DCIT, Circle-3(2), Hyd, Hyderabad V. State Bank of Hyderabad, Hyd, Hyderabad

ITA 498/HYD/2015

• Counselvise Citation: 49822514 RSA 2015
• Duration Of Justice: 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 01-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: MRS LALITHA RAMESWARAN
• Keywords: Depreciation; Earning of tax free income; Bad and doubtful debts
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 450/HYD/2015 ASSESSMENT YEAR: 2012-13 STATE BANK OF HYDERABAD, HYDERABAD. PAN AAADCS 4009 H VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(2), HYDERABAD (APPELLANT) (RESPONDENT) ITA NOS. 498 AND 499/HYD/2015 ASSESSMENT YEARS: 2007-08 & 2012-13 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(2), HYDERABAD VS. STATE BANK OF HYDERABAD, HYDERABAD. PAN AAADCS 4009 H (APPELLANT) (RESPONDENT) ASSESSEE BY : MRS. LALITHA RAMESWARAN REVENUE BY : SHRI J. SIRI KUMAR DATE OF HEARING 13-07-2015 DATE OF PRONOUNCEMENT 14-08-2015 O R D E R PER SAKTIJIT DEY, J.M.: OUT OF THESE THREE APPEALS, TWO BY THE DEPARTMENT AND ONE BY ASSESSEE ARE AGAINST TWO SEPARATE ORDERS OF LD. CIT (A)-III, HYDERABAD FOR THE AYS 2007-08 AND 2012-13. WHILE APPEAL FOR AY 2007-08 BEING ITA NO. 498/HYD/2015 IS BY THE DEPARTMENT, THERE AR E CROSS APPEALS FOR THE AY 2012-13. AS THE ISSUES MORE OR LESS ARE COMMON AND 2 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD ASSESSEE IS SAME IN THESE APPEALS, THEY WERE CLUBBE D AND HEARD TOGETHER, AND THEREFORE, WE FIND IT CONVENIENT TO D ISPOSE OF THESE APPEALS BY WAY OF A COMMON ORDER. ITA NO. 498/HYD/2015 FOR AY 2007-08 BY REVENUE 2. SOLITARY ISSUE RAISED BY REVENUE IN THIS APPEAL IS IN RELATION TO DELETION BY CIT(A) OF ADDITION MADE U/S 14A OF THE ACT BY AO. 3. BRIEFLY THE FACTS ARE, ASSESSEE IS A BANKING COM PANY AND SUBSIDIARY OF SBI. FOR THE AY UNDER CONSIDERATION, ASSESSEE HAD FILED ITS RETURN OF INCOME ON 31/10/07 DECLARING TOTAL IN COME OF RS. 495,28,37,146. ASSESSMENT IN CASE OF ASSESSEE WAS O RIGINALLY COMPLETED U/S 143(3) OF THE ACT VIDE ORDER DATED 30 /09/08 BY DISALLOWING EXPENDITURE OF RS. 5,83,68,430 U/S 14A OF THE ACT. AGAINST SUCH ASSESSMENT ORDER ASSESSEE PREFERRED APPEAL BEF ORE LD. CIT(A). LD. CIT(A), HOWEVER, DIRECTED AO TO DISALLOW THE EX PENDITURE IN TERMS WITH RULE 8D OF THE IT RULES. ASSESSEE CARRIED FURT HER APPEAL TO ITAT. ITAT DISPOSED OF THE APPEAL OF ASSESSEE VIDE ORDER DATED 07/09/2012 HOLDING THAT RULE 8D OF IT RULES WILL NOT BE APPLIC ABLE FOR THE IMPUGNED AY. FURTHER ITAT DIRECTED AO TO ESTIMATE T HE DISALLOWANCE OF EXPENDITURE U/S 14A AT A REASONABLE RATE. THOUGH , THE DEPARTMENT CHALLENGED THE ORDER OF ITAT BEFORE THE HONBLE HIG H COURT, BUT, THE DEPARTMENTS APPEAL WAS DISMISSED BY THE HONBLE HI GH COURT VIDE ORDER DATED 07/08/2013 IN ITTA NO. 323 OF 2013. 4. THUS, IN TERMS WITH THE DIRECTION OF ITAT TO REA SONABLY ESTIMATE THE DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT, AO PASSED IMPUGNED ASSESSMENT ORDER ON 29/11/2013 QUANTIFYING THE DISALLOWANCE U/S 14A AT RS. 5,83,68,430. WHILE DOIN G SO, AO OBSERVED THAT ASSESSEE HAS INCURRED OPERATING EXPEN DITURE OF RS. 808 CRORES AND INTEREST EXPENDITURE OF RS. 2134 CRO RES FOR EARNING TOTAL INCOME OF RS. 3946 CRORES. ACCORDING TO AO, I NTEREST AND 3 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD OPERATING EXPENDITURE INCURRED BY ASSESSEE WORKS OU T TO 74% OF THE TOTAL INCOME. HE, THEREFORE, INFERRED THAT ASSESSEE WOULD HAVE SPENT THE SAME PERCENTAGE AS EXPENDITURE FOR EARNING THE EXEMPT INCOME ALSO. AS ASSESSEE HAD ITSELF DISALLOWED AN AMOUNT O F RS. 7,03,500 U/S 14A, AO TREATED THE BALANCE AMOUNT OF RS. 5,76,64,9 30 AS EXPENDITURE INCURRED TOWARDS EARNING OF EXEMPT INCO ME AND ADDED IT TO THE INCOME OF ASSESSEE. BEING AGGRIEVED OF SUCH DISALLOWANCE, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A). 5. IN COURSE OF HEARING OF APPEAL BEFORE LD CIT(A), ASSESSEE RELYING UPON THE DECISIONS OF ITAT IN ITS OWN CASE SUBMITTED, IT HAS ALREADY MADE DISALLOWANCE U/S 14A AN AMOUNT EQUAL TO ESTABLISHMENT CHARGES IN THE FORM OF SALARY TO OFFI CERS AND STAFF WORKING IN THE INVESTMENT DIVISION INCURRED FOR A P ERIOD OF TWO MONTHS. IT WAS ALSO SUBMITTED BY ASSESSEE, SINCE TAX FREE I NVESTMENTS ARE IN THE NATURE OF STOCK-IN-TRADE OF ASSESSEE, EXEMPT IN COME EARNED BY ASSESSEE ON SUCH INVESTMENT, WHICH ARE EXEMPT FROM TAXATION SHOULD ALSO BE INCIDENTAL TO THE ASSESSEES BUSINESS, HENC E, NO DISALLOWANCE U/S 14A COULD BE MADE. IN THIS CONTEXT, ASSESSEE RE LIED UPON A DECISION OF THE HONBLE KARNATAKA HIGH COURT IN CAS E OF CCI VS. JCIT, 250 CTR 291. 6. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, DELETED THE ADDITION MADE BY AO BY HOLDING AS UNDER : 6. I HAVE CONSIDERED THE FACTS ON RECORD AND THE SUBMISSIONS OF THE AR IN THIS REGARD. IN MY APPELLATE ORDERS FOR AY 2010-11 AND 2011- 12 DATED 18.2.2014, IT WAS HELD ON IDENTICAL FACT S, RELYING ON THE DECISION IN THE CASE OF CCI LTD VS. JCIT (KAR) 25 0 CTR 291 THAT SINCE THE TAX FREE BONDS AND OTHER INVESTMENTS HAD BEEN HELD TO BE IN THE NATURE OF STOCK IN TRADE OF THE APPELLANT, IT WOUL D BE LOGICAL TO HOLD THAT THE INTEREST AND DIVIDEND EARNED BY THE APPELLANT, WHICH ARE EXEMPT FROM TAXATION, STATE BANK OF HYDERABAD WERE INCIDENTAL TO THE APPELLANT'S BUSINESS AND THAT NO DISALLOWANCE U/S 14A, OTHER T HAN THAT ALREADY MADE 4 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD BY THE APPELLANT IN ITS COMPUTATION OF INCOME AS I TS RETURNS, WAS WARRANTED WITH REGARD TO SUCH INVESTMENTS. 7. FOLLOWING MY DECISION IN THE APPELLANT'S OWN C ASE, AS CITED ABOVE, THE DISALLOWANCE OF RS. 5,76,64,930 IS DIRECTED TO BE DELETED AND THE APPEAL IS ALLOWED. 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD. WHILE DR RELIED UPON THE R EASONING OF AO, LD. AR SUBMITTED BEFORE US, TRIBUNAL IN ASSESSEES OWN CASE FOR THE PRECEDING AYS HAS HELD THAT REASONABLE EXPENDITURE WHICH COULD BE DISALLOWED U/S 14A WOULD BE AN AMOUNT EQUAL TO EXPE NDITURE INCURRED BY ASSESSEE TOWARDS TWO MONTHS SALARY OF OFFICERS A ND STAFF OF INVESTMENT DIVISION. IN THIS CONTEXT, LD. AR PLACED ON RECORD ORDER PASSED BY ITAT IN ASSESSEES OWN CASE FOR AYS 1996- 97 TO 1998-99 IN ITA NO. 661,662 & 663/HYD/2003 DATED 19/03/10 PA SSED IN ITA NO. 584/HYD/08 FOR AY 2005-06 AND ORDER DATED 06/08/201 0 PASSED IN ITA NO. 827/H/09 FOR AY 2006-07. 8. