JCIT, Bangalore V. M/s Vijaya Bank, Bangalore

ITA 578/BANG/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8709 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-02-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 01-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P YADAV CITIII
• Assessee Lawyers: LALITHA RAMESWARAN CAS
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income; Question of law; Bad and doubtful debts; Reassessment proceedings
• Section: 14A; 115JB; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.578/BANG/2012 ASSESSMENT YEAR : 2008-09 THE JOINT COMMISSIONER OF INCOME TAX, (LTU), BANGALORE. VS. M/S. VIJAYA BANK, NO.41/2, M.G.ROAD, BANGALORE-5600 085. PAN: AAACV 4791J APPELLANT RESPONDENT ITA NO. 653/BANG/2012 ASSESSMENT YEAR : 2008-09 M/S.VIJAYA BANK, NO.41/2, M.G.ROAD, BANGALORE-5600 085. PAN: AAACV 4791J VS. THE ADDL. COMMISSIONER OF INCOME TAX, (LTU), BANGALORE. APPELLANT RESPONDENT REVENUE BY : SHRI O.P.YADAV, CIT-III (DR) ASSESSEE BY : SHRI S.ANANTHAN AND SMT.LALITHA RAMESWARAN, CAS DATE OF HEARING : 19.02.2015 DATE OF PRONOUNCEMENT : 27.02.2015 ITA NOS. 578 & 653/BANG/2012 PAGE 2 OF 49 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO. 578/BANG/2012 IS AN APPEAL BY THE REVENUE, WHILE ITA NO.653/BANG/2012 IS AN APPEAL BY THE ASSESSEE. BOT H THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 19.01.2012 OF CIT( A), LTU, BANGALORE, RELATING TO AY 08-09. ITA NO.578/BANG/2012 (APPEAL BY THE REVENUE) 2. GROUNDS NOS. 1, 6 AND 7 RAISED BY THE REVENUE IN THE GROUNDS OF APPEAL ARE GENERAL IN NATURE AND CALLS FOR NO SPECI FIC ADJUDICATION. 3. GROUND NO.2 RAISED BY THE REVENUE PROJECTS THE G RIEVANCE OF THE REVENUE AGAINST THE ORDER OF THE CIT(A) WHEREBY THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT OF RS.192,57,72,764/- WHICH ACCORDING TO THE REVENUE W AS IN EXCESS OF THE PROVISIONS MADE IN THE ACCOUNTS BY THE ASSESSEE. I T IS THE STAND OF THE REVENUE THAT THE DEDUCTION U/S.36(1)(VIIA) OF THE A CT OUGHT TO BE ALLOWED ONLY TO THE EXTENT PROVISION IS MADE IN THE BOOKS O F ACCOUNTS FOR BAD AND DOUBTFUL DEBTS. THE ASSESSEE IS A BANKING COMPANY CARRYING ON BUSINESS OF BANKING. IN ITS RETURN OF INCOME THE ASSESSEE C LAIMED DEDUCTION OF A SUM OF RS.200,03,24,219 ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS IN RESPECT OF RURAL ADVANCES, U/S.36(1)(VIIA) OF THE ACT. THE PROVISIONS OF SECTION 36(1)(VIIA)(A) OF THE ACT LAYS DOWN AS F OLLOWS: ITA NOS. 578 & 653/BANG/2012 PAGE 3 OF 49 VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOUB TFUL DEBTS MADE BY (A) A SCHEDULED BANK NOT BEING A BANK INCORPORATE D BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A CO- OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY OR A PRIMARY CO- OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK, AN AMOUNT NOT EXCEEDING SEVEN AND ONE-HALF PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A) AND AN AMOUNT NOT EXCEEDING TEN PER C ENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCH ES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER; PROVIDED THAT A SCHEDULED BANK OR A NON-SCHEDULED B ANK REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION , BE ALLOWED IN ANY OF THE RELEVANT ASSESSMENT YEARS, DEDUCTION IN RESP ECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY T HE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY IT IN THIS BEHALF, FOR AN AMOUNT NOT EXCEEDING FIVE PER CENT OF THE AMOUNT OF SUCH ASSET S SHOWN IN THE BOOKS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR. 4. THE AO DISALLOWED CLAIM FOR DEDUCTION OF RS. 192 ,57,72,764/- OUT OF THE TOTAL CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS .200,03,24,219/- ON THE GROUND THAT THE PROVISION FOR BAD AND DOUBTFUL DEBT S IN RESPECT OF RURAL ADVANCES WAS CREATED BY DEBIT TO PROFIT AND LOSS AC COUNT OF ONLY A SUM OF RS.7,45,51,455 WHEREAS THE CLAIM FOR DEDUCTION ACTU ALLY MADE U/S.36(1)(VIIA) OF THE ACT WAS A SUM OF RS.200,03,2 4,219/-. THE AO WAS OF THE VIEW THAT AS LAID DOWN BY THE HONBLE PUNJAB AN D HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA VS. CIT 272 ITR 53 (P & H) , CLAIM FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT CANN OT BE GREATER THAN THE AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT AS PR OVISION. THE AO ITA NOS. 578 & 653/BANG/2012 PAGE 4 OF 49 THEREFORE PROPOSED TO DISALLOWED A SUM OF RS. 192,5 7,72,764/- (DIFFERENCE BETWEEN RS.200,03,24,219 AND RS.7,45,51,455). THE CIT(A) DELETED THE ADDITION MADE BY THE AO BY FOLLOWING THE DECISION O F THE DECISION OF THE ITAT IN THE CASE OF SYNDICATE BANK REPORTED IN 78 ITD 103 WHEREIN IT WAS HELD THAT IRRESPECTIVE OF THE DEBIT TO THE PROF IT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS (PB DD), AN ASSESSEE IS ENTITLED TO 10% OF THE AARA AS DEDUCTION U/S.36(1)( VIIA) OF THE ACT. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THE AFORES AID DECISION WAS AS FOLLOWS: 20. THE LEARNED CIT HAS ALSO ACTED UNDER THE MISCO NCEPTION THAT DEDUCTION UNDER CL. (VIIA) IS RELATED TO THE ACTUAL AMOUNT OF PROVISION MADE BY THE ASSESSEE FOR BAD AND DOUBTFUL DEBTS. THE TRUE MEANING OF THE CLAUSE, AS INDICATED EARLIER, I S THAT ONCE A PROVISION FOR BAD AND DOUBTFUL DEBTS IS MADE BY A S CHEDULED BANK HAVING RURAL BRANCHES, THE ASSESSEE IS ENTITLED TO A DEDUCTION WHICH IS QUANTIFIED NOT WITH RESPECT TO THE AMOUNT PROVIDED FOR IN THE ACCOUNTS, BUT WITH RESPECT TO A CERTAIN PERCENT AGE OF THE TOTAL INCOME AND ALSO A CERTAIN PERCENTAGE OF THE AGGREGA TE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF THE BANK. IN OTHER WORDS, THIS IS A SPECIFIC DEDUCTION GIVEN BY THE STATUTE I RRESPECTIVE OF THE QUANTUM PROVIDED BY THE ASSESSEE IN ITS ACCOUNTS TO WARDS PROVISION FOR BAD AND DOUBTFUL DEBTS. 5. THE LEARNED DR RELIED ON THE DECISION OF THE ITA T BANGALORE BENCH IN THE CASE OF CANARA BANK IN ITA NO.58/BANG/2004 DATED 9.6.2006 . IN THE AFORESAID DECISION THIS BENCH CONSIDERED THE DECISION OF THE ITAT IN THE CASE OF SYNDICATE BANK 78 ITD 103(BANG) AND THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COU RT IN THE CASE OF ITA NOS. 578 & 653/BANG/2012 PAGE 5 OF 49 STATE BANK OF PATIALA (SUPRA) AND HELD THAT THE DECISION RENDERED BY THE HONBLE HIGH COURT HAS TO BE FOLLOWED. THE ABO VE DECISION IS THE DECISION BROUGHT TO OUR NOTICE ON THE ISSUE RENDERE D AFTER THE DECISION IN ASSESSEES OWN CASE. JUDICIAL DISCIPLINE DEMANDS T HAT WE FOLLOW THE LATER DECISION WHICH HAS CONSIDERED BOTH THE DECISIONS ON THE ISSUE. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF TH E TRIBUNAL IN THE CASE OF CANARA BANK (SUPRA) , HOLD THAT CLAIM FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT CANNOT BE GREATER THAN THE AMOUNT DEBITED TO TH E PROFIT AND LOSS ACCOUNT AS PROVISION. 6. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE CONC EDING THAT THE DECISION OF THE TRIBUNAL REFERRED TO BY THE LEARNED DR COVERS THE ISSUE IN FAVOUR OF THE ASSESSEE, SUBMITTED THAT THE PROVISIO N FOR BAD AND DOUBTFUL DEBTS MADE BY THE ASSESSEE IN THE BOOKS OF ACCOUNT WAS RS.100,55,07,213. ACCORDING TO HIM THE AO CONSIDER ED THE PROVISION FOR BAD AND DOUBTFUL DEBTS CREATED IN THE BOOKS OF ACCO UNTS ONLY WITH REFERENCE TO THE RURAL ADVANCES RS.7,45,51,455. TH E AO OMITTED TO CONSIDER THE PROVISION FOR BAD AND DOUBTFUL DEBTS(P BDD) OF RS.100,55,07,213/- WHICH INCLUDED BOTH PBDD FOR RUR AL AS WELL AS NON-RURAL ADVANCES. ACCORDING TO HIM FOR ALLOWING DEDUCTION U/S.36(1)(VIIA) ON ACCOUNT OF PBDD WHAT IS TO BE CONSIDERED IS PBDD CR EATED IN THE BOOKS OF ACCOUNTS WHICH NEED NOT BE CONFINED ONLY TO RURAL A DVANCES. HE BROUGHT OUR NOTICE THAT THIS TRIBUNAL IN THE CASE OF ING VY SYA BANK IN ITA NO.53 & ITA NOS. 578 & 653/BANG/2012 PAGE 6 OF 49 54/BANG/2013 ORDER DATED 25.10.2013 WHEREIN THIS TR IBUNAL AFTER CONSIDERING THE HISTORY OF THE PROVISIONS OF SEC.36 (1)(VIIA) OF THE ACT HELD THAT THERE IS NO REQUIREMENT IN SEC.36(1)(VIIA) OF THE ACT AS IT STOOD FOR AY 2003-04 AND THEREAFTER THAT THE PROVISION SHOULD RE LATE TO RURAL ADVANCES. AS LONG AS THE BANK MAKES ANY PROVISION FOR BAD AND DOUBTFUL DEBTS, IT IS ELIGIBLE TO CLAIM DEDUCTION U/S.36(1)(VIIA) OF THE ACT AS PER THE CALCULATION PROVIDED THEREIN. 