- 5. THE LEARNED AO BE DIRECTED TO ALLOW THE DEDUCT ION OF RS.36,54,07,903/- U/S 36(1)(VII) OF THE ACT, BEING THE DEBTS WRITTEN OFF BY THE NON-RURAL BRANCHES OF THE APPELL ANT BANK. 38. THE NON-RURAL BRANCHES OF THE ASSESSEE HAD WRIT TEN OFF DEBTS TO THE TUNE OF RS.36,54,07,903 AS BAD DEBTS. THE ASSESSEE WAS ENTITLED TO CLAIM THE SAID SUM AS DEDUCTION U/S.36(1)(VII) OF THE ACT . IT APPEARS THAT THE ASSESSEE DID NOT CLAIM ON AN ERRONEOUS ADVISE THAT THE BAD DEBTS WRITTEN OFF SHOULD BE ADJUSTED AGAINST PROVISION FOR BAD AN D DOUBTFUL DEBTS CREATED U/S.36(1)(VIIA)(A) OF THE ACT. THE ASSESSEE AFTER NOTICING THE DEVELOPMENT OF LAW IN THIS REGARD, AS WE HAVE SEEN EARLIER WHIL E DECIDING GR.NO.2.1 TO 2.3 OF THE GROUNDS OF APPEAL IN ITA NO.496/BANG/10 FOR AY 2006-07, HAS CHOSEN TO RAISE THE AFORESAID GROUND OF APPEAL BEFO RE THE TRIBUNAL, MAKING A CLAIM FOR DEDUCTION U/S.36(1)(VII) OF THE ACT FOR THE FIRST TIME BEFORE THE TRIBUNAL. 39. WE HAVE HEARD THE SUBMISSIONS OF THE LD. COUNS EL FOR THE ASSESSEE AND THE LD. DR. WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE BEING A LEGAL CLAIM AND AS THE FACTS NECESSARY FOR ADJUDICA TION OF THE LEGAL GROUND ARE ALREADY ON RECORD, THE ADDITIONAL GROUND HAS TO BE ADMITTED FOR ADJUDICATION. WE THEREFORE ADMIT THE ADDITIONAL GR OUND FOR ADJUDICATION. ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 34 OF 38 WE, HOWEVER, ARE OF THE VIEW THAT THE FACTUAL DETAI LS THAT ARE ALREADY AVAILABLE ON RECORD NEED TO BE VERIFIED, TO ADJUDIC ATE THE CLAIM OF THE ASSESSEE. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE AO TO CONSIDER THE CLAIM OF THE ASSESSEE IN ACC ORDANCE WITH LAW, AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD. GR OUND NO.5 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 40. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTL Y ALLOWED. ITA 816/BANG/2011 (A.Y. 2009-10) 41. GROUND NO.1 RAISED BY THE ASSESSEE IS GENERAL I N NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 42. GROUND NOS. 2 TO 4 RAISED BY THE ASSESSEE READ AS FOLLOWS:- 2. LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF RS. 25,23,97,921/- U/ S 14A OF THE ACT. 3. LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FA ILED TO APPRECIATE THE FACT THAT NO DISALLOWANCE OF INTERES T CAN BE MADE. 4. LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) FA ILED TO APPRECIATE THE FACT THAT THE LEARNED AO HAS NOT REC ORDED ANY DISSATISFACTION ABOUT THE CLAIM OF THE APPELLANT AN D THE DISALLOWANCE WAS MADE BASED ON NOTIONAL COST. 43. THE AFORESAID GROUNDS RAISED BY THE ASSESSEE AR E IDENTICAL TO GROUNDS 2 TO 4 RAISED BY THE ASSESSEE IN A.Y. 2008- 09. THE FACTS AND CIRCUMSTANCES UNDER WHICH DISALLOWANCE U/S. 14A OF THE ACT WAS MADE ARE ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 35 OF 38 IDENTICAL IN BOTH THE ASSESSMENT YEARS. THE INVEST MENTS IN TAX FREE SECURITIES AS ON 31.3.2008 WAS RS.850.23 CRORES AND AS ON 31.3.2009 THE SAME WAS AT RS.413.75 CRORES. THE OWN FUNDS AVAILA BLE AS ON 31.3.2008 AND 31.3.2009 RESPECTIVELY WERE RS.14,734.64 CRORES AND RS.18,070.69 CRORES RESPECTIVELY. THE AVAILABILITY OF INTEREST FREE FUNDS FOR MAKING INVESTMENTS IN TAX FREE SECURITIES CANNOT BE DISPUT ED. THEREFORE DISALLOWANCE U/S.14A OF THE ACT READ WITH RULE 8D(2 )(I) & (II) OF THE RULES CANNOT THEREFORE BE MADE. THE DISALLOWANCE U/S.14A OF THE ACT READ WITH RULE 8D(2)(III) OF THE RULES ALONE HAS TO BE MADE A ND THE SAME IS DIRECTED TO BE DETERMINED AT 5% OF THE TAX FREE INCOME EARNE D BY THE ASSESSEE FOR THE REASONS STATED WHILE DECIDING IDENTICAL GROUNDS IN A.Y. 2008-09. WE HOLD THAT DISALLOWANCE U/S. 14A OF THE ACT BE RESTR ICTED TO 5% OF THE EXEMPTED INCOME AND DIRECT THE AO DELETE THE REMAIN ING SUM. 44. GROUND NOS.5 & 6 RAISED BY THE ASSESSEE IS AS FOLLOWS:- 5. THE LOWER AUTHORITIES ERRED IN NOT GIVING CRED IT OF RS. 84,97,160/- BEING ADDITIONAL INCOME TAX PAID U/S 11 5(O) OF THE ACT ON THE DIVIDEND RECEIVED FROM A 100% SUBSIDIARY OF THE APPELLANT. 6. THE LOWER AUTHORITIES ERRED IN NOT GIVING CRED IT OF RS. 1,20,08,840/- BEING THE REFUND ARISING U/S 115WE(3) OF THE ACT BEING THE EXCESS PAYMENT OF FRINGE BENEFIT TAX. 45. AS FAR AS GROUND NO.5 IS CONCERNED, SAME WAS RA ISED BEFORE THE CIT(APPEALS) BY THE ASSESSEE, BUT THE SAME WAS WITH DRAWN AND APPLICATION U/S. 154 WAS FILED BY THE ASSESSEE SEEK ING ADJUDICATION OF THE ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 36 OF 38 ISSUE BUT THE SAME HAS NOT YET BEEN CONSIDERED AND DECIDED. PROVISIONS OF SECTION 115-O(1A) OF THE ACT ARE AS FOLLOWS:- SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES. 115-O.(1) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT AND SUBJECT TO THE PROVISIONS OF THIS SECTION, IN ADDITION TO THE INCOME-TAX CHARGEABLE IN RESPECT OF THE TOTAL INCOME OF A DOMESTIC COMPANY FOR ANY ASSESSMENT YEAR, ANY AMOUNT DECLARED, DISTRIBUTED OR PAID BY SUCH COMPANY BY WA Y OF DIVIDENDS (WHETHER INTERIM OR OTHERWISE) ON OR AFTER THE 1ST DAY OF APRIL, 2003, WHETHER OUT OF CURRENT OR ACCUMULATED PROFITS SHALL BE CHARGED TO ADDITIONAL INCOME-TAX (HEREAFTER REFERRED TO AS TAX ON DISTRIBUTED PROFITS) AT THE RATE OF FIFTEEN PER CENT. (1A) THE AMOUNT REFERRED TO IN SUB-SECTION (1) SHAL L BE REDUCED BY, ( I ) THE AMOUNT OF DIVIDEND, IF ANY, RECEIVED BY THE D OMESTIC COMPANY DURING THE FINANCIAL YEAR, IF SUCH DIVIDEND IS RECE IVED FROM ITS SUBSIDIARY AND, ( A ) WHERE SUCH SUBSIDIARY IS A DOMESTIC COMPANY, THE SUBSIDIARY HAS PAID THE TAX WHICH IS PAYABLE UNDER THIS SECTIO N ON SUCH