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIES , THE ONLY ISSUE WHICH ARISES FOR CONSIDERATION, IN OUR VIEW, IS WHETHER THE DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT IS V ALID OR NOT. AS CAN BE SEEN, IN ASSESSEES OWN CASE FOR PRECEDING AY, T HE TRIBUNAL HAS HELD THAT BEFORE INTRODUCTION OF RULE 8D, DISALLOWA NCE U/S 14A OF THE ACT HAS TO BE MADE AT A REASONABLE RATE. IN THIS CO NTEXT, TRIBUNAL IN ASSESSEES OWN CASE HAS HELD THAT EXPENDITURE INCUR RED TOWARDS TWO MONTHS SALARY FOR OFFICERS AND STAFF IN INVESTMENT DIVISION COULD BE CONSIDERED AS DISALLOWANCE TO BE MADE U/S 14A OF TH E ACT. AS IT APPEARS, ASSESSEE IN TERMS WITH THE AFORESAID DIREC TION OF TRIBUNAL HAS DISALLOWED EXPENDITURE OF RS. 7,03,500 U/S 14 A OF THE ACT. IN THE AFORESAID VIEW OF THE MATTER, WE DO NOT FIND AN Y INFIRMITY IN THE ORDER OF LD. CIT(A) IN DELETING ADDITION MADE BY AO . ACCORDINGLY GROUNDS RAISED ARE DISMISSED. 5 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD 9. IN THE RESULT, DEPARTMENTS APPEAL IS DISMISSED. ITA NO. 450/HYD/15 FOR AY 2012-13 BY ASSESSEE 10. IN THIS APPEAL, ASSESSEE HAS RAISED TWO ISSUES. 11. IN GROUND NO.2 ASSESSEE HAS CHALLENGED THE DISA LLOWANCE OF DEDUCTION CLAIMED U/S 36(1)(VIIA) FOR THE AMOUNT OF RS. 43,95,77,953. 12. BRIEFLY THE FACTS RELATING TO THIS ISSUE ARE, D URING THE ASSESSMENT PROCEEDING, AO WHILE EXAMINING ASSESSEE S CLAIM ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS, NO TICED THAT ASSESSEE HAS COMPUTED THE PROVISION FOR BAD AND DOU BTFUL DEBTS ALLOWABLE AS UNDER: A. BAD AND DOUBTFUL DEBTS @ 7.5% OF TOTAL INCOME 156,55,18,082 B. RURAL BRANCH ADVANCES @ 10% OF THE AGGREGATE AVERAGE RURAL ADVANCES BASED ON CENSUS PUBLISHED IN 2011 503,95,59,872 TOTAL 660,50,77,954 ============ HE NOTICED THAT IN THE COMPUTATION OF TAXABLE INCOM E ASSESSEE HAS CLAIMED THE TOTAL AMOUNT OF RS. 6,60,50,77,954 TOWA RDS PROVISION FOR BAD AND DOUBTFUL DEBTS U/S 36(1)(VIIA). IN ADDITION , ASSESSEE HAS ALSO CLAIMED DEDUCTION OF RS. 209,07,50,831 AS BAD DEBTS WRITTEN OFF U/S 36(1)(VII) IN RESPECT OF NON RURAL ADVANCES. AO OBS ERVED THAT AS PER THE PROVISO TO SECTION 36(1)(VII), THE AMOUNT OF D EDUCTION RELATING TO ANY DEBT OR PART THEREOF SHALL BE LIMITED TO THE AM OUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAU SE. HE OBSERVED THAT ASSESSEE BANK HAD OPENING BALANCE OF PROVISION S FOR NPAS AT RS. 475.83 CRORES AND MADE FRESH PROVISION OF RS. 5 80.46 CRORES DURING THE YEAR AND AGAINST THE SAME, ASSESSEE HAS WRITTEN OFF RS. 210.74 IN ITS BOOKS OF ACCOUNT. HOWEVER, IN THE COM PUTATION OF TOTAL 6 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD INCOME, ASSESSEE HAS CLAIMED DEDUCTION OF RS. 209.0 8 CRORE IN STEAD OF SETTING OFF AGAINST PROVISION OF RS. 616.55 CROR ES. HE FURTHER NOTED THAT DURING THE YEAR, ASSESSEE HAS CLAIMED DEDUCTIO N OF RS. 660,50,77,954 U/S 36(1)(VIIA), WHICH IS WORKED OUT AS PER THE LIMIT PRESCRIBED BY THE ACT. HOWEVER, AS PER THE BOOKS OF ACCOUNT, ASSESSEE HAS CREATED PROVISION FOR AN AMOUNT OF RS. 616.55 FOR NPAS, WHICH ALSO INCLUDES RS. 596.57 FOR NON-RURAL BRANCH ADVANCES AND RS. 19.98 CRORES FOR RURAL BRANCHES ADVANCES. T HUS, IT WAS INFERRED BY AO THAT ASSESSEE HAS CLAIMED DEDUCTION U/S 36(1)(VIIA) TO THE MAXIMUM LIMIT PRESCRIBED EVEN THOUGH THE ACTUAL PROVISION MADE IN BOOKS IS LESS. AO THEREAFTER RELYING UPON NUMBER OF DECISIONS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN CASE OF CATHOLIC SYRIAN BANK LTD. VS. CIT, 343 ITR 270 AS WELL AS RE FERRING TO THE PROVISIONS OF SECTION 36(1)(VIIA) AND SECTION 36(1 )(VII) HELD THAT SINCE ASSESSEE HAS CREATED PROVISION FOR RURAL DEBTS AT R S. 19.98 CRORES IN THE BOOKS OF ACCOUNT FOR THE YEAR ENDING 31/03/2012 , DEDUCTION U/S 36(1)(VIIA) HAS TO BE RESTRICTED TO THAT AMOUNT ONL Y AND THE BALANCE AMOUNT OF RS. 640,52,77,954 HAS TO BE DISALLOWED. A CCORDINGLY, HE ADDED BACK THE AMOUNT OF RS. 640,52,77,594. BEING A GGRIEVED OF SUCH DISALLOWANCE, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A). 13. BEFORE LD. CIT(A), ASSESSEE SUBMITTED THAT SECT ION 36(1)(VIIA) PROVIDES FOR A SPECIAL DEDUCTION WHICH HAS TO BE CA LCULATED AS PER THE SAID PROVISION AND NOT WITH REFERENCE TO THE PROVIS ION MADE IN THE BOOKS OF ACCOUNT. ALTERNATIVELY, IT WAS SUBMITTED B Y ASSESSEE THAT AFTER THE AMENDMENT TO SECTION 36(1)(VIIA) IN THE Y EAR 1985, ITS SCOPE HAS BEEN ENLARGED AND THE CONDITION THAT THE PROVIS ION SHOULD RELATE ONLY TO RURAL DEBTS HAS BEEN REMOVED. IT WAS SUBMI TTED BY ASSESSEE AS PER THE PROVISION U/S 36(1)(VIIA) AS IT STANDS N OW THERE IS NO REQUIREMENT THAT PROVISION SHOULD RELATE TO RURAL A DVANCES ALONE. THUS, IT WAS SUBMITTED, ASSESSEE HAD MADE PROVISIO N OF RS. 616.55 CRORES AND CLAIMED DEDUCTION OF RS. 660.50 CRORES. 7 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD 14. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE NOTED THAT AS PER THE DECISIONS OF ITAT IN ASSESSEES OWN CASE IN THE PRECEDING AYS DEDUCTION U/S 36(1)(VIIA) IS ALLOWABL E TO THE EXTENT OF PROVISION ACTUALLY MADE. SHE, THEREFORE, DIRECTED T HAT DEDUCTION U/S 36(1)(VIIA) SHOULD BE ALLOWED TO THE EXTENT OF PROV ISION MADE IN THE BOOKS OF ACCOUNT. BEING AGGRIEVED OF THE AFORESAID DECISION OF LD. CIT(A), ASSESSEE PREFERRED APPEAL BEFORE US. 15. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIAL ON RECORD. AT THE OUTSET, LD. AR FAIRL Y CONCEDED THAT THE DECISION OF LD. CIT(A) TO RESTRICT THE DEDUCTION CL AIMED U/S 36(1)(VIIA) TO THE EXTENT OF PROVISION ACTUALLY MADE IN THE BOO KS OF ACCOUNT IS FAIR AND REASONABLE. CONSIDERING SUCH SUBMISSIONS OF LD. AR, WE UPHOLD THE ORDER OF LD. CIT(A) ON THIS ISSUE AND DISMISS T HE GROUND RAISED. 14. THE NEXT ISSUE AS RAISED IN GROUND NO. 3 IS IN RELATION TO DISALLOWANCE OF AN AMOUNT OF RS. 209,07,50,831 CLAI MED AS DEDUCTION U/S 36(1)(VII) OF THE ACT. 15. BRIEFLY THE FACTS ARE, AS ALREADY STATED IN THE PRECEDING PARAGRAPHS, ASSESSEE DURING THE YEAR HAD OPENING BA LANCE OF PROVISION FOR NPAS AT RS. 428.83 CRORE AND MADE FRE SH PROVISION OF RS. 580.46 CRORE DURING THE YEAR. AGAINST THE AFORE SAID PROVISION MADE ASSESSEE HAD WRITTEN OFF RS. 210.74 CRORE IN I TS BOOKS OF ACCOUNT. HOWEVER, IN THE COMPUTATION OF INCOME, ASS ESSEE CLAIMED DEDUCTION OF RS. 209.08 CRORE U/S 36(1)(VII). AO WH ILE COMPLETING ASSESSMENT OBSERVED THAT OUT OF THE TOTAL PROVISION OF RS. 616.55 CRORES MADE IN THE BOOKS OF ACCOUNT, AN AMOUNT OF R S. 596.57 WAS FOR NON-RURAL ADVANCESS AND RS. 19.98 CRORES FOR RU RAL ADVANCES. AO OBSERVED THAT BAD DEBTS WRITTEN OFF IN THE BOOKS OF ACCOUNT IS NOT CONTROLLED OR LIMITED BY THE PROVISO TO CLAUSE 36(1 )(VII). IN OTHER WORDS, BAD DEBTS WRITTEN OFF IN THE ACCOUNTS OF AS SESSEE REPRESENTING URBAN ADVANCES IS AN ALLOWABLE DEDUCTION. HE, THERE FORE, ACCEPTED 8 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD ASSESSEES CLAIM OF DEDUCTION U/S 36(1)(VII) FOR AN AMOUNT OF RS. 209,07,50,831 AS THE SAME WAS LESS THAN THE PROVISI ON MADE IN THE BOOKS OF ACCOUNT AT RS. 596.57 CRORES. HAVING HELD SO, AO OBSERVED THAT IF IT IS ULTIMATELY HELD THAT ASSESSEE IS ENTI TLED TO MAKE PROVISION FOR BOTH URBAN AND RURAL ADVANCES U/S 36(1)(VIIA), THE, PROVISO U/S 36(1)(VII) WILL OPERATE AND ASSESSEE WILL NOT BE EN TITLED TO WRITE OFF BAD DEBTS CLAIMED U/S 36(1)(VII) FOR THE AMOUNT OF RS. 209,07,50,831. BEING AGGRIEVED OF SUCH DECISION OF AO, ASSESSEE CH ALLENGED THE SAME BEFORE LD. CIT(A). LD. CIT(A), HOWEVER, UPHELD THE DECISION OF AO BY OBSERVING AS UNDER: 9.2 THIS ALTERNATIVE DISALLOWANCE BY THE ASSESSING OFFICER IS A NATURAL COROLLARY TO THE REJECTION OF THE DISALLOW ANCE U/S 36(1)(VIIA). A DEBT CANNOT BE CLAIMED BOTH ON THE BASIS OF ITS BEING WRITTEN OFF AND ITS BEING PART OF THE PROVI SION. THE APPELLANT ADMITTEDLY HAD MADE A PROVISION OF ONLY RS. 19.98 CRORES IN ITS BOOKS FOR RURAL BAD DEBTS. THE BALAN CE PROVISION ADMITTEDLY RELATED TO URBAN DEBTS. THE DISALLOWANC E OF RS. 209,07,50,831 U/S 36(L)(VII) IS, THEREFORE, UPHELD . 