7. THE LEARNED DR HOWEVER OPPOSED THE ALTERNATE PRA YER MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE ON THE GROUND THAT NO SUCH SUBMISSION WAS MADE BEFORE THE LOWER AUTHORITIES AND THE ASSES SEE CANNOT IN PROCEEDINGS BEFORE THE TRIBUNAL RAISE THE ISSUE. T HE LEARNED COUNSEL FOR THE ASSESSEE HOWEVER IN REJOINDER SUBMITTED THAT TH E ASSESSEE CAN RAISE LEGAL ISSUES WHICH CAN BE DECIDED ON FACTS WHICH AR E ALREADY ON RECORD. ACCORDING TO HIM THE POWERS OF THE TRIBUNAL IN DEAL ING WITH APPEALS ARE EXPRESSED IN SECTION 254(1) OF THE ACT IN THE WIDES T POSSIBLE TERMS. THE APPELLATE TRIBUNAL MAY, AFTER GIVING BOTH PART IES TO THE APPEAL AN OPPORTUNITY OF BEING HEARD, PASS SUCH ORD ERS THEREON AS IT THINKS FIT. IT WAS HIS SUBMISSION THAT THE WORD 'THEREON', OF C OURSE, RESTRICTS THE JURISDICTION OF THE TRIBUNAL TO THE SUBJECT-MATTER OF THE APPEAL. THE WORDS 'PASS SUCH ORDERS AS THE TRIBUNAL THINKS FIT' INCLU DE ALL THE POWERS (EXCEPT POSSIBLY THE POWER OF ENHANCEMENT) WHICH ARE CONFER RED UPON THE COMMISSIONER OF INCOME TAX (APPEALS) BY SECTION 251 OF THE ACT. OUR ITA NOS. 578 & 653/BANG/2012 PAGE 7 OF 49 ATTENTION WAS DRAWN TO RULE 11 AND 27 OF THE APPELL ATE TRIBUNAL RULES, 1963, WHICH PROVIDES AS FOLLOWS :- RULE-11 PROVIDES: 'THE APPELLANT SHALL NOT, EXCEPT BY LEAVE OF THE TR IBUNAL, URGE OR BE HEARD IN SUPPORT OF ANY GROUND NOT SET FORTH IN THE MEMORANDUM OF APPEAL; BUT THE TRIBUNAL, IN DECIDING THE APPEAL, SHALL NOT BE CONFINED TO THE GROUNDS SET FOR THE IN THE MEMORANDUM OF APPEAL OR TAKEN BY LEAVE OF THE TRIBU NAL UNDER THIS RULE : PROVIDED THAT THE TRIBUNAL SHALL NOT REST ITS DECIS ION ON ANY OTHER GROUND UNLESS THE PARTY WHO MAY BE AFFECTED THEREBY HAS HAD A SUFFICIENT OPPORTUNITY OF BEING HEARD ON THAT GROUN D.' RULE 27 PROVIDES THAT: 'THE RESPONDENT, THOUGH HE MAY NOT HAVE APPEALED, M AY SUPPORT THE ORDER APPEALED AGAINST ON ANY OF THE GROUNDS DE CIDED AGAINST HIM.' RELIANCE WAS PLACED BY HIM ON THE DECISION OF THE H ONBLE GAUHATI HIGH COURT IN THE CASE OF ASSAM COMPANY (INDIA) LTD. VS. CIT 256 ITR 423 (GAU) , WHERE IT WAS HELD THAT IT IS PERMISSIBLE ON THE P ART OF THE TRIBUNAL TO ENTERTAIN A GROUND BEYOND THOSE INCORPO RATED IN THE MEMORANDUM OF APPEAL THOUGH THE PARTY URGING THE SA ID GROUND HAD NEITHER APPEALED BEFORE IT NOR HAD FILED A CROSS-OB JECTION IN THE APPEAL FILED BY THE OTHER PARTY. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN TH E CASE OF ASSAM COMPANY (INDIA) LTD. (SUPRA) THE QUESTION BEFORE THE COURT WAS AS TO WHETHER THE TRIBUNAL OUGHT TO HAVE CONSIDERED THE P LEA OF THE APPLICANT- ITA NOS. 578 & 653/BANG/2012 PAGE 8 OF 49 COMPANY THAT IT WAS ENTITLED TO THE BENEFIT OF WEIG HTED DEDUCTION UNDER SECTION 35B(1)(B)(IV) OF THE ACT IN THE ABSENCE OF ANY APPEAL OR ANY CROSS- OBJECTION FILED BY IT AGAINST THE ORDER OF THE COMM ISSIONER OF INCOME-TAX (APPEALS). THE COURT AFTER CONSIDERING SEVERAL JUD ICIAL PRONOUNCEMENTS ON THE SUBJECT HELD AS FOLLOWS: WE ARE THEREFORE OF THE VIEW THAT IT IS PERMISSIBL E ON THE PART OF THE TRIBUNAL TO ENTERTAIN A GROUND BEYOND THOSE INC ORPORATED IN THE MEMORANDUM OF APPEAL THOUGH THE PARTY URGING TH E SAID GROUND HAD NEITHER APPEALED BEFORE IT NOR HAD FILED A CROSS- OBJECTION IN THE APPEAL FILED BY THE OTHER PARTY. W E MUST HOWEVER HASTEN TO ADD THAT IN ORDER TO ENABLE EITHER THE AS SESSEE OR THE DEPARTMENT TO URGE A GROUND IN THE APPEAL FILED BY THE OTHER SIDE, THE RELEVANT FACTS ON WHICH SUCH GROUND IS TO BE FO UNDED SHOULD BE AVAILABLE ON RECORD. IN THE ABSENCE OF SUCH PRIM ARY FACTS, IN OUR OPINION, NEITHER THE ASSESSEE NOR THE DEPARTMEN T CAN BE PERMITTED TO URGE ANY GROUND OTHER THAN THOSE WHICH ARE INCORPORATED IN THE MEMORANDUM OF APPEAL FILED BY T HE OTHER PARTY. IN OTHER WORDS, IF THE ASSESSEE OR THE DEPAR TMENT, WITHOUT FILING ANY APPEAL OR A CROSS-OBJECTION SEEKS TO URG E A GROUND OTHER THAN THE GROUNDS INCORPORATED IN THE MEMORANDUM OF APPEAL FILED BY THE OTHER SIDE, THE EVIDENTIARY FACTS IN SUPPORT OF NEW GROUND MUST BE AVAILABLE ON RECORD. 9. IT WOULD BE USEFUL TO REFER TO THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CORPORATION 229 ITR 383 (SC) . THE HONBLE SUPREME COURT IN THE AFORESAID DECIS ION REFRAMED QUESTION OF LAW FOR CONSIDERATION AS FOLLOWS: 'WHERE ON THE FACTS FOUND BY THE AUTHORITIES BELOW A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHORITIE S) WHICH BEARS ON THE TAX LIABILITY OF THE ASSESSEE, WHETHER THE T RIBUNAL HAS JURISDICTION TO EXAMINE THE SAME ?' ITA NOS. 578 & 653/BANG/2012 PAGE 9 OF 49 ANSWERING THE ABOVE QUESTION, THE HONBLE SUPREME C OURT HELD AS FOLLOWS: 3. UNDER S. 254 OF THE IT ACT THE TRIBUNAL MAY, A FTER GIVING BOTH THE PARTIES TO THE APPEAL AN OPPORTUNITY OF BE ING HEARD, PASS SUCH ORDERS THEREON AS IT THINKS FIT. THE POWER OF THE TRIBUNAL IN DEALING WITH APPEALS IS THUS EXPRESSED IN THE WIDES T POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BE FORE THE TAXING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX L IABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, A S A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TA XED OR A PERMISSIBLE DEDUCTION DENIED, WE DO NOT SEE ANY REA SON WHY THE ASSESSEE SHOULD BE PREVENTED FROM RAISING THAT QUES TION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE REL EVANT FACTS ARE ON RECORD IN RESPECT OF THAT ITEM. WE DO NOT SEE ANY R EASON TO RESTRICT THE POWER OF THE TRIBUNAL UNDER S. 254 ONLY TO DECI DE THE GROUNDS WHICH ARISE FROM THE ORDER OF THE CIT(A). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPE AL/CROSS- OBJECTIONS BEFORE THE TRIBUNAL. WE FAIL TO SEE WHY THE TRIBUNAL SHOULD BE PREVENTED FROM CONSIDERING QUESTIONS OF L AW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. UNDOUBTEDLY, THE TRIBUNAL WILL HAVE THE DISCRETION TO ALLOW OR NOT ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER A Q UESTION OF LAW ARISING FROM THE FACTS WHICH ARE ON RECORD IN THE A SSESSMENT PROCEEDINGS WE FAIL TO SEE WHY SUCH A QUESTION SHOU LD NOT BE ALLOWED TO BE RAISED WHEN IT IS NECESSARY TO CONSID ER THAT QUESTION IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF A N ASSESSEE. 6. THE REFRAMED QUESTION, THEREFORE, IS ANSWERED I N THE AFFIRMATIVE, I.E., THE TRIBUNAL HAS JURISDICTION TO EXAMINE A QUESTION OF LAW WHICH ARISES FROM THE FACTS AS FOUND BY THE AUT HORITIES BELOW AND HAVING A BEARING ON THE TAX LIABILITY OF THE ASSESS EE. 10. FROM THE AFORESAID DECISION OF THE HONBLE SUPR EME COURT, IT IS CLEAR THAT:- ITA NOS. 578 & 653/BANG/2012 PAGE 10 OF 49 (A) IT IS THE DISCRETION OF THE TRIBUNAL TO ADMIT OR NOT TO ADMIT A NEW GROUND TO BE RAISED BEFORE IT; (B) IF THE TRIBUNAL IS REQUIRED TO ONLY CONSIDER A QUESTION OF LAW ARISING FROM THE FACTS WHICH ARE ON RECORD IN THE ASSESSMEN T PROCEEDINGS SUCH QUESTION SHOULD BE ALLOWED TO BE RAISED; AND (C) THAT THE PROCEEDINGS BEFORE THE TAX AUTHORITIE S ARE FOR CORRECTLY ASSESSING THE TAX LIABILITY OF AN ASSESSEE IN ACCOR DANCE WITH LAW. 11. IN THE LIGHT OF THE ABOVE LEGAL POSITION ON THE ALTERNATIVE PLEA RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE FOR THE FIR ST TIME BEFORE THE TRIBUNAL, IS PERMITTED TO BE RAISED EVEN THOUGH THE ASSESSEE HAS NEITHER FILED A CROSS-OBJECTION NOR HAS RAISED THE ISSUE IN THE APPEAL FILED BY THE ASSESSEE. 