DIVIDEND; OR ( B ) WHERE SUCH SUBSIDIARY IS A FOREIGN COMPANY, THE T AX IS PAYABLE BY THE DOMESTIC COMPANY UNDER SECTION 115BBD ON SUCH DIVIDEND: PROVIDED THAT THE SAME AMOUNT OF DIVIDEND SHALL NOT BE TAKEN INTO ACCOUNT FOR REDUCTION MORE THAN ONCE; ( II ) THE AMOUNT OF DIVIDEND, IF ANY, PAID TO ANY PERSO N FOR, OR ON BEHALF OF, THE NEW PENSION SYSTEM TRUST REFERRED TO IN CLAUSE (44) OF SECTION 10. EXPLANATION. FOR THE PURPOSES OF THIS SUB-SECTION, A COMPANY SH ALL BE A SUBSIDIARY OF ANOTHER COMPANY, IF SUCH OTHER C OMPANY, HOLDS ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 37 OF 38 MORE THAN HALF IN NOMINAL VALUE OF THE EQUITY SHARE CAPITAL OF THE COMPANY. 46. IT IS THE CLAIM OF ASSESSEE THAT IT HAD RECEIV ED A SUM OF RS.84,97,160 FROM ITS 100% SUBSIDIARY AND THAT THE SUBSIDIARY HAS PAID TAX U/S. 115-O ON SUCH DIVIDEND DISTRIBUTED. THE ASSESS EE HAS THEREFORE PRAYED THAT ASSESSEE SHOULD BE GIVEN CREDIT FOR THE AFORESAID SUM, WHICH WAS, BY MISTAKE, PAID BY THE ASSESSEE. THE GROUND BEING A LEGAL GROUND WHICH CAN BE DECIDED ON THE BASIS OF FACTS AVAILABL E ON RECORD, WE DEEM IT APPROPRIATE TO CONSIDER THE CLAIM OF THE ASSESSEE N OTWITHSTANDING THE FACT THAT THE SAID GROUND WAS WITHDRAWN BEFORE CIT(A). IN TAX MATTERS THERE CANNOT BE ANY ESTOPPEL. TAX DETERMINATION AND COLL ECTION HAS TO BE IN ACCORDANCE WITH LAW AND NOT BASED ON ANY CONCESSION OF LEGAL RIGHTS BY AN ASSESSEE. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND PROPER TO DIRECT THE AO TO EXAMINE THE CLAIM OF ASSESSEE AND IF FOUND CO RRECT, TO ALLOW THE SAME. 47. AS FAR AS GROUND NO.6 IS CONCERNED, THIS ISSUE WAS NEVER RAISED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES. THIS GR OUND BEING A LEGAL GROUND WHICH CAN BE DECIDED ON THE BASIS OF THE FAC TS AVAILABLE ON RECORD, WE ARE OF THE VIEW THAT THE SAME SHOULD BE ADMITTED FOR ADJUDICATION. 48. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND A PPROPRIATE TO DIRECT THE AO TO CONSIDER THE CLAIM OF ASSESSEE FOR CREDIT OF A SUM OF RS.1,20,08,840 BEING THE REFUND ARISING U/S. 115WE(3) OF THE ACT, WHICH HIS CLAIMED BY THE ITA NOS.496/BANG/2010 & 815 & 816/BANG/2011 PAGE 38 OF 38 ASSESSEE AS EXCESS PAYMENT OF FRINGE BENEFIT TAX. IF THE CLAIM OF THE ASSESSEE IS FOUND TO BE CORRECT, THEN ASSESSEE SHOU LD BE GIVEN APPROPRIATE CREDIT IN ACCORDANCE WITH LAW. WE HOLD AND DIRECT ACCORDINGLY. 49. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTL Y ALLOWED. 50. IN THE RESULT, APPEAL BY THE REVENUE IS DISMISSED , WHILE APPEALS BY THE ASSESSEE ARE PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER , 2014 . SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 31 ST OCTOBER, 2014 . ENCL: ANNEXURES I & II . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.