16. LD. AR SUBMITTED BEFORE US, ASSESSEE CAN CLAIM DEDUCTION BOTH U/S 36(1)(VII) AND 36(1)(VIIA) SUBJECT TO RESTRICTI ONS PUT UNDER THE PROVISO TO SECTION 36(1)(VII) OF THE ACT, WHICH ONL Y APPLIES TO RURAL DEBTS. IT WAS SUBMITTED BY LD. AR, AS THE AMOUNT OF RS. 209,07,50,831 REPRESENTS THE DEBTS ACTUALLY WRITTEN OFF RELATING TO NON-RURAL ADVANCES CLAIM OF DEDUCTION U/S 36(1)(VII) CANNOT B E DISALLOWED. HE SUBMITTED, THE HONBLE SUPREME COURT IN CASE OF CA THOLIC SYRIAN BANK VS., CIT (SUPRA) HAS CLEARLY LAID DOWN THE LAW THAT PROVISO TO SECTION 36(1)(VII) IS APPLICABLE ONLY IN RESPECT OF RURAL ADVANCES AND NOT NON-RURAL ADVANCES. THEREFORE, THE DEBTS RELATI NG NON-RURAL ADVANCES ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOU NT CANNOT BE DISALLOWED BY APPLYING PROVISO TO SECTION 36(1)(VII ). IN THIS CONTEXT, HE SPECIFICALLY REFERRED TO THE OBSERVATIONS MADE IN P ARA 2 OF THE JUDGMENT DELIVERED BY HONBLE SUPREME COURT. LD. A R SUBMITTED, AS FAR AS THE PROVISION FOR BAD AND DOUBTFUL DEBT TO B E MADE U/S 36(1)(VIIA) IS CONCERNED, IT WILL INCLUDE BOTH RURA L ADVANCES AND NON- 9 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD RURAL ADVANCES. IN THIS CONTEXT, HE REFERRED TO THE DECISION OF THE ITAT BANGALORE BENCH IN CASE OF DCIT VS. ING VYSYA BANK LTD., ITA NO. 53 & 54/BANG./13, DATED 25/10/2013. THUS, LD. AR SU BMITTED, ASSESSEE HAVING ACTUALLY WRITTEN OFF BAD DEBTS RELA TING TO NON-RURAL ADVANCES, NO DISALLOWANCE CAN BE MADE BY APPLYING P ROVISO TO SECTION 36(1)(VII). 17. LD. DR, ON THE OTHER HAND, REFERRING TO EXPLANA TION 2 TO SECTION 36(1)(VII)SUBMITTED BEFORE US, AS PER THE SAID EXPL ANATION, IT HAS BEEN CLARIFIED THAT FOR THE PURPOSE OF PROVISO TO SECTIO N 36(1)(VII) ASSESSEE HAS TO MAINTAIN ONLY ONE ACCOUNT IN RESPECT OF PROV ISION FOR BAD AND DOUBTFUL DEBTS AND AS SUCH ACCOUNT WILL RELATE TO ALL TYPES OF ADVANCES INCLUDING THE ADVANCES MADE BY RURAL BRANC HES, NO DIFFERENTIATION CAN BE MADE BETWEEN RURAL ADVANCES AND NON-RURAL ADVANCES WHILE APPLYING THE PROVISO TO SECTION 36(1 )(VII). 18. IN THE REJOINDER, LD. AR SUBMITTED, EXPLANATION 2 TO SECTION 36(1)(VII) WAS INTRODUCED INTO THE STATUTE BY THE F INANCE ACT, 2013 WITH EFFECT FROM 01/04/2014, HENCE, IT WILL HAVE PR OSPECTIVE APPLICATION AND WILL NOT APPLY TO THE AY UNDER CONS IDERATION. IN THIS CONTEXT, HE RELIED UPON FOLLOWING DECISION:- 1. ITAT MUMBAI BENCH IN CASE OF BANK OF INDIA VS. ADDL. CIT- 14, [2014] (5) TMI 929 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF REVENU E AUTHORITIES. AS COULD BE SEEN FROM THE FINDING OF AO AS WELL AS LD. CIT(A), ONLY REASON FOR WHICH CLAIM OF DEDUCTION FOR RS. 209,07 ,50,831 REPRESENTING ACTUAL WRITE OFF OF BAD DEBTS RELATING TO NON-RURAL ADVANCES U/S 36(1)(VII) WAS DENIED IS, ASSESSEE HAV ING ALREADY AVAILED DEDUCTION U/S 36(1)(VIIA), IT IS NOT ELIGIB LE TO CLAIM DEDUCTION U/S 36(1)(VII) AS IT WILL AMOUNT TO DOUBLE DEDUCTIO N. IN OUR VIEW, BOTH AO AS WELL AS LD. CIT(A) HAVE COMMITTED FUNDAMENTAL ERROR BY MIXING UP PROVISIONS OF SECTIONS 36(1)(VII) AND 36(1)(VIIA ). WHILE 36(1)(VII) 10 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD SPEAKS OF ACTUAL WRITE OFF OF BAD DEBTS IN THE BOOK S OF ACCOUNT, SECTION 36(1)(VIIA) EVEN ALLOWS PROVISION MADE TOWA RDS BAD AND DOUBTFUL DEBTS IN RESPECT OF RURAL ADVANCES TO THE EXTENT OF PROVISION MADE IN THE BOOKS OF ACCOUNT SUBJECT TO THE CEILING FIXED UNDER CLAUSE (VIIA) OF SECTION 36(1). PROVISO TO SECTION 36(1)(VII) OPERATES ONLY IN A CASE WHERE DEDUCTION IS ALSO CLAIMED UNDE R SECTION 36(1)(VIIA). IN OTHER WORDS, PROVISO TO SECTION 36( 1)(VII) APPLIES TO WRITE OFF OF BAD DEBTS RELATING TO RURAL ADVANCES T O THE EXTENT IT EXCEEDS THE PROVISION MADE U/S 36(1)(VIIA). IF WE E XAMINE THE FACTS OF THE PRESENT CASE IN THE CONTEXT OF AFORESAID STATUT ORY PROVISION, IT WILL BE EVIDENT THAT ASSESSEE, THOUGH, HAS WRITTEN OFF I N THE BOOKS OF ACCOUNT AN AMOUNT OF RS. 210.74 CRORE, BUT, IN THE COMPUTATION OF TOTAL INCOME, THE ACTUAL DEDUCTION CLAIMED U/S 36(1 )(VII) IS RS. 209.08 CRORE REPRESENTING BAD DEBTS WRITTEN OFF RELATING T O NON-RURAL/URBAN ADVANCES. THE BALANCE AMOUNT OF BAD DEBTS RELATING TO RURAL ADVANCES WAS NOT CLAIMED AS DEDUCTION BY ASSESSEE I N TERMS WITH THE PROVISO TO SECTION 36(1)(VII) AS IT HAS NOT EXCEEDE D THE PROVISION FOR BAD AND DOUBTFUL DEBTS RELATING TO RURAL ADVANCES C REATED U/S 36(1)(VIIA). BOTH AO AND LD. CIT(A) HAVE MISCONSTRU ED THE STATUTORY PROVISIONS WHILE OBSERVING THAT PROVISO TO SECTION 36(1)(VII) WOULD ALSO APPLY IN CASE OF BAD DEBTS RELATING TO NON-RU RAL ADVANCES. THE HONBLE SUPREME COURT IN CASE OF CATHOLIC SYRIAN BA NK VS. CIT (SUPRA) WHILE ANALYZING PROVISIONS OF SECTION 36(1) (VII) AND 36(1)(VIIA) HAVE OBSERVED THAT SECTION 36(1)(VIIA) APPLIES ONLY TO RURAL ADVANCES. THE OBSERVATIONS MADE BY HONBLE APEX COURT IN THIS REGARD IN PARAS 26 & 27 OF THE JUDGMENT IS EXTRACTED HEREUNDER FOR CONVENIENCE. 26. THE SPECIAL BENCH OF THE TRIBUNAL HAD REJECTED THE CONTENTION OF THE REVENUE THAT PROVISO TO S. 36(1)(VII) APPLIES TO A LL BANKS AND WITH REFERENCE TO THE CIRCULARS ISSUED BY THE BOARD, HELD THAT A BANK WOULD BE ENTITLED TO BOTH DEDUCTIONS, ONE UNDER CL. (VII) OF S. 36(1) O F THE ACT ON THE BASIS OF ACTUAL WRITE OFF AND THE OTHER ON THE BASIS OF CL. (VIIA) OF S. 36(1) OF THE ACT ON THE MERE MAKING OF PROVISION FOR BAD DEBTS. THI S, ACCORDING TO THE REVENUE, WOULD LEAD TO DOUBLE DEDUCTION AND THE PR OVISO TO S. 36(1)(VII) WAS INTRODUCED WITH THE INTENTION TO PREVENT THIS MISCHIEF. THE CONTENTION OF THE REVENUE, IN OUR OPINION, WAS RIGHTLY REJECTED BY THE SPECIAL BENCH OF THE TRIBUNAL AND IT CORRECTLY HELD THAT THE BOARD ITSE LF HAD RECOGNIZED THE POSITION THAT A BANK WOULD BE ENTITLED TO BOTH THE DEDUCTIONS. FURTHER, IT 11 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD CONCLUDED THAT THE PROVISO HAD BEEN INTRODUCED TO PROTECT THE REVENUE, BUT IT WOULD BE MEANINGLESS TO INVOKE THE SAME WHERE T HERE WAS NO THREAT OF DOUBLE DEDUCTION. 