12. THIS TRIBUNAL IN THE CASE OF ING VYSYA BANK (SUPRA) HAD TO CONSIDER THE QUESTION AS TO WHETHER THERE IS NO REQ UIREMENT IN SEC.36(1)(VIIA) OF THE ACT AS IT STOOD FOR AY 2003- 04 AND THEREAFTER THAT FOR CLAIMING DEDUCTION UNDER THE SAID PROVISION THAT TH E PROVISION FOR BAD AND DOUBTFUL DEBTS SHOULD RELATE TO RURAL ADVANCES OR A S TO WHETHER AS LONG AS THE BANK MAKES ANY PROVISION FOR BAD AND DOUBTFUL D EBTS, IT IS ELIGIBLE TO CLAIM DEDUCTION U/S.36(1)(VIIA) OF THE ACT AS PER T HE CALCULATION PROVIDED THEREIN. THE TRIBUNAL ANALYSED THE PROVISION OF SE C.36(1)(VIIA) OF THE ACT AS IT EXISTED AT VARIOUS POINT OF TIME AND CONCLUDE D AS FOLLOWS:- ITA NOS. 578 & 653/BANG/2012 PAGE 11 OF 49 34. IT CAN BE SEEN FROM THE HISTORY OF SEC.36(1)(VIIA) OF THE ACT THAT AT STAGE-I THE DEDUCTION WAS ALLOWED IN RESPE CT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHE DULED BANK IN RELATION TO THE ADVANCES MADE BY ITS RURAL BRANC HES . AT THIS STAGE THE PBDD HAD TO BE LINKED TO THE ADVANCE S MADE BY BANKS RURAL BRANCHES. AT STAGE-II OF SEC.36(1)(VI IA), THE DEDUCTION WHILE COMPUTING THE TAXABLE PROFITS WAS A LLOWED OF AN AMOUNT NOT EXCEEDING TEN PER CENT OF THE TOTAL INCO ME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PRO POSED NEW PROVISION) OR TWO PER CENT OF THE AGGREGATE AVE RAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANKS, WHIC HEVER IS HIGHER. AT THIS STAGE ALSO THE PBDD HAD TO BE CREAT ED AND DEBITED TO THE PROFIT AND LOSS ACCOUNT BUT IT WAS N OT REQUIRED TO BE DONE IN RELATION TO ADVANCES MADE BY BANKS RURA L BRANCHES AND CAN BE IN RELATION TO ANY DEBT. PBDD NEED N OT BE IN RELATION TO RURAL ADVANCES BUT CAN BE IN RELATION T O 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 A DVANCES. THE OTHER ELIGIBLE SUM WHICH CAN BE CONSIDERED FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT VIZ., TEN PER CENT OF TH E TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PRO POSED NEW PROVISION) DOES NOT REQUIRE COMPUTATION IN RELA TION 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 CONCE RNED BANK DOES NOT HAVE RURAL BRANCHES THEN THEY COULD NOT CLAIM T HE DEDUCTION. THEREFORE THE DEDUCTION WAS CONFINED ONLY TO BANKS THAT HAD RURAL BRANCHES. 35. AT STAGE-III OF THE PROVISIONS OF SEC.36(1)(VII A) OF THE ACT, THE DEDUCTION ALLOWED EARLIER WAS ENHANCED. THE EN HANCEMENT OF THE DEDUCTION WAS CONSEQUENT TO REPRESENTATION T O THE GOVERNMENT THAT THE EXISTING CEILING IN THIS REGARD I.E. 10% OF THE TOTAL INCOME OR 2% OF THE AGGREGATE AVERAGE ADV ANCES MADE BY THE RURAL BRANCHES OF INDIAN BANKS, WHICHEV ER IS HIGHER, SHOULD BE MODIFIED. ACCORDINGLY, BY THE AME NDING ACT, THE DEDUCTION PRESENTLY AVAILABLE UNDER CL. (VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT HAS BEEN SPLIT INTO TWO SEPARAT E PROVISIONS. ONE OF THESE LIMITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% (AS IT EXISTED ORIGINALLY, NOW IT IS 10% ) OF TH E AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF THE BANK S CONCERNED. THIS WILL IMPLY THAT ALL SCHEDULED OR NON-SCHEDULED BANKS HAVING RURAL BRANCHES WOULD BE ALLOWED THE DE DUCTION (A) UPTO 2% (NOW 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AND (B) A FURTHER DEDUCTION UPTO 5% OF THEIR ITA NOS. 578 & 653/BANG/2012 PAGE 12 OF 49 TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DO UBTFUL DEBTS. THE FURTHER DEDUCTION OF 5% OF TOTAL INCOME WAS AVA ILABLE TO BANKS WHICH DID NOT HAVE RURAL BRANCHES. 36. THEREFORE AFTER 1.4.1987, SCHEDULED OR NON-SCHE DULED 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-SCHEDULED BAN KS WHETHER IT HAD RURAL BRANCHES OR NOT A DEDUCTION UP TO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. EVEN UNDER THE NEW PROVISIONS CREATING A PB DD IN THE BOOKS OF ACCOUNTS IS NECESSARY. 37. THOUGH UNDER STAGE-II AND STAGE-III OF THE PROV ISIONS 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 D EDUCTION, THE CONDITION THAT THE PROVISION SHOULD BE IN RESPECT O F RURAL ADVANCES IS NOT NECESSARY. AT STAGE-II OF THE PROV ISIONS OF SEC.36(1)(VIIA) OF THE ACT, THIS CONDITION WAS DONE AWAY WITH AND IT WAS ONLY NECESSARY TO CREATE PBDD IN THE BOO KS OF ACCOUNTS AND DEBIT TO PROFIT AND LOSS ACCOUNT. THE QUANTIFICATION OF THE MAXIMUM DEDUCTION PERMISSIBLE U/S.36(1)(VIIA) OF THE ACT HAD TO BE DONE. FIRSTLY IT HAS TO BE ASCERTAINED AS TO WHAT IS 10% OF THE AGGREGATE AVER AGE ADVANCES MADE BY RURAL BRANCHES, IF THE BANK HAS RU RAL BRANCHES, OTHERWISE THAT PART OF THE DEDUCTION U/S. 36(1)(VIIA) OF THE ACT WILL NOT BE AVAILABLE TO THE BANK. THE SE COND PART OF THE 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 DEDUCTION S U/S.36(1)(VIIA) OF THE ACT. THE ACTUAL PROVISION M ADE IN THE BOOKS BY THE ASSESSEE ON ACCOUNT OF PBDD (IRRESPECT IVE OF WHETHER IT IS RURAL OR NON-RURAL) HAS TO BE SEEN. TO THE EXTENT PBDD IS SO CREATED, THEN SUBJECT TO THE PERMISSIBLE UPPER LIMITS REFERRED TO ABOVE, THE DEDUCTION 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. 13. THE FACTS WITH REGARD TO THE PBDD CREATED BY TH E ASSESSEE IN THE BOOKS OF ACCOUNTS ARE AVAILABLE ON RECORD AND THERE FORE THERE SHOULD NOT ITA NOS. 578 & 653/BANG/2012 PAGE 13 OF 49 BE ANY DIFFICULTY IN DECIDING THE QUANTUM OF DEDUCT ION THAT THE ASSESSEE SHOULD BE ALLOWED U/S.36(1)(VIIA) OF THE ACT. 14. NOT CONTENT WITH THE ABOVE RELIEF, THE LEARNED COUNSEL MADE A FURTHER ALTERNATE SUBMISSION THAT THE ASSESSEE SHOULD BE AL LOWED DEDUCTION ON ACCOUNT OF PBDD U/S.36(1)(VIIA) OF THE ACT FOR THE ENTIRE PERMISSIBLE LIMIT BECAUSE THE PROVISION WHATEVER IS THE SHORTFALL BET WEEN THE ELIGIBLE LIMITS AND THE PBDD MADE IN THE BOOKS OF ACCOUNTS BY THE A SSESSEE VIZ., SHORTFALL OF RS.99,47,57,006 (RS.200,03,24,219 RS .100,55,67,213/-) WAS MADE GOOD BY PROVIDING EXCESS PROVISION IN SUBSEQUE NT YEARS AND THEREFORE THE ENTIRE RS.200,03,24,219/- SHOULD BE A LLOWED AS DEDUCTION. IN SUPPORT OF THE CLAIM THAT THE PROVISION MADE IN SUB SEQUENT YEAR WAS MUCH MORE THAN THE ELIGIBLE LIMITS U/S.36(1)(VIIA) OF TH E ACT AND SUCH EXCESS WILL TAKE CARE OF THE SHORTFALL OF PBDD IN THE BOOKS OF ACCOUNTS, THE LEARNED COUNSEL FOR THE ASSESSEE FILED A CHART BEFORE US AN D THE SAME IS ANNEXED AS ANNEXURE-1 TO THIS ORDER . THE LEARNED COUNSEL FOR THE ASSESSEE IN SUPPORT OF THE PROPOSITION THAT IF THERE IS SHORTFA LL IN THE PBDD MADE IN THE BOOKS OF ACCOUNTS TO THE ELIGIBLE LIMITS AND IF THE SHORTFALL IS MADE GOOD BY PROVIDING EXCESS PROVISION IN SUBSEQUENT YEARS THE UPPER LIMIT PERMISSIBLE U/S.36(1)(VIIA) OF THE ACT SHOULD BE ALLOWED AS DED UCTION, REFERRED TO DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION 323 ITR 495 ( PUN.& HAR.) AND THE SPECIAL BENCH ITAT CHANDIGARH BENCH IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD . 102 ITD 1 ITA NOS. 578 & 653/BANG/2012 PAGE 14 OF 49 (CHD.)(SB) . IN THE AFORESAID DECISIONS THE ASSESSEE CLAIMED D EDUCTION U/S.36(1)(VIII) OF THE ACT IN RESPECT OF SPECIAL RE SERVE CREATED AND MAINTAINED BY A SPECIFIED ENTITY, AN AMOUNT NOT EXC EEDING TWENTY PER CENT OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPU TED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' (BEFO RE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RESERVE ACCOUNT. THE ASSESSEE DID NOT CREATE SPECIAL RESERVE TO THE EXTENT OF 20% OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS. IT WAS HELD THAT THE ASSESSEE S HOULD BE AFFORDED AN OPPORTUNITY TO ASSESSEE TO CREATE FURTHER RESERVE. REFERENCE WAS MADE TO THE DECISION OF ITAT DELHI IN THE CASE OF POWER FIN ANCE CORPORATION LTD. 2008-TIOL-475-ITAT-DEL WHEREIN IN THE CONTEXT OF DE DUCTION U/S.32A OF THE ACT, THE TRIBUNAL HELD THAT THE RESERVE CREATED BY HOLDING A SECOND ANNUAL GENERAL MEETING AND WHERE ACCOUNTS WERE AMENDED CRE ATING RESERVE REQUIRED U/S.32A OF THE ACT, THE ASSESSEE SHOULD BE ALLOWED DEDUCTION U/S.36(1)(VIIA) OF THE ACT. 15. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF T HE VIEW THAT THE SAME CANNOT BE ACCEPTED. THE CREATION OF A SPECIAL RESERVE U/S.32A OR SEC.36(1)(VIII) OF THE ACT CANNOT BE EQUATED WITH C REATION OF PBDD U/S.36(1)(VIIA) OF THE ACT. CREATION OF PROVISION U/S.36(1)(VIIA) OF THE ACT IS GOVERNED BY CERTAIN RULES LIKE RULE 6ABA OF THE RUL ES IN RESPECT OF RURAL ADVANCES. IT CANNOT BE CREATED AT THE BANKS WHIMS AND FANCY. MOREOVER THE ASSESSEE IS NOT MAKING A CLAIM FOR CREATION OF PBDD IN THE BOOKS OF ACCOUNTS OF PY RELEVANT TO AY 08-09. THE EXCESS RE SERVE CREATED IN THE ITA NOS. 578 & 653/BANG/2012 PAGE 15 OF 49 SUBSEQUENT YEAR CANNOT BE EQUATED TO THE PBDD CREAT ED IN THE BOOKS FOR THE PRESENT AY. THE DECISIONS RELIED UPON BY THE L EARNED COUNSEL FOR THE ASSESSEE DO NOT LAY DOWN A PROPOSITION THAT EXCESS PROVISION CREATED IN THE SUBSEQUENT YEAR CAN SUPPLEMENT THE INADEQUATE C REATED IN AN EARLIER YEAR. THE DECISIONS RELIED UPON BY THE LEARNED COU NSEL FOR THE ASSESSEE LAY DOWN PROPOSITION THAT THE ASSESSEE SHOULD BE GI VEN LIBERTY TO CREATE A RESERVE IN THE BOOKS OF ACCOUNTS OF THE RELEVANT AY . FOR THE REASONS GIVEN ABOVE, WE REJECT THE SECOND ALTERNATE SUBMISSION MA DE BY THE LEARNED COUNSEL FOR THE ASSESSEE. THUS THE ASSESSEE WILL BE ENTITLED TO DEDUCTION U/S.36(1)(VIIA) OF THE ACT OF RS.100,55,67,213/- ON LY. GROUND NO.2 OF THE REVENUE IS ALLOWED TO THIS EXTENT. 16. GROUND NO.3 RAISED BY THE REVENUE IS WITH REGAR D TO THE DEDUCTION OF RS.108,53,62,763 CLAIMED BY THE ASSESSEE U/S.36( 1)(VII) OF THE ACT ON ACCOUNT OF BAD DEBTS WRITTEN OFF IN THE BOOKS OF AC COUNTS BY THE ASSESSEE WHICH WAS DISALLOWED BY THE AO ON THE GROUND THAT T HE CREDIT BALANCE IN THE PBDD RELATING TO NON-RURAL BRANCHES HAVE TO BE ADJUSTED AGAINST THE DEBIT TO THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF BAD DEBTS. 17. THE ASSESSEE CLAIMED DEDUCTION OF A SUM OF RS.1 08,53,62,763/- U/S.36(1)(VII) OF THE ACT IN RESPECT OF BAD DEBTS W RITTEN OFF. THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE BAD DEBTS WRITTEN OFF RELATING TO ITS RURAL BRANCHES WERE ADJUSTED AGAINST THE PROVISION CLAIME D U/S.36(1)(VIIA) OF THE ACT, TO ENSURE THAT THERE IS NO DOUBLE DEDUCTION, O NCE AS PBDD FOR RURAL ITA NOS. 578 & 653/BANG/2012 PAGE 16 OF 49 DEBTS U/S.36(1)(VIIA) AND AGAIN AS BAD DEBTS U/S.36 (1)(VII) OF THE ACT. THE ASSESSEE FURTHER BROUGHT TO THE NOTICE OF THE BENCH THE DECISION OF HONBLE KARNATAKA HIGH COURT DATED 19.3.2008 IN THE CASE OF CIT VS. KARNATAKA BANK , WHEREIN THE HONBLE KARNATAKA HIGH COURT HELD THA T BAD DEBTS WRITTEN OFF IN RESPECT OF NON-RURAL BRANC HES NEED NOT BE ADJUSTED AGAINST THE PBDD OF NON-RURAL BRANCHES BECAUSE SUCH PROVISION IS NOT ALLOWED AS DEDUCTION U/S.36(1)(VIIA) OF THE ACT. T HE ASSESSEE GAVE THE BREAK-UP OF BAD DEBTS WRITTEN OFF AS UNDER:- BAD DEBTS WRITTEN OFF RS.185,53,26,012 LESS: AMOUNT WRITTEN OFF IN RESPECT OF RURAL ADVANCES FOR WHICH DEDUCTION U/S.36(1)(VIIA) WAS CLAIMED IN EARLIER YEARS RS.13,17,13,161 LESS: AMOUNT WRITTEN OFF IN RESPECT OF NON- RURAL BRANCHES AND FOR WHICH DEDUCTION U/S.36(1)(VIIA) WAS CLAIMED IN EARLIER YEARS A) NPA ACCOUNTS IN RESPECT OF WHICH DEDUCTION IS CLAIMED U/S.36(1)(VIIA) @ 7.5% OF THE TOTAL INCOME IN THE A.Y. 2003- 04 RS.2,92,45,322 B) NPA ACCOUNT IN RESPECT OF WHICH DEDUCTION IS CLAIMED U/S.36(1)(VIIA) @ 10% OF THE BAD & DOUBTFUL DEBTS IN THE AY 2003-04. RS.15,91,33,959 C) NPA ACCOUNT IN RESPECT OF WHICH DEDUCTION IS CLAIMED U/S.36(1)(VIIA) @ 7.5% OF THE TOTAL INCOME IN THE A.Y. 2004- 05 RS.22,29,88,026 D) NPA ACCOUNT IN RESPECT OF WHICH DEDUCTION IS CLAIMED U/S.36(1)(VIIA) @ 10% OF THE BAD & DOUBTFUL DEBTS IN THE AY 2004-05. RS.22,68,82,781 ITA NOS. 578 & 653/BANG/2012 PAGE 17 OF 49 18. THE AO WAS OF THE VIEW THAT JUST AS HOW THE ASS ESSEE HAS ADJUSTED THE PBDD IN RESPECT OF RURAL ADVANCES, IT OUGHT TO HAVE ADJUSTED PBDD IN RESPECT OF NON-RURAL ADVANCES AND CLAIMED ONLY THE REMAINING SUM, IF ANY, AS BAD DEBTS U/S.36(1)(VII) OF THE ACT. THE AO ACC ORDINGLY TABULATED THE FIGURES OF PBDD IN RESPECT OF NON- RURAL BRANCHES A S UNDER:- ASSESSMENT YEAR OPTIONAL DEDUCTION 10% OF LOSS AND DOUBTFUL DEBTS 7.5% OF TOTAL INCOME OPTIONAL DEDUCTION PREMIUM ON BUYBACK OF GOVT. SECURITIES 2003-04 50,55,36,813 5,88,05,215 0 2004-05 - 42,86,11,182 70,00,40,702 2005-06 - - - 2006-07 - - - TOTAL 50,55,36,813 48,74,16,397 70,00,40,702 THEREAFTER THE AO TABULATED THE CLAIM FOR BAD DEBTS U/S.36(1)(VII) OF THE ACT MADE BY THE ASSESSEE IN VARIOUS AYS AS UNDER: ASSESSMENT YEAR DEBTS WRITTEN OFF AGAINST OPTIONAL DEDUCTION ALLOWED AS 10% OF LOSS AND DOUBTFUL DEBTS WRITTEN OFF AGAINST THE PROVISION ALLOWED AS 7.5% OF TOTAL INCOME DEBTS WRITTEN OFF AGAINST PROVISION ALLOWED IN RELATION TO THE INCOME FROM REDEMPTION OF SECURITIES. 2004-05 3,27,58,000 1,07,94,000 - 2005-06 11,00,95,215 3,69,01,418 15,39,76,237 2006-07 12,52,42,584 6,85,80,516 25,60,40,154 2007-08 6,20,48,994 11,78,17,181 9,87,94,655 TOTAL 33,01,44,793 23,40,93,115 50,88,11,046 ITA NOS. 578 & 653/BANG/2012 PAGE 18 OF 49 19. ACCORDING TO THE AO, SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 (THE ACT) ALLOWS DEDUCTION IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), TH E AMOUNT OF ANY BAD DEBT OR PART THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERA BLE IN THE ACCOUNTS OF THE ASSESSEE DURING THE PREVIOUS YEAR. PROVISO TO SEC.3 6(1)(VII) PROVIDES AS FOLLOWS: 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 AC COUNTS OF THE ASSESSEE SHALL NOT INCLUDE ANY PROVISION FOR BAD AN D DOUBTFUL DEBTS MADE IN THE ACCOUNTS OF THE ASSESSEE. 20. ACCORDING TO THE AO AS PER THE PROVISO TO SEC.3 6(1)(VII) OF THE ACT, THE ASSESSEE WAS REQUIRED TO SET OFF THE BAD DEBTS WRITTEN OFF AGAINST THE PROVISION CREATED U/S.36(1)(VIIA) OF THE ACT. THE AO FURTHER HELD THAT THE CREDIT AVAILABLE IN THE PBDD OF NON-RURAL DEBTS WAS MUCH MORE THAN THE SUM OF RS.108,53,62,763 CLAIMED AS DEDUCTION ON ACC OUNT OF BAD DEBTS WRITTEN OFF BY THE ASSESSEE HENCE CANNOT BE ALLOWED . 21. AGGRIEVED BY THE AFORESAID DISALLOWANCE, ASSESS EE 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 BAD DEBTS WRITTEN OFF OF RURAL DEBTS AND NOT TO NON -RURAL DEBTS. SINCE THE ITA NOS. 578 & 653/BANG/2012 PAGE 19 OF 49 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 D EBTS THAT ARE INDEPENDENT OF THE PROVISIONS UNDER SECTION 36(1)(V IIA), VIZ., URBAN DEBTS. ITA NOS. 578 & 653/BANG/2012 PAGE 20 OF 49 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 TAXMAN 325 , THAT DEDUCTION UNDER SECTION 36(1)(VII) IS ALLOWABLE INDEPENDENTLY AND IRRESPECTIVE OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS CREATED BY THE ASSESSEE IN RELATION TO THE ADVANCES OF THE RURAL BRANCHES, SUBJECT TO THE LIMITATION THAT AN AMOUNT SHOULD NOT BE DEDUCTED TWICE UNDER SECTION 36(1) (V II) AND 36(1) (VIA) SIMULTANEOUSLY. THE FACTS IN THAT CASE WERE THAT TH E APPELLANT BANK HAD, IN THE RETURN FOR ASSESSMENT YEAR 1993-94 FILED ON 30-12-1993, CLAIMED A SUM OF RS. 38,28,836 AS BAD DEBTS 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 ASSESSING OFFICER DID NOT ALLO W THE CLAIM FOR DEDUCTION OF DEBTS AMOUNTING TO RS. 38,28,836 ACTUALLY WRITTE N OFF. THE CIT(A) REJECTED THE ASSESSEES CLAIM AND UPHELD THE ORDER OF ASSESSING OFFICER AND THE ITAT HELD THAT DEDUCTION 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 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 BY TWO JUDGMENTS OF KERALA AND MADRAS HIGH COURTS I N SOUTH INDIAN BANK ITA NOS. 578 & 653/BANG/2012 PAGE 21 OF 49 LTD. VS. CIT [2003 262 ITR 579], AND IN CIT VS. CIT Y 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) AN D (VIIA), WAS THAT A SCHEDULED BANK MIGHT BE HAVING BOTH URBAN AND 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 THE ACT. IF THE BAD DEBT WRITTEN OFF RELATED TO DEB TS OTHER THAN FOR WHICH THE ITA NOS. 578 & 653/BANG/2012 PAGE 22 OF 49 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). THE ASSESSEE ALSO RELIED ON THE DEC ISION OF THE ITAT IN ITS OWN CASE IN ITA NO.150 & 151/BANG/2001 ORDER DATED 9.6.2006 FOR AY 1999-2000 & 2000-01 WHEREIN ON IDENTICAL ISSUE, THE TRIBUNAL ALLOWED DEDUCTION AS CLAIMED BY THE ASSESSEE. 22. THE LD. CIT(APPEALS) AGREED WITH THE CONTENTION S PUT FORTH BY THE ASSESSEE AND DIRECTED THE AO TO ALLOW THE CLAIM FOR DEDUCTION ON ACCOUNT OF BAD DEBTS AS MADE BY THE ASSESSEE. ITA NOS. 578 & 653/BANG/2012 PAGE 23 OF 49 23. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS), THE REVENUE HAS RAISED GROUNDS NO. 3 BEFORE THE TRIBUNAL. THE LD. DR RELI ED 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. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IDEN TICAL ISSUE RAISED BY THE REVENUE IN GROUND NO.3 HAD COME FOR CONSIDERATI ON BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) . THE FACTS OF THE CASE BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) WAS THAT THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF IN RESPECT OF NON- 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 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 ITA NOS. 578 & 653/BANG/2012 PAGE 24 OF 49 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 PROVI SIONS 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 LEGISLATIVE INTE NT WAS TO ENCOURAGE RURAL ADVANCES AND THE MAKING OF PROVISIO NS FOR BAD DEBTS IN RELATION TO SUCH RURAL BRANCHES. (III) THE LANGUAGE OF S. 36(1)(VII) IS UNAMBIGUOUS AND DOES 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 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 FAL LS SQUARELY UNDER S. 36(1)(VIIA). THE EXPLANATION TO S. 36(1)(V II) SPECIFICALLY EXCLUDED ANY PROVISION FOR BAD AND DOUBTFUL DEBTS M ADE IN THE ITA NOS. 578 & 653/BANG/2012 PAGE 25 OF 49 ACCOUNT OF THE ASSESSEE FROM THE AMBIT AND SCOPE OF 'ANY BAD DEBT, OR PART THEREOF, WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE'. THUS, THE CONCEPT OF MAKING A PRO VISION FOR BAD AND DOUBTFUL DEBTS WILL FALL OUTSIDE THE SCOPE OF S . 36(1)(VII) SIMPLICITER. (IV) AS PER THE PROVISO TO CL. (VII) OF S. 36(1), T HE 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). TH E PROVISO BY AND LARGE PROTECTS THE INTERESTS OF THE REVENUE. IN CASE OF RURAL ADVANCES WHICH ARE COVERED BY CL. (VIIA), THERE WOU LD BE NO SUCH DOUBLE DEDUCTION. THE PROVISO, IN ITS TERMS, LIMITS ITS APPLICATION TO THE CASE OF A BANK TO WHICH CL. (VIIA) APPLIES. INDISPUTABLY, CL. (VIIA)(A) APPLIES ONLY TO RURAL ADVANCES. 25. THE HONBLE CHIEF JUSTICE, HIS LORDSHIP, MR. S. H. KAPADIA, IN HIS CONCURRING JUDGMENT HAD SUMMED UP THE POSITION IN T HE FOLLOWING 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 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 ITA NOS. 578 & 653/BANG/2012 PAGE 26 OF 49 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). 26. 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 P ERTAINING TO NON-RURAL DEBTS. THIS DEDUCTION IS ALLOWED ONLY WH EN THE AMOUNT OF BAD DEBT IS ACTUALLY WRITTEN OFF IN THE BOOKS AN D DEBITED TO PROFIT & LOSS ACCOUNT. DEDUCTION CANNOT BE CLAIMED FOR CREATING PROVISION FOR BAD AND DOUBTFUL DEBTS OF NON-RURAL B RANCHES. IT IS LIKE ANY OTHER BAD DEBT WRITTEN OFF WHICH IS ALL OWED AS DEDUCTION IN THE CASE OF ASSESSEES WHO ARE NOT IN B ANKING BUSINESS. ITA NOS. 578 & 653/BANG/2012 PAGE 27 OF 49 (2) DEDUCTION U/S.36(1)(VIIA)(A) IS ALLOWED WHEN A PROVISION FOR BAD AND DOUBTFUL DEBTS RELATING TO RURAL ADVANC ES IS MADE IN 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 UN DER CLAUSE (VII) FOR ACTUAL WRITE OFF OF BAD DEBTS RELATING TO RURAL ADVANCES, UNTIL OR UNLESS THERE IS A BALANCE LYING IN THE PRO VISION ACCOUNT MADE UNDER CLAUSE (VIIA). THIS SO BECAUSE OF THE PR OVISO TO SECTION 36(1)(VII) OF THE ACT WHICH PROVIDES THAT I N THE CASE OF AN ASSESSEE TO WHICH CLAUSE (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO ANY SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EX CEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFU L DEBTS ACCOUNT MADE UNDER THAT CLAUSE. THUS THE PROVISO ENSURES T HAT THERE IS NO DOUBLE DEDUCTION, I.E., FIRSTLY GETTING A DEDUCTION WHEN A PROVISION IS CREATED AND SECONDLY GETTING A DEDUCTI ON WHEN BAD DEBTS ARE WRITTEN OFF. 27. 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.3 RAISED BY THE REVENUE. 28. GROUND NO.4 RAISED BY THE REVENUE IS WITH REGAR D TO THE ACTION OF THE CIT(A) IN DIRECTING THE AO TO ALLOW THE CLAIM F OR DEDUCTION MADE BY THE ASSESSEE ON ACCOUNT OF DEPRECIATION IN THE VALUE OF INVESTMENTS HELD BY THE ASSESSEE IN THE CATEGORY OF HTM (HELD TO MATURI TY) HOLDING THAT EVEN SUCH INVESTMENTS ARE STOCK-IN-TRADE OF BUSINESS OF BANKING AND THEREFORE THEY HAVE TO BE VALUED AT COST OR MARKET PRICE WHIC HEVER IS LOWER AND CONSEQUENT DEDUCTION ALLOWED. ITA NOS. 578 & 653/BANG/2012 PAGE 28 OF 49 29. THE ASSESSEE CLAIMED DEDUCTION OF A SUM OF RS. 171,29,30,664 IN RESPECT OF DIMINUTION IN THE VALUE OF INVESTMENTS H ELD BY THE ASSESSEE IN THE HELD TO MATURITY (HTM) CATEGORY OF INVESTMENT S. ACCORDING TO THE ASSESSING OFFICER, AS PER THE RBI'S MASTER CIRCULAR PRUDENTIAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF INVESTME NT PORTFOLIO BY BANKS RBI/2010-11/50 REVISED AS ON 1.7.2010, INVESTMENT P ORTFOLIO OF BANKS CANNOT BE TREATED AS STOCK IN TRADE WHERE THE INVES TMENTS ARE HELD ON THE BASIS OF 'HELD TO MATURITY' CATEGORY OR AVAILABLE FOR SALE CATEGORY. THE ASSESSING OFFICER WAS ALSO OF THE VIEW THAT FOR IT PURPOSES THE ASSESSEE 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 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 DISALLOWED BY THE AO. 30. ON APPEAL BY THE ASSESSEE; THE CIT (A), FOLLO WING 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 3-04 IN ITA ITA NOS. 578 & 653/BANG/2012 PAGE 29 OF 49 NO.253/BANG/2007 DATED 24.1.2008, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ORDER O F THE CIT (A), REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNA L. 31. THE LEARNED DR RELIED ON THE ORDER OF THE ASSE SSING OFFICER. 32. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT T O 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 (BANGALORE TRIB.) AND THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA BANK LTD., V. ACIT (356 ITR 549) . 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIM ILAR 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 ITA NOS. 578 & 653/BANG/2012 PAGE 30 OF 49 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. 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 ITA NOS. 578 & 653/BANG/2012 PAGE 31 OF 49 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, 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 ITA NOS. 578 & 653/BANG/2012 PAGE 32 OF 49 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. 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. ITA NOS. 578 & 653/BANG/2012 PAGE 33 OF 49 34. 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 GROUND OF APPEAL NO .4 OF THE REVENUE. 35. GROUND NO.5 RAISED BY THE REVENUE IS WITH REGA RD TO THE ACTION OF THE CIT(A) IN DELETING THE DISALLOWANCE OF PENALTY PAID BY THE ASSESSEE OF RS.90,94,829. THE AO DISALLOWED THE CLAIM OF THE A SSESSEE FOR DEDUCTION OF THE AFORESAID SUM AS THEY WERE IN THE NATURE PEN ALTY FOR INFRACTION OF LAW AND COULD BE ALLOWED AS DEDUCTION IN VIEW OF EXPLAN ATION TO SEC.37(1) OF THE ACT. THE CIT(A) DELETED THE ADDITION ON THE RE ASONING THAT THE SUMS IN QUESTION WERE NOT IN THE NATURE OF PENALTY FOR INFR ACTION OF LAW. 36. IT IS NOT IN DISPUTE BEFORE US THAT THE NATURE OF THE PENALTY IN THE PRESENT CASE IS IDENTICAL TO THE PENALTY THAT WAS D ISALLOWED ON SIMILAR GROUNDS IN THE CASE OF CIT VS. SYNDICATE BANK 261 ITR 528 (KAR) . THE HONBLE KARNATAKA HIGH COURT HELD THAT THE PENA LTY WAS NOT TO BE ALLOWED AS DEDUCTION. THE QUESTION BEFORE THE HON BLE COURT WAS AS TO WHETHER PENAL INTEREST TO RBI FOR NON-COMPLIANCE WI TH PROVISIONS OF S. 24 OF BANKING REGULATION ACT, 1949, IS IN THE NATURE OF P ENALTY FOR INFRACTION OF LAW AND HENCE TO BE DISALLOWED UNDER EXPLANATION TO SEC.37(1) OF THE ACT. THE HONBLE COURT OBSERVED THAT IF A PAYMENT IS A P ENALTY FOR INFRACTION OF LAW IT DOES NOT QUALIFY FOR DEDUCTION. THE HONBLE COURT THEREAFTER FOUND THAT THE ASSESSEE-BANK PAID PENALTY THOUGH TERMED AS 'PENAL INTEREST' ITA NOS. 578 & 653/BANG/2012 PAGE 34 OF 49 UNDER S. 24(4)(A) AND 24(4)(B) OF THE 1949 ACT FOR NON-COMPLIANCE WITH THE REQUIREMENT STIPULATED UNDER S. 24(2A). THE HONBL E COURT FOUND THAT SUB- S. (6) OF S. 24 CLEARLY INDICATES THAT THE PENAL IN TEREST PAYABLE UNDER SUB-SS. (4) AND (5) IS A 'PENALTY' AND IF THE PENALTY AMOUN T IS NOT PAID IT CAN BE ENFORCED AS A DECREE MADE BY A CIVIL COURT. FURTHE R, AN OPPORTUNITY IS ALSO PROVIDED TO THE DEFAULTING BANKING COMPANY TO SATIS FACTORILY EXPLAIN THE NON-COMPLIANCE AND TO AVOID THE PENALTY. ACCORDING TO THE HONBLE COURT THAT SHOWS THAT THE AMOUNT IN QUESTION IS NOT COMPE NSATORY IN NATURE BUT DEFINITELY PENAL AND THAT THE SAID AMOUNT PAID BY W AY OF PENALTY THOUGH CALLED PENAL INTEREST CANNOT BE TREATED AS LEGITIMA TE ITEM OF EXPENDITURE. THE HONBLE COURT HELD THAT PERMITTING PENALTY PAID FOR THE NATURE OF SUCH VIOLATIONS AS AN ITEM OF DEDUCTIBLE EXPENDITURE UND ER S. 37 OF THE IT ACT WILL ONLY AMOUNT TO PLACING A PREMIUM ON THE COMMISSION OF INFRACTION OF THE ASSESSEE. THEREFORE, PENALTY PAYABLE UNDER S. 24(4 )(A) AND 24(4)(B) COULD NOT BE ALLOWED AS DEDUCTIBLE EXPENDITURE. 37. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE HONBLE KARNATAKA HIGH COURT, WE HOLD THAT THE SUM IN QUEST ION IS NOT ALLOWABLE AS A DEDUCTION. THE ORDER OF THE CIT(A) ON THIS ISSUE IS ACCORDINGLY REVERSED AND THE ORDER OF THE AO RESTORED. GROUND NO.5 RAIS ED BY THE REVENUE IS ALLOWED. 38. THE REVENUE HAS FILED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL AND SEEK ADMISSION OF THE SAME ON THE GROUND THAT T HE ISSUES RAISED ITA NOS. 578 & 653/BANG/2012 PAGE 35 OF 49 THEREIN ARE LEGAL ISSUES RELATING TO ALLOWANCE OF D EDUCTION OF PBDD U/S.36(1)(VIIA) & 36(1)(VII) OF THE ACT. THE ADDIT IONAL GROUNDS SOUGHT TO BE RAISED IN THIS REGARD READ THUS: (1) ASSESSEES CLAIM OF DEDUCTION U/S. 36(1)(VII) OF RS.108.53 CR IS NOT IN ACCORDANCE WITH THE PROVISIONS UNDER T HE ACT WHERE BAD DEBTS WRITTEN OFF WAS NOT DEBITED INTO TH E PROFIT & LOSS ACCOUNT. (2) THE PROVISION OF NPA FOR BOTH RURAL AND NON RUR AL BRANCHES DEBITED INTO THE PROFIT AND LOSS ACCOUNT WAS ONLY R S.100.56 CR, WHEREAS THE BAD DEBT WRITTEN OFF OF RS.108.53 C R WAS CLAIMED AS A DEDUCTION IN COMPUTATION OF INCOME U/S . 36(1)(VII) OF THE IT ACT OVER AND ABOVE THE PROVISI ONS FOR BAND AND DOUBTFUL DEBTS OF RS.200.03 CR CLAIMED U/S . 36(1)(VII) OF THE IT ACT OUGHT TO BE DISALLOWED. (3) THE BAD DEBT WRITE OFF CLAIMED IN COMPUTATION OF INCOME WAS PRUDENTIAL WRITE OFF AND IT IS A BALANCE SHEET ADJUSTMENT AND NOT PROFIT AND LOSS ADJUSTMENT THAT HAS LEAD TO DOUBLE DEDUCTION. 39. AS FAR AS ADDITIONAL GROUND NO.1 IS CONCERNED, THE SAME WAS NOT THE CASE MADE OUT BY THE AO. IN THE ORDER OF ASSESSMEN T, THE AO NEVER DISPUTED THE FACT THAT THE SUM OF RS.108.53 CRORES CLAIMED AS DEDUCTION U/S.36(1)(VII) OF THE ACT WAS NOT ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. AS FAR AS GROUND NO.2 IS CONCERNE D, IT PROCEEDS UNDER A MISCONCEPTION THAT DEDUCTION U/S.36(1)(VII) OF THE ACT IS LINKED WITH THE PBDD FOR NON-RURAL DEBTS. THIS IS ABSOLUTELY INCOR RECT AS HAS BEEN BROUGHT OUT WHILE DECIDING GROUND NO.3 RAISED BY THE REVENU E. GROUND NO.3 IS AGAIN A CLAIM WHICH WAS NEVER THE CASE MADE OUT BY THE AO. WE ARE OF ITA NOS. 578 & 653/BANG/2012 PAGE 36 OF 49 THE VIEW THAT THE ADDITIONAL GROUNDS SOUGHT TO BE R AISED BY THE REVENUE IS DEVOID OF ANY MERIT. THEY ARE THEREFORE DISMISSED AS WITHOUT MERIT, NOT ARISING OUT OF THE ORDER OF THE AO AND NOT BASED ON THE FACTS AS BORNE OUT BY THE RECORDS. THE ADDITIONAL GROUNDS ARE THUS DI SMISSED. 35. IN THE RESULT, THE APPEAL BY THE REVENUE IS PA RTLY ALLOWED. ITA NO. 653/BANG/2012 (ASSESSEES APPEAL) 40. GROUND NO.1 RAISED BY THE ASSESSEE IS GENERAL I N NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. GROUND NO.2 & 3 RAIS ED BY THE ASSESSEE IS WITH REGARD TO THE ACTION OF THE CIT(A) IN CONFIRMI NG THE ORDER OF THE AO REJECTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U /S.36(1)(VIII) OF THE ACT OF RS.25,00,00,000/-. THE PROVISIONS OF SEC.36(1)(VII I) OF THE ACT READS AS FOLLOWS: SECTION 36:- OTHER DEDUCTIONS. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RE SPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 (I) TO (VII) (VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED AN D MAINTAINED BY A SPECIFIED ENTITY, AN AMOUNT NOT EXCEEDING TWENTY PER CENT. OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' (BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RE SERVE ACCOUNT: PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS CA RRIED TO SUCH RESERVE ACCOUNT FROM TIME TO TIME EXCEEDS TWIC E THE AMOUNT OF THE PAID UP SHARE CAPITAL AND OF THE GENE RAL RESERVES OF THE SPECIFIED ENTITY, NO ALLOWANCE UNDER THIS CL AUSE SHALL BE MADE IN RESPECT OF SUCH EXCESS. EXPLANATION: IN THIS CLAUSE, (A) 'SPECIFIED ENTITY' MEANS, ITA NOS. 578 & 653/BANG/2012 PAGE 37 OF 49 (I) A FINANCIAL CORPORATION SPECIFIED IN SECTION 4A OF THE COMPANIES ACT, 1956 (1 OF 1956); (II) A FINANCIAL CORPORATION WHICH IS A PUBLIC SECT OR COMPANY; (III) A BANKING COMPANY; (IV) A CO-OPERATIVE BANK OTHER THAN A PRIMARY AGRIC ULTURAL CREDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK; (V) A HOUSING FINANCE COMPANY; AND (VI) ANY OTHER FINANCIAL CORPORATION INCLUDING A PU BLIC COMPANY; (B) 'ELIGIBLE BUSINESS' MEANS, (I) IN RESPECT OF THE SPECIFIED ENTITY REFERRED TO IN SUB-CLAUSE (I) OR SUB-CLAUSE (II) OR SUB-CLAUSE (III) OR SUB-CLAUS E (IV) OF CLAUSE (A), THE BUSINESS OF PROVIDING LONG-TERM FINANCE FO R- (A) INDUSTRIAL OR AGRICULTURAL DEVELOPMENT; (B) DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA ; OR (C) DEVELOPMENT OF HOUSING IN INDIA;] (II) IN RESPECT OF THE SPECIFIED ENTITY REFERRED TO IN SUB-CLAUSE (V) OF CLAUSE (A), THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR THE CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RES IDENTIAL PURPOSES; AND (III) IN RESPECT OF THE SPECIFIED ENTITY REFERRED T O IN SUB-CLAUSE (VI) OF CLAUSE (A), THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA; (C) 'BANKING COMPANY' MEANS A COMPANY TO WHICH THE BANKING REGULATION ACT, 1949 (10 OF 1949) APPLIES AND INCLU DES ANY BANK OR BANKING INSTITUTION REFERRED TO IN SECTION 51 OF THAT ACT; (D) 'CO-OPERATIVE BANK', 'PRIMARY AGRICULTURAL CRED IT SOCIETY' AND 'PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELO PMENT BANK' SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO TH EM IN THE EXPLANATION TO SUB-SECTION (4) OF SECTION 80P; (E) 'HOUSING FINANCE COMPANY' MEANS A PUBLIC COMPAN Y FORMED OR REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARR YING ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRU CTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSE S; ITA NOS. 578 & 653/BANG/2012 PAGE 38 OF 49 (F) 'PUBLIC COMPANY' SHALL HAVE THE MEANING ASSIGNE D TO IT IN SECTION 3 OF THE COMPANIES ACT, 1956 (1 OF 1956); (G) 'INFRASTRUCTURE FACILITY' MEANS (I) AN INFRASTRUCTURE FACILITY AS DEFINED IN THE EX PLANATION TO CLAUSE (I) OF SUB-SECTION (4) OF SECTION 80-IA, OR ANY OTHER PUBLIC FACILITY OF A SIMILAR NATURE AS MAY BE NOTIFIED BY THE BOARD IN THIS BEHALF IN THE OFFICIAL GAZETTE AND WHICH FULFILS TH E CONDITIONS AS MAY BE PRESCRIBED; (II) AN UNDERTAKING REFERRED TO IN CLAUSE (II) OR C LAUSE (III) OR CLAUSE (IV) OR CLAUSE (VI) OF SUB-SECTION (4) OF SE CTION 80-IA; AND (III) AN UNDERTAKING REFERRED TO IN SUB-SECTION (10 ) OF SECTION 80- IB; (H) 'LONG-TERM FINANCE' MEANS ANY LOAN OR ADVANCE W HERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PRO VIDE FOR REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERI OD OF NOT LESS THAN FIVE YEARS; 41. THE COMPUTATION OF DEDUCTION U/S.36(1)(VIII) OF THE ACT AS MADE BY THE ASSESSEE WAS AS FOLLOWS: S.NO. & PARTICULARS AMOUNT IN RS. 1. INTEREST EARNED FROM ADVANCES MADE TO INDUSTRIAL , AGRICULTURAL AND INFRASTRUCTURE ACTIVITIES 815,24,34,678 2. TOTAL INCOME FOR THE YEAR ENDED 31.3.08 4420,5 6,84,509 3. % OF INTEREST EARNED FROM ADVANCES MADE TO INDUSTRIAL, AGRICULTURAL AND INFRASTRUCTURE ACTIVIT IES TO TOTAL INTEREST INCOME (SL.NO.1/SL.NO.2) 18.44% 4. OPERATING PROFIT FOR THE YEAR ENDED 31.3.2008 660,87,65,493 5. PROFITS FROM ACTIVITIES SPECIFIED U/S.36(1)(VIII ) (SL.NO.4 X SL.NO.3 X 100) 121,87,91,872 6. 20% OF THE PROFITS DERIVED FROM ACTIVITIES SPECI FIED U/S.36(1)(VIII) 24,37,58,374 7. AMOUNT TRANSFERRED TO SPECIAL RESERVE 25,00,00 ,000 8. AMOUNT ELIGIBLE FOR DEDUCTION U/S.36(1)(VIII) (L OWER OF AMOUNT UNDER SL.NO.6 OR SL.NO.7) 24,37,58,374 ITA NOS. 578 & 653/BANG/2012 PAGE 39 OF 49 42. THE AO HELD THAT THE ASSESSEE IS NOT AN ENTITY ELIGIBLE FOR DEDUCTION U/S.36(1)(VIII) OF THE ACT. WITHOUT PREJUDICE TO T HE ABOVE STAND OF THE AO, HE ALSO FOUND FAULT WITH THE METHOD OF COMPUTATION OF DEDUCTION U/S.36(1)(VIII) OF THE ACT DONE BY THE ASSESSEE. T HE LOSS UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION DECLARED BY TH E ASSESSEE IN THE RETURN OF INCOME WAS RS.118,71,25,119. AFTER REDUC ING THE DEDUCTION OF RS.25,00,00,000/- CLAIMED U/S.36(1)(VIII) OF THE AC T, THE LOSS AS PER THE RETURN OF INCOME UNDER THE HEAD INCOME FROM BUSINE SS OR PROFESSION WAS A SUM OF RS.93,71,25,119. ACCORDING TO THE ASSESS EE SINCE THE INCOME EARNED FROM THE ACTIVITIES MENTIONED IN SEC.36(1)(V III) OF THE ACT WAS 18.44% OF THE TOTAL INCOME AS PER TABLE GIVEN ABOVE , THE PROFIT FROM SUCH ACTIVITIES UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION WAS 18.44% OF 93,71,25,119 VIZ., RS.17,28,05,872. 