27. AS PER THIS PROVISO TO CL. (VII), THE DEDUCTION 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 INTE RESTS OF THE REVENUE. IN CASE OF RURAL ADVANCES WHICH ARE COVERED BY CL. (V IIA), THERE WOULD BE NO SUCH DOUBLE DEDUCTION. THE PROVISO, IN ITS TERMS, LIMITS ITS APPLICATION TO THE CASE OF A BANK TO WHICH CL. (VIIA) APPLIES. INDISP UTABLY, CL. (VIIA)(A) APPLIES ONLY TO RURAL ADVANCES. CONCURRING WITH THE AFORESAID MAJORITY VIEW, HONBL E CJI, S.H. KAPADIA, AS THE THEN HE WAS, HELD AS UNDER: 2. UNDER SECTION 36(1)(VII) OF THE ITA 1961, THE TAX PAYER CARRYING ON BUSINESS IS ENTITLED TO A DEDUCTION, I N THE COMPUTATION OR TAXABLE PROFITS, OF THE AMOUNT OF A NY DEBT WHICH IS ESTABLISHED TO HAVE BECOME A BAD DEBT DURING TH E PREVIOUS YEAR, SUBJECT TO CERTAIN CONDITIONS. HOWEVER, A ME RE PROVISION FOR BAD AND DOUBTFUL DEBT(S) IS NOT ALLOWED AS A D EDUCTION IN THE COMPUTATION OF TAXABLE PROFITS. IN ORDER TO PROMO TE RURAL BANKING AND IN ORDER TO ASSIST THE SCHEDULED COMME RCIAL BANKS IN MAKING ADEQUATE PROVISIONS FROM THEIR CURRENT P ROFITS TO PROVIDE FOR RISKS IN RELATION TO THEIR RURAL ADVAN CES, THE FINANCE ACT, INSERTED CLAUSE (VIIA) IN SUBSECTION (1) OF S ECTION 36 TO PROVIDE FOR A DEDUCTION, IN THE COMPUTATION OF TAX ABLE PROFITS OF ALL SCHEDULED COMMERCIAL BANKS, IN RESPECT OF PROV ISIONS MADE BY THEM FOR BAD AND DOUBTFUL DEBTS RELATING TO AD VANCES MADE BY THEIR RURAL BRANCHES. THE DEDUCTION IS LIM ITED TO A SPECIFIED PERCENTAGE OF THE AGGREGATE AVERAGE ADVA NCES MADE BY THE RURAL BRANCHES COMPUTED IN THE MANNER PRESC RIBED BY THE IT RULES, 1962. THUS, THE PROVISIONS OF CLAUSE (V IIA) OF SECTION 36(1) RELATING TO THE DEDUCTION ON ACCOUNT OF THE PROVISION FOR BAD AND DOUBTFUL DEBT(S) IS DISTINCT AND INDEPENDE NT OF THE PROVISIONS OF SECTION 36(11(VII) RELATING TO ALLOW ANCE OF THE BAD DEBT(S). IN OTHER WORDS, THE SCHEDULED COMMERCIAL BANKS CONTINUE TO GET THE FULL BENEFIT OF THE WRITE OFF OF THE IRRECOVERABLE DEBT(S) UNDER SECTION 36(1)(VII) IN ADDITION TO THE BENEFIT OF DEDUCTION FOR THE PROVISION MADE FOR BA D AND DOUBTFUL DEBT(S) UNDER SECTION 36(1)(VIIA). A READING OF TH E CIRCULARS ISSUED BY CBDT INDICATES THAT NORMALLY A DEDUCTION FOR BAD DEBT(S) CAN BE ALLOWED ONLY IF THE DEBT IS WRITTEN OFF IN THE BOOKS AS BAD DEBT(S). NO DEDUCTION IS ALLOWABLE IN RESPE CT OF A MERE PROVISION FOR BAD AND DOUBTFUL DEBT(S). BUT IN THE CASE OF RURAL ADVANCES, A DEDUCTION WOULD BE ALLOWED EVEN IN RES PECT OF A MERE PROVISION WITHOUT INSISTING ON AN ACTUAL WRIT E OFF HOWEVER, THIS MAY RESULT IN DOUBLE ALLOWANCE IN THE SENSE T HAT IN RESPECT OF SAME RURAL ADVANCE THE BANK MAY GET ALLOWANCE O N THE BASIS 12 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD OF CLAUSE (VIIA) AND ALSO ON THE BASIS OF ACTUAL W RITE OFF UNDER CLAUSE (VII). THIS SITUATION IS TAKEN CARE OF BY T HE PROVISO TO CLAUSE (VII) WHICH LIMITS THE ALLOWANCE ON THE BAS IS OF THE ACTUAL WRITE OFF TO THE EXCESS, IF ANY, OF THE WRITE OFF OVER THE AMOUNT STANDING TO THE CREDIT OF THE ACCOUNT CREATED UNDE R CLAUSE (VIIA). HOWEVER, THE REVENUE DISPUTES THE POSITION THAT TH E PROVISO TO CLAUSE (VII) REFERS ONLY TO RURAL ADVANCES. IT SAY S THAT THERE ARE NO SUCH WORDS IN THE PROVISO WHICH INDICATES THAT THE PROVISO APPLY ONLY TO RURAL ADVANCES. WE FIND NO MERIT IN THE OBJECTION RAISED BY THE REVENUE. FIRSTLY, CBDT ITSELF HAS RE COGNIZED THE POSITION THAT A BANK WOULD BE ENTITLED TO BOTH THE DEDUCTION, ONE UNDER CLAUSE (VII) ON THE BASIS OF ACTUAL WRIT E OFF AND ANOTHER, ON THE BASIS OF CLAUSE (VIIA) IN RESPECT OF A MERE PROVISION. FURTHER, TO PREVENT DOUBLE DEDUCTION, T HE PROVISO TO CLAUSE (VII) WAS INSERTED WHICH SAYS THAT IN RESPE CT OF BAD DEBT(S) ARISING OUT OF RURAL ADVANCES, THE DEDUCTI ON ON ACCOUNT OF ACTUAL WRITE OFF WOULD BE LIMITED TO THE EXCESS OF THE AMOUNT WRITTEN OFF OVER THE AMOUNT OF THE PROVISION ALLOW ED UNDER CLAUSE (VIIA). THUS, THE PROVISO TO CLAUSE (VII) S TOOD INTRODUCED IN ORDER TO PROTECT THE REVENUE. IT WOULD BE MEANI NGLESS TO INVOKE THE SAID 1 PROVISO WHERE THERE IS NO THREAT OF DOUBLE DEDUCTION. IN CASE OF RURAL ADVANCES, WHICH ARE CO VERED BY THE PROVISIONS OF CLAUSE (VIIA), THERE WOULD BE NO SUC H DOUBLE DEDUCTION. THE PROVISO LIMITS ITS APPLICATION TO T HE CASE OF A BANK TO WHICH CLAUSE (VIIA) APPLIES. CLAUSE (VIIA) APPLIES ONLY TO RURAL ADVANCES. THIS HAS BEEN EXPLAINED BY THE CIR CULARS ISSUED BY CBDT. THUS, THE PROVISO INDICATES THAT IT IS LI MITED IN ITS APPLICATION TO BAD DEBT(S) ARISING OUT OF RURAL AD VANCES OF A BANK. IT FOLLOWS THAT IF THE AMOUNT OF BAD DEBT(S) ACTUALLY WRITTEN OFF IN THE ACCOUNTS OF THE BANK REPRESENTS ONLY DE BT(S) ARISING OUT OF URBAN ADVANCES, THE ALLOWANCE THEREOF IN TH E ASSESSMENT IS NOT AFFECTED, CONTROLLED OR LIMITED IN ANY WAY BY THE PROVISO TO CLAUSE (VII). THUS, CONSIDERED IN LIGHT OF PRINCIPLE LAID DOWN AS REFERRED TO ABOVE, WHEN THE PROVISO TO SECTION 36(1)(VII) APPLIES TO B AD DEBTS WRITTEN OFF RELATING TO RURAL ADVANCES, THE SAME CANNOT BE APPL IED FOR DISALLOWING DEDUCTION CLAIMED ON ACCOUNT OF WRITE OFF OF BAD AN D DOUBTFUL DEBTS RELATING TO NON-RURAL/URBAN ADVANCES. AS FAR AS AP PLICATION OF EXPLANATION TO SECTION 36(1)(VII) IS CONCERNED, WE AGREE WITH THE LD. AR THAT ITS OPERATION WILL BE PROSPECTIVE AND WILL NOT APPLY TO THE IMPUGNED AY. FOR THIS PROPOSITION, WE RELY UPON THE DECISION OF THE ITAT MUMBAI IN CASE OF BANK OF INDIA VS. ADDL. CIT (SUPRA). EVEN OTHERWISE ALSO, CAREFUL READING OF EXPLANATION TO SECTION 36(1)(VII) 13 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD WOULD INDICATE THAT NOWHERE IT SUGGESTS THAT THE PR OVISO TO SECTION 36(1)(VII) WOULD APPLY IN RESPECT OF BAD DEBT WRITT EN OFF RELATING TO NON-RURAL ADVANCES. IN THE AFORESAID VIEW OF THE MA TTER, WE HOLD THAT ASSESSEE WOULD BE ELIGIBLE TO AVAIL DEDUCTION OF AN AMOUNT OF RS. 209.94 CRORE REPRESENTING ACTUAL WRITE OFF IN THE B OOKS OF ACCOUNT OF BAD DEBTS RELATING TO NON-RURAL/URBAN ADVANCES IN T ERMS WITH SECTION 36(1)(VII), AS PROVISO TO THE SAID SECTION WOULD NO T APPLY TO NON-RURAL ADVANCES. ACCORDINGLY, WE DELETE THE ADDITION MADE BY AO AND CONFIRMED BY LD. CIT(A). 20. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ITA NO. 499/HYD/2015 FOR 2012-13 BY REVENUE 21. IN THIS APPEAL, THE DEPARTMENT HAS RAISED SIX G ROUNDS. GROUND NOS. 1 & 6 BEING GENERAL IN NATURE, DO NOT REQUIRE ANY SPECIFIC ADJUDICATION. 22. THE FIRST ISSUE AS RAISED IN GROUND NO. 2 RELAT ES TO DISALLOWANCE OF DEPRECIATION RELATING TO HELD TO MA TURITY (HTM) INVESTMENTS. 23. BRIEFLY THE FACTS ARE, WHILE VERIFYING THE COMP UTATION OF INCOME FOR THE AY UNDER CONSIDERATION, AO NOTICED THAT ASS ESSEE HAS CLAIMED DEDUCTION FOR AN AMOUNT OF RS. 507,05,30,372 ON ACC OUNT OF DEPRECIATION ON INVESTMENT IN HTM SECURITIES AND I N HELD FOR TRADING (HFT)/APPROVED FOR SALE (AFS) SECURITIES, THE DETAI LS OF WHICH ARE AS UNDER: I) DEPRECIATION OF INVESTMENTS IN HTM SECURITIES RS . 249,92,95,750 II) DEPRECIATION OF INVESTMENTS IN AFS & HFT SECURITIES (BEING HELD IN STOCK IN TRADE) RS. 257,12,34,622 RS. 507,05,30,372 ================ 14 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD AO WHILE COMPLETING ASSESSMENT HELD THAT ASSESSEE I S NOT ELIGIBLE TO CLAIM DEPRECIATION ON HTM SECURITIES AS IT CANNOT B E TREATED AS STOCK- IN-TRADE. HE, THEREFORE, DISALLOWED THE CLAIM OF DE PRECIATION FOR AN AMOUNT OF RS. 249,92,95,750 ON HTM SECURITIES. SIMI LARLY, AO OBSERVING THAT DEPRECIATION ON HFT AND AFS SECURITI ES IS TO BE ALLOWED TO THE EXTENT PROVIDED IN THE BOOKS OF ACCO UNT, RESTRICTED DEDUCTION TO RS. 79,01,00,000 AND ADDED BACK THE BA LANCE AMOUNT OF RS. 178,11,34,622. BEING AGGRIEVED OF SUCH DISALLOW ANCE, ASSESSEE CHALLENGED THE SAME BEFORE LD. CIT(A). 24. LD. CIT(A) FOLLOWING THE DECISION OF ITAT, HYDE RABAD IN ASSESSEES OWN CASE FOR AY 2003-04 IN ITA NO. 1232/ HYD/06, DATED 28/11/08 AND THE DECISION OF THE HONBLE AP HIGH CO URT IN ASSESSEES OWN CASE REPORTED IN 151 ITR 203 DELETED THE ADDITI ON BY HOLDING THAT AS HTM CATEGORY OF SECURITIES AS WELL AS HFT AND AF S SECURITIES ARE HELD AS STOCK-IN-TRADE, CLAIM OF DEPRECIATION HAS T O BE ALLOWED. BEING AGGRIEVED, DEPARTMENT IS BEFORE US. 25. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IALS ON RECORD. AT THE OUTSET, LEARNED COUNSELS OF BOTH THE PARTIES HAVE AGREED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DEC ISIONS OF THE COORDINATE BENCHES IN ASSESSEES OWN CASE FOR DIFFE RENT ASSESSMENT YEARS. ON PERUSAL OF MATERIALS ON RECORD, WE FIND T HAT THIS PARTICULAR ISSUE HAS BEEN SUBJECT MATTER OF DISPUTE FROM AY 20 03-04 ONWARDS. IN AY 2003-04, ITAT WHILE DECIDING THE ISSUE IN DIS PUTE IN ITA NO. 1232/HYD/06 DATED 28/11/08 ALLOWED ASSESSEES CLAIM OF DEPRECIATION ON HTM SECURITIES BY HOLDING THAT THEY ARE IN THE N ATURE OF STOCK-IN- TRADE. THE HONBLE AP HIGH COURT ALSO AFFIRMED THE VIEW EXPRESSED BY THE TRIBUNAL IN THE JUDGMENT REPORTED IN 151 ITR 20 3. THE HONBLE HIGH COURT HELD SECURITIES OF ALL CATEGORIES HELD B Y A BANK ARE IN THE NATURE OF STOCK-IN-TRADE. THE COORDINATE BENCH IN I TS LATEST ORDER 15 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD PASSED FOR AY 2009-10 IN ITA NO. 666/HYD/2013 DATED 29/11/13 HELD AS UNDER: 5. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD, WE ARE OF THE VIEW THAT THE ISSUE IS SQUAR ELY COVERED IN FAVOUR OF THE ASSESSEE NOT ONLY BY VIRTUE OF DECISION OF THE JURISDICTION AL HIGH COURT IN ASSESSEES OWN CASE REPORTED IN 151 ITR 703 BUT BY ATLEAST THREE SEPAR ATE ORDERS OF THE ITAT, HYDERABAD BENCH IN ASSESSEES OWN CASE FOR DIFFERENT ASSESSM ENT YEARS. THE COORDINATE BENCH IN ITS LATEST ORDER PASSED IN ITA.NO.847/HYD/2012 AND 1002/HYD/2012 DATED 28.03.2013 RELATING TO ASSESSMENT YEAR 2008-2009 WHILE DECIDI NG THE ISSUE HELD AS UNDER : 28. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE MATERIAL ON RECORD. THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE (151 ITR 703 ) HELD THAT MAIN BUSINESS OF THE BANKING COMPANY BEING TO ACCEPT DEPOSITS TO ADVANCE LOANS TO APPROPRIATE PERSONS, MONEY CONSTITUTES ITS STOCK IN TRADE. THE AMOUNT REQUIRED 4 ITA.NO.584 & 666/ HYD/2013 STATE BANK OF HYDERABAD, HYD. TO KEPT IN INDIA AS PER SECTION 2 4 OF THE BANKING REGULATION ACT, 1949 IN THE FORM OF CASH, GOLD AND UNENCUMBE RED SECURITIES IS PART OF STOCK IN TRADE OF THE ASSESSEE. WHILE IDENTICAL I SSUE OF CLAIM OF DEPRECIATION ON HTM SECURITIES CAME UP BEFORE THE INCOME-TAX APPE LLATE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003- 04 IN ITA NO.1232/HYD/2006 DATED 28-11-2008, THE INCOMETAX APPELLATE TRIBUNAL FOLLOWING THE RATIO LAID DOWN BY THE JURISDICTION AL HIGH COURT IN 151 ITR 703 AND HONBLE KERALA HIGH COURT IN CASE OF CIT V/S. NEDUNGADI BANK LTD (264 ITR 545) HELD THAT WHEN THERE IS NO DISTINCTION BETWE EN THE THREE CATEGORIES OF SECURITIES VIZ.,HTM, AFS AND HFT. THE ASSESSEE CA N PROVIDE FOR DEPRECIATION IN ALL THE SECURITIES ON THE SAME FOOTING. IN VIEW O F THE RATIO LAID DOWN BY THE CO- ORDINATE BENCH OF THIS TRIBUNAL, WE DO NOT FIND A NY REASON TO INTERFERE WITH THE FINDING OF THE CIT (A) ON THIS ISSUE. ACCORDI NGLY, THE GROUND RAISED BY THE DEPARTMENT IS DISMISSED. SINCE THE ISSUE IN DISPUTE IS SQUARELY COVERED BY T HE DECISIONS OF THE COORDINATE BENCHES IN ASSESSEES OWN CASE FOR PREVI OUS AYS, FOLLOWING THE VIEW EXPRESSED BY THE TRIBUNAL, WE UP HOLD THE ORDER OF LD. CIT(A) BY DISMISSING THE GROUND RAISED. 26. THE NEXT ISSUE AS RAISED IN GROUND NO. 3 RELATE S TO DECISION OF LD. CIT(A) IN DELETING THE ADDITION MADE BY AO ON A CCOUNT OF BROKEN PERIOD INTEREST. 27. BRIEFLY THE FACTS ARE, AO OBSERVED THAT EVERY B ANK IS REQUIRED TO MAINTAIN PRESCRIBED PERCENTAGE OF LIQUID ASSET FOR MAINTAINING STATUTORY LIQUIDITY RATIO (SLR) AS PER THE BANKING REGULATION ACT, 1949. FOR THIS PURPOSE, BANK SUBSCRIBES/BUYS GOVT. SECURITIES. BANKS ALSO DEAL IN GOVT. SECURITIES BY BUYING AND SELLING IN THE OPEN MARKET 16 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD TO COMPLY WITH THE ABOVE NORM. HE OBSERVED THAT RBI PAYS HALF YEARLY INTEREST ON THE DUE DATES OF SUCH SECURITIES TO THE HOLDERS OF THE SECURITIES WHOSE NAME APPEAR IN THE LEDGER MAINTAIN ED BY RBI. BANKS ARE FREE TO TRANSFER SUCH SECURITIES FOR CONSIDERAT ION TO OTHER BANKS AND CONSEQUENTLY RBI PAYS INTEREST TO SUCH HOLDER O N THE DATE FOR PAYMENT OF INTEREST. WHILE BANK APPEARING IN THE R BI LEDGER IS ENTITLED TO RECEIVE INTEREST FOR THE ENTIRE PERIOD, BANK WHICH BUYS SECURITIES IN THE INTERVENING PERIOD HAS TO MAKE PA YMENT TO THE SELLER AN AMOUNT WHICH INCLUDES THE TRADED VALUE OF THE SE CURITY AND A PORTION OF INTEREST FOR THE PERIOD COVERING BETWEEN COMMENCEMENT OF DUE DATE AND UPTO THE DATE OF PURCHASE. THE PROPORT IONATE INTEREST RELATABLE TO THE ABOVE INTERVENING PERIOD IS KNOWN AS BROKEN PERIOD INTEREST. ON PERUSAL OF THE FINANCIAL STATEMENTS OF ASSESSEE FOR THE YEAR UNDER CONSIDERATION, AO NOTICED THAT ASSESSEE HAS PAID BROKEN PERIOD INTEREST ON PURCHASE OF SECURITIES AMOUNTING TO RS. 263,58,94,093 DURING THE RELEVANT PY WHICH HAS BEEN CLAIMED AS DEDUCTION. AO, HOWEVER, DISALLOWED THE EXPENDITURE CLAIMED BY OBSERVING THAT THE NATURE OF EXPENDITURE BEING CAP ITAL IS NOT ALLOWABLE. BEING AGGRIEVED OF SUCH DISALLOWANCE MAD E BY AO, ASSESSEE CHALLENGED THE SAME BEFORE LD. CIT(A). 