20% OF THE ABOVE ACCORDING TO THE AO WAS -3,45,61,174/-. SINCE THE ASSESSEE DECLARED A LOSS AND NOT PROFITS, THE AO HELD THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCTION U/S.36(1)(VIII) OF THE ACT. 43. ON APPEAL BY THE ASSESSEE, THE CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE THAT IT WAS AN ENTITY ELIGIBLE FOR DED UCTION U/S.36(1)(VIII) OF THE ACT. THAT FINDING IS NOT IN CHALLENGE BY THE REVEN UE BEFORE THE TRIBUNAL IN THE APPEAL FILED BY IT AGAINST THE ORDER OF CIT(A) AND HAS NOW BECOME FINAL. THEREFORE THE DISCUSSION OF THE CIT(A) IN THIS REGA RD IS NOT DISCUSSED. ITA NOS. 578 & 653/BANG/2012 PAGE 40 OF 49 44. AS FAR AS THE METHODOLOGY ADOPTED BY THE AO FO R REJECTING THE CLAIM OF DEDUCTION U/S.36(1)(VIII) OF THE ACT IS CONCERNE D, THE CIT(A) CONCURRED WITH THE VIEW OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE HAS RAISED GROUND NO.2 & 3 BEFORE THE TRIB UNAL. 45. WE HAVE HEARD THE SUBMISSION OF THE LEARNED CO UNSEL FOR THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE AO AND CIT(A) ERRED IN CONSIDERING THE LOSS DECLARED B Y THE ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION AS TH E BASIS ON DEDUCTION U/S.36(1)(VIII) OF THE ACT HAS TO BE COMPUTED. HE POINTED OUT THAT THE PROVISIONS OF SEC.36(1)(VIII) OF THE ACT PROVIDE TH AT A SPECIAL RESERVE HAS TO BE CREATED AND MAINTAINED BY A SPECIFIED ENTITY. T HEN AN AMOUNT NOT EXCEEDING TWENTY PER CENT OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSIN ESS OR PROFESSION' (BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CA RRIED TO SUCH RESERVE ACCOUNT WILL BE ALLOWED AS DEDUCTION. ACCORDING TO HIM IT IS THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION THAT HAS BEEN SEEN AND NOT THAT OF THE ENTITY AS A WHOLE, AS HAS BEEN DONE BY THE AO AND C IT(A). THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 46. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PL AIN READING OF THE PROVISIONS OF SEC.36(1)(VIII) OF THE ACT CLEARLY SH OWS THAT WHAT IS RELEVANT IS PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UND ER THE HEAD 'PROFITS AND ITA NOS. 578 & 653/BANG/2012 PAGE 41 OF 49 GAINS OF BUSINESS OR PROFESSION' AND NOT THE PROFIT S DERIVED BY THE ENTITY AS A WHOLE AS HAS BEEN DONE BY THE AO AND CIT(A). WE THEREFORE HOLD THAT THE METHOD OF COMPUTATION OF DEDUCTION AS DONE BY T HE AO AND CIT(A) IS INCORRECT. THE PROFITS DERIVED FROM ELIGIBLE BUSIN ESS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AS DONE BY THE ASSESSEE HAS BEEN ACCEPTED BY THE AO AND CIT(A). T HERE SHOULD BE NO DIFFICULTY IN ACCEPTING THE CLAIM MADE BY THE ASSES SEE FOR DEDUCTION U/S.36(1)(VIII) OF THE ACT. THE ASSESSEE HAS ALSO FILED BEFORE US AN ALTERNATE METHOD OF COMPUTATION OF DEDUCTION U/S.36 (1)(VIII) OF THE ACT TO DEMONSTRATE THAT SUCH ALTERNATE METHOD WILL RESULT IN CLAIM FOR DEDUCTION BEING MADE AT RS.37,14,84,183/-. THE SAID COMPUTAT ION IS GIVEN AS ANNEXURE-2 TO THIS ORDER . WE DEEM IT APPROPRIATE TO DIRECT THE AO TO EXAMINE THE COMPUTATION GIVEN AS ANNEXURE-2 TO SATI SFY HIMSELF THAT THE CLAIM AS MADE ORIGINALLY WAS CORRECT. THE AO IS TH EREAFTER DIRECTED TO CONSIDER THE CLAIM OF THE ASSESSEE FOR THE CORRECT AMOUNT OF ELIGIBLE DEDUCTION U/S.36(1)(VIII) OF THE ACT. THE RELEVANT GROUNDS ARE THUS TREATED AS ALLOWED. 47. GROUND NO.4 & 5 RAISED BY THE ASSESSEE IS WITH REGARD TO THE COMPUTATION OF DISALLOWANCE U/S.14A OF THE ACT. TH E ASSESSEE EARNED INTEREST AND DIVIDEND INCOME OF RS.2,14,32,814 AND RS.13,83,53,278 RESPECTIVELY WHICH WAS EXEMPT U/S.10(15) AND 10(34) OF THE ACT AND DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. I N VIEW OF THE PROVISIONS OF SEC.14A OF THE ACT WHICH PROVIDES THAT NO DEDUCTION SHALL BE ALLOWED IN ITA NOS. 578 & 653/BANG/2012 PAGE 42 OF 49 RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE ASSESSEE CLAIMED THAT IT HAD NOT INCURRED ANY DIRECT EXPENDITURE IN THE FORM OF INTEREST EXPENDITURE OR OTHER EXPENDITURE IN MAKING THE INVESTMENTS WHIC H YIELDED TAX-FREE INCOME. THE AO ALSO DOES NOT DISPUTE THE CLAIM OF THE ASSESSEE. THE AO DISPUTED ONLY GENERAL AND ADMINISTRATION EXPENSES ( OTHER EXPENSES) INCURRED BY THE ASSESSEE WHICH HAD TO BEEN APPORTIO NED AS ATTRIBUTABLE TO EARNING OF THE EXEMPT TAX FREE INCOME. THE CLAIM O F THE ASSESSEE IN THIS REGARD WAS THAT TAX FREE INCOME FOR THE BANK IS MAI NLY FROM INVESTMENTS HELD BY THE BANK. THE INVESTMENT ACTIVITIES OF THE BANK ARE CARRIED OUT BY THE TREASURY DEPARTMENT AT HEAD OFFICE. EVEN WITHO UT EARNING ANY FREE INCOME, THESE EXPENDITURE WOULD HAVE BEEN INCURRED BY THE BANK SINCE THE BANK HAS TO HOLD SLR SECURITIES TO CARRY ON THE BUS INESS AND THE EXPENDITURE IS OF FIXED IN NATURE. THEREFORE, THER E IS NO EXPENDITURE INCURRED DIRECTLY BY THE BANK FOR EARNING ANY TAX F REE INCOME. SINCE THE EXPENDITURE WOULD HAVE BEEN INCURRED BY THE BANK EV EN WITHOUT THE EARNING OF TAX FREE INCOME, NO PART OF THE EXPENDIT URE CAN BE RELATED TO EARNING THE TAX FREE INCOME. THEREFORE NO DISALLOW ANCE U/S.14A OF THE ACT IS WARRANTED. 48. THE AO DID NOT AGREE WITH THE ABOVE CONTENTION. ACCORDING TO HIM EXPENDITURE RELATABLE TO EXEMPT INCOME HAS TO BE DE TERMINED AND IN THE ABSENCE OF ANY OTHER ACCEPTABLE BASIS ON WHICH THE SAME IS DETERMINED, RULE 8D OF THE INCOME TAX RULES, 1962 (RULES) HAVE TO BE APPLIED. ITA NOS. 578 & 653/BANG/2012 PAGE 43 OF 49 THEREAFTER THE AO INVOKED RULE 8D(III) OF THE RULES AND DETERMINED A SUM OF RS.2.14 CRORES AS EXPENDITURE INCURRED IN RELATI ON TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 49. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONFIRMED THE ACTION OF THE AO. THE CIT(A) HOWEVER PROCEEDED ON THE BASIS THAT THE ASSESSEE HAD INCURRED DIRECT EXPENDITURE ALSO IN THE FORM OF INT EREST EXPENSES IN EARNING THE TAX FREE INCOME. WE HAVE ALREADY SEEN THAT THE AO DID NOT RAISE SUCH ISSUE IN THE ORDER OF ASSESSMENT. THE DISALLOWANCE BY THE AO WAS ONLY WITH REFERENCE TO OTHER EXPENSES UNDER RULE 8D(III) OF THE RULES. THEREFORE THE OBSERVATIONS OF THE CIT(A) IN HIS ORDER ON APPL ICABILITY OF SEC.14A OF THE ACT TO BOTH DIRECT AND INDIRECT EXPENSES, ARE WITHO UT ANY BASIS. 50. BEFORE THE TRIBUNAL, THE LEARNED COUNSEL FOR T HE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA H IGH COURT IN THE CASE OF CCI LTD. VS. JCIT (2012) 20 TAXMANN.COM 196 (KAR.)/ (2012) 250 CTR (KAR) 291 . THE SUBSTANTIAL QUESTION OF LAW FOR CONSIDERATIO N BEFORE THE HONBLE KARNATAKA HIGH COURT IN THE AFOR ESAID CASE WAS AS TO WHETHER THE PROVISIONS OF SECTION 14A OF THE ACT AR E APPLICABLE TO THE EXPENSES INCURRED BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS MERELY BECAUSE THE ASSESSEE IS ALSO HAVING DIVIDEND INCOME WHEN THERE WAS NO MATERIAL BROUGHT TO SHOW THAT THE ASSESSEE HAD INCU RRED EXPENDITURE FOR EARNING DIVIDEND INCOME WHICH IS EXEMPTED FROM TAXA TION?. THE HONBLE COURT HELD THAT WHEN THE ASSESSEE HAS NOT RETAINED SHARES WITH THE ITA NOS. 578 & 653/BANG/2012 PAGE 44 OF 49 INTENTION OF EARNING DIVIDEND INCOME AND THE DIVIDE ND INCOME IS INCIDENTAL TO HIS BUSINESS OF SALE OF SHARES, WHICH REMAINED U NSOLD BY THE ASSESSEE, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING THE SHARES HAS TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INCOME AND THAT SHOULD BE DISALLOWED FROM DEDUCTIONS. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 51. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. IN THE PRESENT CASE, THE CLAIM OF THE ASSESSEE BEFO RE THE AO THAT TAX FREE INCOME FOR THE BANK IS MAINLY FROM INVESTMENTS HELD BY THE BANK. THE INVESTMENT ACTIVITIES OF THE BANK ARE CARRIED OUT B Y THE TREASURY DEPARTMENT AT HEAD OFFICE. EVEN WITHOUT EARNING AN Y FREE INCOME, THESE EXPENDITURE WOULD HAVE BEEN INCURRED BY THE BANK SI NCE THE BANK HAS TO HOLD SLR SECURITIES TO CARRY ON THE BUSINESS AND TH E EXPENDITURE IS OF FIXED IN NATURE. THEREFORE, THERE IS NO EXPENDITURE INCU RRED DIRECTLY BY THE BANK FOR EARNING ANY TAX FREE INCOME. SINCE THE EXPENDI TURE WOULD HAVE BEEN INCURRED BY THE BANK EVEN WITHOUT THE EARNING OF TA X FREE INCOME, NO PART OF THE EXPENDITURE CAN BE RELATED TO EARNING THE TAX F REE INCOME. IN THE LIGHT OF THE ABOVE UNDISPUTED FACT AND IN VIEW OF THE DE CISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. (SUPRA ), WE ARE OF THE VIEW THAT NO DISALLOWANCE CAN BE MADE U/S.14A OF THE ACT . THE ADDITION MADE IN THIS REGARD IS DIRECTED TO BE DELETED. THE RELE VANT GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. ITA NOS. 578 & 653/BANG/2012 PAGE 45 OF 49 52. IN GROUND NO.6 & 7 THE ASSESSEE HAS CHALLENGED THE ACTION OF THE CIT(A) IN CONFIRMING THE ACTION OF THE AO IN REJECT ING THE CLAIM OF THE ASSESSEE THAT PROVISIONS OF SEC.115JB OF THE ACT AR E NOT APPLICABLE TO BANKING COMPANIES AND IN FURTHER REJECTING THE CLAI M OF THE ASSESSEE TO ASCERTAIN BOOK PROFITS AS PER RECASTED PROFIT AND L OSS ACCOUNT PREPARED BY THE BANK AS PER THE PROVISIONS OF COMPANIES ACT, 19 56. 53. WE HAVE HEARD THE PARTIES ON THE ABOVE ISSUES. THE PROVISIONS OF SEC.115JB OF THE ACT ARE NOT APPLICABLE TO BANKING COMPANIES AS HELD BY THIS TRIBUNAL IN THE CASE OF SYNDICATE BANK ITA NO. 668 & 669/BANG/2010 ORDER DATED 19.6.2013. THE RELEVANT OBSERVATIONS O F THE TRIBUNAL IN THIS REGARD ARE AS FOLLOWS: 95. AT THE TIME OF HEARING, IT WAS SUBMITTED BY T HE LD. DR THAT THE ISSUE CAN BE REMANDED FOR FRESH CONSIDERATION AS WA S DONE BY THE TRIBUNAL IN A.Y. 2005-06 IN ITA NO.504/BANG/200 9, ORDER DATED 13.01.2012. THE LD. COUNSEL FOR THE ASSESSEE , HOWEVER, SUBMITTED THAT THE TRIBUNAL IN ITS EARLIER ORDER TH OUGH NOTED DIRECT JUDGMENTS ON THE POINT VIZ., (1) ORDER DATED 30.09.2010 IN ITA NO.3390/2009 PASS ED BY ITAT G BENCH, MUMBAI IN THE CASE OF KRUNG THAI BANK; (2) ORDER DATED 30.06.2011 IN ITA NOS.4702 TO 4706 /2010 PASSED BY THE ITAT, MUMBAI F BENCH IN THE CASE OF UNION BANK OF INDIA; AND (3) ORDER DATED 03.08.2011 IN ITA NO.469/2010 PASS ED BY THE ITAT C BENCH, CHENNAI IN THE CASE OF INDIAN BANK, DID NOT ADJUDICATE ON THE APPLICABILITY OF SECTION 115JB, BUT FOLLOWING AN EARLIER ORDER IN THE ASSESSEES OWN CA SE FOR EARLIER YEARS (AT WHICH POINT OF TIME THE ABOVE TRIBUNALS DECISIONS WERE NOT AVAILABLE), RESTORED THE MATTER TO THE ASSESSIN G OFFICER TO COMPUTE BOOK PROFITS BASED ON RECAST P & L ACCOUNT PREPARED IN ACCORDANCE WITH THE SCHEDULE-VI OF THE COMPANIES AC T. ITA NOS. 578 & 653/BANG/2012 PAGE 46 OF 49 96. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMI TTED THAT THE PROVISIONS OF SEC.115JB OF THE ACT WERE AMENDED WIT H EFFECT FROM 01.04.2013 MAKING IT OBLIGATORY, INTER ALIA , FOR BANKS TO PREPARE P & L ACCOUNT IN ACCORDANCE WITH THE BANKING REGULATI ON ACT IS CLEARLY INDICATIVE OF LEGISLATIVE UNDERSTANDING THA T UPTO AND INCLUDING A.Y. 2012-13, SECTION 115JB HAD NO APPLIC ATION TO BANKS AND INSURANCE COMPANIES. IT WAS SO HELD BY I TAT, HYDERABAD IN THE CASE OF STATE BANK OF HYDERABAD DATED 07.09.2013 IN ITA NO. 578/HYD/2010 AND ITAT MUMBAI IN THE CASE OF ICICI LOMBARD GENERAL INSURANCE CO. LTD. DATED 10.10.2012 IN ITA NO.2398/MUM/2009 . 97. THE LEARNED DR RELIED ON THE ORDER OF THE CIT (A). 98. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE. WE FIND THAT THIS ISSUE WAS CON SIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF KRUNG THAI BANK (SUPRA) AND ON THE ABOVE ISSUE HELD AS FOLLOWS:- 5. LEARNED COUNSEL FOR THE ASSESSEE, HOWEVER, CONT ENDS THAT THE PROVISIONS OF MAT DO NOT APPLY TO THE ASSE SSEE, AND , FOR THIS REASON, VERY FOUNDATION OF IMPUGNED REASSESSMENT PROCEEDINGS IS DEVOID OF LEGALLY SUSTAINABLE MERITS. HIS LINE OF REASONING IS THIS. THE PROVISIONS OF MAT CAN COME INTO PLAY ONLY WHEN THE ASSESSEE PREPARES ITS PROFIT AND LOSS ACCOUNT IN ACCORDANCE WITH SCHEDULE VI TO THE COMPANIES ACT .I T IS POINTED OUT THAT , IN TERMS OF THE PROVISIONS OF SE CTION 115JB(2),EVERY ASSESSEE IS REQUIRED TO PREPARE ITS PROFIT AND LOSS ACCOUNT IN TERMS OF THE PROVISIONS OF PART II AND II I OF SCHEDULE VI TO THE COMPANIES ACT . UNLESS T HE PROFIT AND LOSS IS SO PREPARED, THE PROVISIONS OF S ECTION 115 JB CANNOT COME INTO PLAY AT AL L. HOWEVER, THE ASSESSEE IS A BANKING COMPANY AND UNDER PROVISO TO SECTION 211 (2) OF THE ACT , THE ASSESSEE IS EXEMPT ED FROM PREPARING ITS BOOKS OF ACCOUNTS IN TERMS OF REQUIREMENTS OF SCHEDULE VI TO THE COMPANIES ACT , AND THE ASSESSEE IS TO PREPARE ITS BOOKS OF ACCOUNTS IN TERMS OF THE PROVISIONS OF BANKING REGULATION ACT . IT IS THUS CONTENDED THAT THE PROVISIONS OF SECTION 115 JB DO NOT APPLY IN THE CASE OF BANKING COMPANIES WHICH ARE NO T REQUIRED TO PREPARE THE PROFIT AND LOSS ACCOUNT AS PER THE REQUIREMENTS OF PART II AND III OF SCHEDULE VI TO T HE COMPANIES ACT . SINCE THE PROVISIONS OF SECTION 11 5 JB ITA NOS. 578 & 653/BANG/2012 PAGE 47 OF 49 DO NOT APPLY TO THE ASSESSEE COMPANY, THE REASONS RECORDED FOR REOPENING THE ASSESSMENT ARE CLEARLY W RONG AND INSUFFICIENT . WE ARE URGED TO QUASH THE REASSESSMENT PROCEEDINGS ON THIS SHORT GROUND. 6. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, VEHEMENTLY RELIES UPON THE ORDERS OF TH E AUTHORITIES BELOW AND SUBMITS THAT THERE IS NO SPEC IFIC EXCLUSION CLAUSE FOR THE BANKING COMPANIES, AND IN THE ABSENCE OF SUCH A CLAUSE, IT IS NOT OPEN TO US TO I NFER THE SAME. THE SUBMISSIONS OF THE LEARNED COUNSEL, ACCORDING TO THE DEPARTMENTAL REPRESENTATIVE, ARE C LEARLY CONTRARY TO THE LEGISLATIVE INTENT AND PLAIN WORDIN GS OF THE STATUTE. 7. THE PLEA OF THE ASSESSEE IS INDEED WELL TAKEN, AND IT MEETS OUR APPROVAL. THE PROVISIONS OF SECTION 11 5 JB CAN ONLY COME INTO PLAY WHEN THE ASSESSEE IS REQUIR ED TO PREPARE ITS PROFIT AND LOSS ACCOUNT IN ACCORDANCE W ITH THE PROVISIONS OF PART II AND I II OF SCHEDULE VI TO TH E COMPANIES ACT . THE STARTING POINT OF COMPUTATION O F MINIMUM ALTERNATE TAX UNDER SECTION 115 JB IS THE R ESULT SHOWN BY SUCH A PROFIT AND LOSS ACCOUNT. IN THE CAS E OF BANKING COMPANIES, HOWEVER, THE PROVISIONS OF SCHED ULE VI ARE NOT APPLICABLE IN VIEW OF EXEMPTION SET OUT UNDER PROVISO TO SECTION 211 (2) OF THE COMPANIES ACT . T HE FINAL ACCOUNTS OF THE BANKING COMPANIES ARE REQUIRE D TO BE PREPARED IN ACCORDANCE WITH THE PROVISIONS OF TH E BANKING REGULATION ACT . THE PROVISIONS OF SECTION 115 JB CANNOT THUS BE APPLIED TO THE CASE OF A BANKING COMPANY. 99. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DEC ISION OF THE MUMBAI BENCH OF THE TRIBUNAL, WE HAVE TO NECESSARIL Y HOLD THAT PROVISIONS OF SECTION 115JB OF THE ACT ARE NOT APPL ICABLE TO THE ASSESSEE WHICH IS A BANKING COMPANY. THE DECISIONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE, CLEARLY SUPPOR T THE PLEA OF THE ASSESSEE IN THIS REGARD. CONSEQUENTLY, GROUND NO.3 RAISED BY THE ASSESSEE IS ALSO ALLOWED. ITA NOS. 578 & 653/BANG/2012 PAGE 48 OF 49 54. SINCE THE PROVISIONS OF SEC.115JB OF THE ACT AR E NOT APPLICABLE TO BANKING COMPANIES AS HELD BY THE TRIBUNAL, WE ARE O F THE VIEW THAT THE COMPUTATION OF BOOKS PROFITS MADE BY THE AO CANNOT BE SUSTAINED. CONSEQUENTLY GROUND NO.6 RAISED BY THE ASSESSEE IS ALLOWED. GROUND NO.7 DOES NOT REQUIRE ADJUDICATION IN VIEW OF THE C ONCLUSION ON GROUND NO.6 THAT PROVISIONS OF SEC.115JB OF THE ACT DO NOT APPLY TO BANKING COMPANIES. 55. IN THE RESULT THE APPEAL BY THE ASSESSEE IS ALL OWED. 56. IN THE RESULT APPEAL BY THE REVENUE IS PARTLY ALLOWED , WHILE THE APPEAL BY THE ASSESSEE IS ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF FEBRUARY , 2015 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 27 TH FEBRUARY , 2015 . ENCL: ANNEXURES I & II D S/ ITA NOS. 578 & 653/BANG/2012 PAGE 49 OF 49 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.