28. LD. CIT(A) HAVING FOUND THAT ITAT IN ASSESSEES OWN CASE FOR AY 2007-08 HAS ALLOWED THE EXPENDITURE CLAIMED ON A CCOUNT OF BROKEN PERIOD INTEREST , FOLLOWED THE SAME AND DELE TED THE ADDITION MADE BY AO. AGGRIEVED, DEPARTMENT IS BEFORE US. 29. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. LD. COUNSELS FOR BOTH THE PARTIES AGREED THAT THE ISSUE IS COVERED BY THE DECISION OF ITAT IN ASS ESSEES OWN CASE. ON PERUSAL OF THE ORDERS OF COORDINATE BENCH, IT IS SEEN THAT THIS ISSUE RELATING TO DEDUCTION CLAIMED ON ACCOUNT OF BROKEN PERIOD INTEREST HAS PERMEATED THROUGH PRECEDING AYS IN ASSESSEES OWN CASE. IN THE LATEST ORDER PASSED FOR THE AY 2009-10 BY THE COORD INATE BENCH IN ITA 17 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD NO. 666/HYD/13 DATED 29/11/13, THE BENCH FOLLOWING ITS EARLIER ORDER FOR AY 2008-09 HELD AS UNDER: 9. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. AS CAN BE SEEN FROM THE ORDER OF THE COORDINATE BENCH OF THIS TR IBUNAL WHILE CONSIDERING THIS ISSUE IN ASSESSEES OWN CASE FOR THE A.Y. 2008-09 IN IT A. NO. 847 & 1002/HYD/2012 DATED 28.03.2012 HELD AS UNDER : 30. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PA RTIES. ON PERUSAL OF THE ORDERS OF THE REVENUE AUTHORITIES AND MATERIALS O N RECORD WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESS EE BY THE ORDERS OF CO-ORDINATE BENCH PASSED IN ASSESSEES OWN FOR THE ASSESSMENT YEARS 1999- 2000 AND 2007-08. THE TRIBUNAL IN THE ORDER FOR THE ASSESS MENT YEAR 2007-08 IN ITA NO.578 AND 779/HYD/10 DATED 7-9-2012 HAVE HELD AS UNDER:- THE FIRST ISSUE IN THE APPEAL IS REGARDING DISAL LOWANCE OF BROKEN PERIOD INTEREST OF RS.58.51 CRORES. THE BANK WHICH HAVE PURCHASED GOVERNMENT SECURITIES HAVE PAID 6 ITA.NO.584 & 666/HYD/2013 STATE BANK OF HYDERABAD, HYD. RS.58.51 CRORES TOWARDS INTEREST IN RESPECT OF SECURITIES PURCHASED FOR THE BROKEN PERIOD FROM THE PRECEDING DUE DATE FOR PAYMENT OF INTEREST UPTO THE DATE OF PURCHASE. THE BANK HAD ALSO RECEIVED INTEREST OF RS.36.84 CRORES IN RESPECT OF SECURITIES SOLD BY THEM FOR THE BROKEN PERIOD FROM THE PRECEDING DUE DATE FOR PAYMENT OF INTEREST UPTO THE DATE OF THE SALE. THE ASSESSEE CLAIMED THE AMOUNT OF INTEREST PAID FOR THE BROKE N PERIOD UPTO THE DATE OF PURCHASE AS DEDUCTION ON THE GROUND THAT THE SECU RITIES WERE HELD STOCK IN TRADE. THE AO HOWEVER REJECTED THE APPELLANTS CL AIM HOLDING THAT THE APPELLANTS CONTENTION THAT THE SECURITIES CONSTI TUTED STOCK IN TRADE. IT HAS NOT BEEN ACCEPTED SINCE IT WAS FOUND THAT THE SECURIT IES HELD IN THE CATEGORY OF HTM (HELD TO MATURITY) DID NOT FORM PART OF THE S TOCK. HOWEVER, THE CIT(A) ALLOWED THE CLAIM ON THE GROUND THAT THE SAME WAS IN STOCK IN TRADE AND HENCE THE INTEREST FOR THE BROKEN PERIOD IS AN AL LOWABLE DEDUCTION, FOLLOWING THE DECISION OF ITAT HYDERABAD DATED 18/03/05. AG GRIEVED REVENUE IS ON APPEAL. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE MUMBAI BENCH IN THE CASE OF JCIT VS. DENA BANK 139 TTJ 81 (MUM ). THEY HAD FOLLOWED THE DECISION OF SPECIAL BENCH IN THE MUMBAI IN JCIT B ANK OF BEHARAIN, 132 TTJ 505 AND THE 7 ITA.NO.584 & 666/HYD/2013 STATE BANK OF HYDERABAD, HYD. DECISION OF MUMBAI HIGH COURT IN THE CASE OF AMERICAN EXPR ESS INTERNATIONAL BANKING CORPORATION VS. CIT 258 ITR 601, WE FIND THAT KER ALA HIGH COURT., CIT VS. NEDUNGADI BANK 264 ITR 545 HAS HELD THAT THE BROK EN PERIOD INTEREST IS AN ALLOWABLE DEDUCTION. RESPECTFULLY FOLLOWING THE A BOVE DECISIONS, WE UPHOLD THE ORDER OF CIT(A) AND REJECT THE REVENUES APPE AL ON THIS GROUND. 31. THOUGH IT IS A FACT THAT IN CASE OF CIT V/S. BANK OF RAJASTHAN LTD (316 ITR 391), RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENT ATIVE, THE HONBLE RAJASTHAN HIGH COURT HAS TAKEN A CONTRARY VIEW BY HOLDING THAT THE PAYMENT TOWARDS BROKEN PERIOD INTEREST IS A CAPITAL EXPEN DITURE. HOWEVER, AS THE CO- ORDINATE BENCH HAS DECIDED THE ISSUE AFTER FOLLOW ING THE VIEW EXPRESSED BY THE HONBLE BOMBAY HIGH COURT IN CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION (SUPRA) AND HONBLE KERALA HI GH COURT IN CASE OF CIT V/S. NEDUNGADI BANK (SUPRA), WE RESPECTFULLY FOLLOW TH E SAME AND UPHOLD THE ORDER OF THE CIT (A). THE GROUND RAISED BY THE DE PARTMENT IS DISMISSED. 18 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD FACTS BEING MATERIALLY SAME, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH ON THE ISSUE, WE UPHOLD THE ORDER OF LD. CIT(A) BY DISMISSING THE GROUND RAISED BY THE DEPARTMENT. 30. THE NEXT ISSUE AS RAISED IN GROUND NO. 4 RELATE S TO ADDITION MADE ON ACCOUNT OF DISALLOWANCE U/S 14A OF THE ACT, BUT, DELETED BY LD. CIT(A). 31. BRIEFLY, THE FACTS ARE, DURING THE ASSESSMENT P ROCEEDING, AO NOTICED THAT ASSESSEE HAD EARNED EXEMPT INCOME OF R S. 5,10,91,194 ON WHICH IT HAS ADMITTED EXPENDITURE OF RS. 11,91,0 90. AO CALLED UPON ASSESSEE TO EXPLAIN THE BASIS FOR QUANTIFYING THE EXPENDITURE AT RS. 11,91,090. IN RESPONSE TO THE QUERY RAISED BY A O, IT WAS SUBMITTED BY ASSESSEE THAT IN TERMS WITH THE DECISI ON OF ITAT IN ASSESSEES OWN CASE FOR AY 2000-01, ASSESSEE HAS QU ANTIFIED THE EXPENDITURE RELATING TO EXEMPT INCOME BY TAKING INT O CONSIDERATION TWO MONTHS SALARY OF TREASURY/INVESTMENT DEPARTMENT . ALTERNATIVELY, IT WAS SUBMITTED BY ASSESSEE THAT PROVISIONS OF SECTIO N 14A ARE NOT APPLICABLE TO THE DIVIDEND EARNED OUT OF THE SHARES HELD AS STOCK-IN- TRADE. FOR THIS PROPOSITION, ASSESSEE RELIED UPON A DECISION OF THE HONBLE KARNATAKA HIGH COURT IN CASE OF M/S CCI LTD . VS. JCIT, 250 CTR 291. AO, HOWEVER, WAS NOT CONVINCED WITH THE EX PLANATION OF ASSESSEE. AO NOTICED THAT AS PER THE FINANCIAL STAT EMENT, ASSESSEE HAS INCURRED OPERATING EXPENDITURE OF RS. 1735.81 A ND INTEREST EXPENDITURE OF RS. 782.17 FOR EARNING TOTAL INCOME OF RS. 11670.97. THUS, TOTAL EXPENDITURE INCURRED BY ASSESSEE FOR EA RNING INCOME OF RS. 1667.97 IS RS. 9107.98, WHICH WORKS OUT TO 77.2 6% OF THE TOTAL INCOME. AO OPINED THAT ASSESSEE MUST HAVE INCURRED SAME PERCENTAGE OF EXPENDITURE FOR EARNING EXEMPT INCOME ALSO. HE, THEREFORE, APPLYING THE RATE OF 77.26% TO THE EXEMP T INCOME EARNED BY ASSESSEE OF RS. 5,10,91,194 QUANTIFIED THE EXPEN DITURE AT RS. 19 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD 3,94,73,056. BEING AGGRIEVED OF SUCH DISALLOWANCE A SSESSEE CHALLENGED THE SAME BEFORE LD. CIT(A). 32. LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE IN THE LIGHT OF DECISION IN CASE OF CCI VS. JCIT (SUPRA) H ELD THAT AS THE TAX FREE BONDS AND OTHER INVESTMENTS ARE IN THE NATURE OF SECURITY OF ASSESSEE, IT WILL BE LOGICAL TO HOLD THAT INTEREST AND DIVIDEND EARNED BY ASSESSEE WHICH ARE EXEMPT FROM TAXATION ARE MERE LY INCIDENTAL TO ASSESSEES BUSINESS, HENCE, NO DISALLOWANCE U/S 14A CAN BE MADE OTHER THAN THE DISALLOWANCE ALREADY MADE BY ASSESSE E IN ITS COMPUTATION OF INCOME. ACCORDINGLY, SHE DELETED THE ADDITION MADE BY AO. 33. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE ITSELF HAS SHOWN TO HAVE EARNED EXEMPT INCOME AMOUN TING TO RS. 5.10 CRORES AND HAS ALSO ON ITS OWN DISALLOWED EXPE NDITURE RELATING TO SUCH INCOME QUANTIFIED AT RS. 11,91,090. THOUGH FOR THE YEAR UNDER CONSIDERATION, DISALLOWANCE U/S 14A, IF ANY, SHOULD HAVE BEEN MADE AS PER RULE 8D OF THE IT RULES, BUT, AO FOR SOME STRANGE REASONS HAS MADE DISALLOWANCE OF EXPENDITURE WORKED OUT AT 77.26% OF THE EXEMPT INCOME. IN OUR VIEW, SUCH ADHOC DISALLOWANCE MADE BY AO IS NOT PERMISSIBLE IN LAW. IN OUR VIEW DISALLOWANCE U/ S 14A, IF ANY, SHOULD BE STRICTLY IN COMPLIANCE TO RULE 8D OF IT R ULES. FURTHER, IF ASSESSEE HAS NOT INCURRED ANY INTEREST EXPENDITURE FOR EARNING EXEMPT INCOME, NO DISALLOWANCE UNDER RULE 8D(2)(II) OF THE ACT, CAN BE MADE. THE ONLY DISALLOWANCE WHICH COULD BE MADE BY AO IS UNDER RULE 8D(2)(III) I.E. 0.5% OF THE AGGREGATE AVERAGE VALUE OF INVESTMENT. FURTHER, WE FIND MERIT IN THE CONTENTION OF ASSESS EE THAT NO DISALLOWANCE U/S 14A CAN BE MADE AS ASSESSEES INVE STMENTS IN SHARES IS AS PER THE BUSINESS NEEDS OF ASSESSEE, HE NCE, EARNING OF EXEMPT INCOME IS INCIDENTAL TO ASSESSEES BUSINESS. AS STATED EARLIER, SECURITY HELD AS HTM//AFS/HFT ARE IN THE NATURE OF STOCK-IN-TRADE OF 20 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD ASSESSEE. MOREOVER, HOLDING OF SUCH SECURITIES IS A NCILLARY AND INCIDENTAL TO ASSESSEES BUSINESS. IN THE AFORESAID VIEW OF THE MATTER, SHARES/SECURITIES HELD BY ASSESSEE CANNOT BE TREATE D AS INVESTMENT SO AS TO ATTRACT PROVISIONS OF SECTION 14A. IN THE AFORESAID VIEW OF THE MATTER, WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE BY AO. ACCORDINGLY, WE UPHOLD THE SAM E BY DISMISSING GROUND RAISED BY DEPARTMENT. 34. THE LAST ISSUE WHICH IS RAISED BY THE DEPARTMEN T IN GROUND NO. 5 IS IN RELATION TO ALLOWANCE OF DEDUCTION U/S 36(1 )(VIIA) FOR AN AMOUNT OF RS. 616.55 CRORES BEING THE PROVISION MADE FOR B AD AND DOUBTFUL DEBTS. 35. BRIEFLY THE FACTS ARE, AS STATED EARLIER, IN TH E COMPUTATION OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, ASSESSEE HAS CLAIMED DEDUCTION U/S 36(1)(VIIA) FOR AN AMOUNT OF RS. 660,50,77,954 BEING THE AGGREGATE OF 7.5% OF TOTAL INCOME AND 10% OF THE AGGREGATE AVERAGE RURAL ADVANCES. HOWEVER, ACTUAL P ROVISION MADE FOR BAD AND DOUBTFUL DEBTS IN THE BOOKS OF ACCOUNT WAS TO THE TUNE OF RS. 616.55 CRORES. DURING THE ASSESSMENT PROCEEDING , AO NOTICED THAT OUT OF THE AFORESAID PROVISION FOR BAD AND DOU BTFUL DEBTS MADE IN THE BOOKS OF ACCOUNT AN AMOUNT OF RS. 19.98 CRORES REPRESENTS PROVISION TOWARDS BAD AND DOUBTFUL DEBTS OF RURAL A DVANCES WHEREAS THE BALANCE PROVISION OF RS. 596.57 REPRESENTS URBA N BAD DEBTS. AO ON INTERPRETING THE PROVISIONS OF SECTION 36(1)(VI IA) WAS OF THE VIEW THAT ONLY PROVISION RELATING TO RURAL DEBTS CAN BE ALLOWED AS DEDUCTION U/S 36(1)(VIIA) THEREBY RESTRICTING THE DEDUCTION TO RS. 19.98 CRORES. AO ADDED BACK THE BALANCE AMOUNT OF RS. 640,52,77,9 54 TO THE INCOME OF ASSESSEE. BEING AGGRIEVED OF SUCH DISALLO WANCE, ASSESSEE CHALLENGED THE SAME BEFORE LD. CIT(A). 36. LD. CIT(A) FOLLOWING THE DECISION OF ITAT IN AS SESSEES OWN CASE, THOUGH, HELD, THAT ASSESSEE IS ELIGIBLE FOR D EDUCTION U/S 21 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD 36(1)(VIIA) FOR THE PROVISION MADE TOWARDS RURAL AD VANCES AS WELL AS NON-RURAL ADVANCES, BUT, SHE HELD THAT DEDUCTION HA S TO BE RESTRICTED TO ACTUAL PROVISION MADE IN THE BOOKS OF ACCOUNT. I N OTHER WORDS, SHE ALLOWED DEDUCTION U/S 36(1)(VIIA) TO THE EXTENT OF RS. 616.55 CRORES BEING THE PROVISION ACTUALLY MADE IN THE BOOKS OF A CCOUNT. BEING AGGRIEVED OF SUCH DECISION OF THE LD. CIT(A), REVEN UE IS BEFORE US. 37. LD. DR SUPPORTING THE REASONING OF AO SUBMITTED BEFORE US, AS THE DEDUCTION ALLOWABLE U/S 36(1)(VIIA) IS RELATABL E TO ADVANCES OF RURAL BRANCHES, ASSESSEE CANNOT CLAIM DEDUCTION TOW ARDS PROVISION MADE ON ACCOUNT OF DOUBTFUL DEBTS RELATING TO NON-R URAL/URBAN ADVANCES. 38. LD. AR, ON THE OTHER HAND, SUBMITTED BEFORE US, THERE IS NO RESTRICTION IN THE PROVISIONS OF SECTION 36(1)(VII A) TO INFER THAT THE PROVISION MADE HAS TO BE CONFINED TO ADVANCES MADE BY RURAL BRANCHES ONLY. IN THIS CONTEXT, HE REFFERED TO A DE CISION OF THE ITAT, BANGALORE BENCH IN CASE OF DCIT VS. ING VYSYA BANK LTD., IN ITA NO. 53 & 54/BANG./13, DATED 25/10/2013. 39. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. ON CAREFUL ANALYSIS OF SECTION U/S 36(1)(VIIA) OF T HE ACT, IT IS VERY MUCH CLEAR THAT ASSESSEE BEING A SCHEDULE BANK CAN CLAIM DEDUCTION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN ITS BOOKS OF ACCOUNT, WHICH DOES NOT EXCEED THE AGGREGATE OF AMO UNT NOT EXCEEDING 7.5% OF THE TOTAL INCOME COMPUTED BEFORE MAKING ANY DEDUCTION U/S 36(1)(VIIA) AND CHAPTER-VIA AND AN A MOUNT NOT EXCEEDING 10% OF THE AGGREGATE AVERAGE ADVANCES MAD E BY RURAL BRANCHES OF SUCH BANK COMPUTED IN TERMS WITH THE PR ESCRIBED RULES. THUS, ON READING OF THE AFORESAID PROVISION, IT IS VERY MUCH CLEAR THAT FOR CLAIMING DEDUCTION UNDER THE SAID PROVISION, AS SESSEE HAS TO FULFILL TWO CONDITIONS, FIRSTLY, IT MUST HAVE MADE A PROVIS ION FOR BAD AND 22 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD DOUBTFUL DEBTS IN ITS BOOKS OF ACCOUNT AND SECONDLY THE MAXIMUM DEDUCTION ALLOWABLE IS TO THE EXTENT OF 7.5% OF THE TOTAL INCOME AND 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANK. ON A READING OF THE PROVISIONS OF SECTIO N 36(1)(VIIA), AS IT STANDS NOW, IT IS VERY MUCH CLEAR THAT THERE IS NO RESTRICTION IMPOSED UNDER THE SAID PROVISION TO INDICATE THAT ASSESSEE CANNOT MAKE A PROVISION FOR NON-RURAL/URBAN ADVANCES. THAT BEING THE CASE, DEPARTMENTS ARGUMENT THAT DEDUCTION U/S 36(1)(VIIA ) HAS TO BE RESTRICTED ONLY TO THE EXTENT OF PROVISION FOR BAD AND DOUBTFUL DEBTS RELATING TO RURAL ADVANCES, IN OUR VIEW, IS NOT ACC EPTABLE. PROVISION CONTAINED U/S 36(1)(VIIA), WAS EXAMINED BY THE ITA T BANGALORE BENCH IN CASE OF CIT VS. ING VYSYA BANK (SUPRA). TH E ITAT AFTER CONSIDERING THE LEGISLATIVE HISTORY OF SECTION U/S 36(1)(VIIA) FROM ITS INCEPTION HAS LUCIDLY EXPLAINED THE TRUE IMPORT OF SECTION U/S 36(1)(VIIA) AS IT STANDS IN THE PRESENT FORM. FOR B ETTER CLARITY, WE THOUGHT IT PROPER TO REPRODUCE THE OBSERVATIONS OF THE ITAT BANGALORE BENCH IN EXTENSO, WHICH ARE AS UNDER: 34. IT CAN BE SEEN FROM THE HISTORY OF SEC.36(1)(VI IA) OF THE ACT THAT AT STAGE-I THE DEDUCTION WAS ALLOWED IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED BANK IN RELATION TO THE ADVANCES MADE BY ITS RURAL BRANCHES. AT THIS STAGE THE PBDD HAD TO BE LINKED TO THE ADVANCES MADE BY BANKS RURAL BRANCHES. AT STAGE-II OF SEC.36(1)(VIIA), THE DEDUCTION WHILE COMPUTING THE TAXABLE PROFITS WAS ALLOWED OF AN AMOUNT NOT EXCEEDING TEN PER CENT OF THE TOTAL INC OME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PROPOSED NEW PROVISION) OR TWO PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANKS, WHI CHEVER IS HIGHER. AT THIS STAGE ALSO THE PBDD HAD TO BE CREATED AND DEBITED TO THE PROF IT AND LOSS ACCOUNT BUT WAS NOT REQUIRED TO BE DONE IN RELATION TO ADVANCES MADE BY BANKS RURAL BRANCHES AND CAN BE IN RELATION TO ANY DEBT. PBDD NEED NOT BE I N RELATION TO RURAL ADVANCES BUT CAN BE IN RELATION TO ANY ADVANCES BOTH RURAL AND NON-RURAL ADVANCES. THE TWO PERCENT AAA MADE BY RURAL BRANCHES OF SUCH BANKS HAD TO BE COMPUTED AND THE PBDD MADE IN BOOKS HAS TO BE IN RELATION TO RURAL ADVANCES. THE OTHER ELIGIBLE SUM WHICH CAN BE CONSIDERED FOR DEDUCTION U/S.36(1)(VIIA) OF THE AC T VIZ., TEN PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PR OPOSED NEW PROVISION) DOES NOT REQUIRE COMPUTATION IN RELATION TO RURAL ADVANCES. NEVERTHELESS THE DEBIT OF PBDD TO PROFIT AND LOSS ACCOUNT IS NECESSARY OF THE HIGHER OF THE TWO SUMS TO CLAIM DEDUCTION U/S.36(1)(VIIA) OF THE ACT. IF THE CONCERNED BANK DOES NOT HAVE RURAL BRANCHES THEN THEY COULD NOT CLAIM THE DEDUCTION. THEREFORE THE DEDUC TION WAS CONFINED ONLY TO BANKS THAT HAD RURAL BRANCHES. 23 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD 35. AT STAGE-III OF THE PROVISIONS OF SEC.36(1)(VI IA) OF THE ACT, THE DEDUCTION ALLOWED EARLIER WAS ENHANCED. THE ENHANCEMENT OF THE DEDUC TION WAS CONSEQUENT TO REPRESENTATION TO THE GOVERNMENT THAT THE EXISTING CEILING IN THIS REGARD I.E. 10% OF THE TOTAL INCOME OR 2% OF THE AGGREGATE AVERAGE ADVANC ES MADE BY THE RURAL BRANCHES OF INDIAN BANKS, WHICHEVER IS HIGHER, SHOULD BE MODIF IED. ACCORDINGLY, BY THE AMENDING ACT, THE DEDUCTION PRESENTLY AVAILABLE UNDER CL. ( VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT HAS BEEN SPLIT INTO TWO SEPARATE PROVISIONS. ONE O F THESE LIMITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% (AS IT EXISTED ORIGINALLY, NOW IT IS 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF THE BAN KS CONCERNED. THIS WILL IMPLY THAT ALL SCHEDULED OR NON-SCHEDULED BANKS HAVING RURAL BRANCHES WOULD BE ALLOWED THE DEDUCTION (A) UPTO 2% (NOW 10%) OF THE AGGREGATE A VERAGE ADVANCES MADE BY SUCH BRANCHES AND (B) A FURTHER DEDUCTION UPTO 5% OF TH EIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. THE FURTHER DEDUCTION OF 5% OF TOTAL INCOME WAS AVAILABLE TO BANKS WHICH DID NOT HAVE RURAL BRANCH ES. 36. THEREFORE AFTER 1.4.1987, SCHEDULED OR NON-SCH EDULED BANKS HAVING RURAL BRANCHES WERE ALLOWED DEDUCTION., (A) UPTO 2% (NOW 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AND (B) SCHEDULE OR NON-SCHE DULED BANKS WHETHER IT HAD RURAL BRANCHES OR NOT A DEDUCTION UPTO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. EVEN UNDER THE NEW PROVISI ONS CREATING A PBDD IN THE BOOKS OF ACCOUNTS IS NECESSARY. 37. THOUGH UNDER STAGE-II AND STAGE-III OF THE PRO VISIONS OF SEC.36(1)(VIIA) OF THE ACT, PBDD HAS TO BE CREATED BY DEBITING THE PROFIT AND LOSS ACCOUNT OF THE SUM CLAIMED AS DEDUCTION, THE CONDITION THAT THE PROVISION SHOULD BE IN RESPECT OF RURAL ADVANCES IS NOT NECESSARY. AT STAGE-II OF THE PROVISIONS OF SEC.36 (1)(VIIA) OF THE ACT, THIS CONDITION WAS DONE AWAY WITH AND IT WAS ONLY NECESSARY TO CREATE PBDD IN THE BOOKS OF ACCOUNTS AND DEBIT TO PROFIT AND LOSS ACCOUNT. THE QUANTIFICATI ON OF THE MAXIMUM DEDUCTION PERMISSIBLE U/S.36(1)(VIIA) OF THE ACT HAD TO BE D ONE. FIRSTLY IT HAS TO BE ASCERTAINED AS TO WHAT IS 10% OF THE AGGREGATE AVERAGE ADVANCES M ADE BY RURAL BRANCHES, IF THE BANK HAS RURAL BRANCHES, OTHERWISE THAT PART OF THE DED UCTION U/S.36(1)(VIIA) OF THE ACT WILL NOT BE AVAILABLE TO THE BANK. THE SECOND PART OF T HE DEDUCTION U/S.36(1)(VIIA) HAS TO BE ASCERTAINED VIZ., 7.5% SEVEN AND ONE-HALF PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A). THE ABOVE ARE THE PERMISSIBLE UPPER LIMITS OF DEDUCTIONS U/S.36(1)(V IIA) OF THE ACT. THE ACTUAL PROVISION MADE IN THE BOOKS BY THE ASSESSEE ON ACCOUNT OF PB DD (IRRESPECTIVE OF WHETHER IT IS RURAL OR NONRURAL) HAS TO BE SEEN. TO THE EXTENT P BDD IS SO CREATED, THEN SUBJECT TO THE PERMISSIBLE UPPER LIMITS REFERRED TO ABOVE, THE DE DUCTION HAS TO BE ALLOWED TO THE ASSESSEE. THE QUESTION OF BIFURCATING THE PBDD AS ONE RELATING TO RURAL ADVANCES AND OTHER ADVANCES (NON-RURAL ADVANCES) DOES NOT ARISE FOR CONSIDERATION. AS CAN BE SEEN FROM THE AFORESAID OBSERVATION OF TH E BANGALORE BENCH, IT HAS BEEN HELD IN CLEAR TERMS THAT ACTUAL PROVISION MADE BY ASSESSEE ON ACCOUNT OF PROVISION FOR BAD AND DOUBTF UL DEBT IRRESPECTIVE OF THE FACT WHETHER IT IS RURAL OR NON -RURAL, HAS TO BE SEEN WHILE EXAMINING ASSESSEES CLAIM OF DEDUCTION U/S 3 6(1)(VIIA). IF THE BANK DOES NOT HAVE RURAL BRANCH, IT WILL NOT GET DE DUCTION RELATING TO 24 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD 10% OF AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRA NCHES. HOWEVER, IT WILL BE ELIGIBLE TO CLAIM DEDUCTION OF 7.5% OF TOTAL INCOME. THE BENCH FURTHER HELD THAT BIFURCATING THE PROVIS ION FOR BAD AND DOUBTFUL DEBT AS ONE RELATING TO RURAL ADVANCES AND OTHER ADVANCES (NON-RURAL) DOES NOT ARISE FOR CONSIDERATION. CONSI DERED IN THE AFORESAID PERSPECTIVE, REASONING OF THE AO IN CONFI NING THE DEDUCTION CLAIMED U/S 36(1)(VIIA) ONLY TO THE PROVISION MADE TOWARDS RURAL ADVANCES, IN OUR VIEW, IS NOT IN ACCORDANCE WITH TH E STATUTORY PROVISION. ON THE OTHER HAND, THE VIEW EXPRESSED BY LD. CIT(A) WHILE ALLOWING ASSESSEES CLAIM OF DEDUCTION IS AS PER TH E STATUTORY PROVISION. ACCORDINGLY, WE DO NOT FIND ANY INFIRMIT Y IN THE ORDER OF LD. CIT(A) IN ALLOWING ASSESSEES CLAIM OF DEDUCTION FO R RS. 616.55 CRORES U/S 36(1)(VIIA). 40. IN THE RESULT, DEPARTMENTS APPEAL IS DISMISSED . 41. TO SUM UP, ASSESSEES APPEAL IN ITA NO. 450/HY D/15 IS PARTLY ALLOWED AND DEPARTMENTS APPEALS IN ITA NO. 498 & 4 99/HYD/15 ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 14 TH AUGUST, 2015. SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 14 TH AUGUST, 2015 KV 25 ITA NOS. 450, 498 & 499 /HYD/2015 STATE BANK OF HYDERABAD COPY TO:- 1) DGM, STATE BANK OF HYDERABAD, FINANCE & ACCOUNT S DEPT., HYBANK TOWERS, HEAD OFFICE, GUNFOUNDRY, HYD 5 00 001. 2) DCIT, CIRCLE 3(2), IT TOWERS, AC GUARDS, HYDER ABAD 3) CIT(A)-3, HYDERABAD 4) CIT-3, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.