Dy.CIT, Circle-3(2), Hyderabad V. State Bank of Hyderabad, Hyderabad

ITA 835/HYD/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5871 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-11-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 24-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P CHANDRA SEKHAR
• Assessee Lawyers: VANDANA JHA
• Keywords: Depreciation; Earning of tax free income; Cost of acquisition; Bad and doubtful debts; Capital expenditure
• Section: 143(3); 14A

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI J SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SMT P. MADHAVI DEVI, JUDICIAL MEMBER ITA NOS. 735 & 736/HYD/2014 ASSESSMENT YEARS: 2010-11 & 2011-12 STATE BANK OF HYDERABAD, HYDERABAD PAN AADL54009H VS. ACIT, CIRCLE-3(2). HYDERABAD (APPELLANT) (RESPONDENT) ITA NOS. 835 & 836/HYD/2014 ASSESSMENT YEARS: 2010-11 & 2011-12 DY. COMMISSIONER OF INCOME- TAX, CIRCLE-3(2), HYDERABAD VS. STATE BANK OF HYDERABAD, HYDERABAD PAN AADCS 4009H (APPELLANT) (RESPONDENT) ASSESSEE BY : SMT. VANDANA JHA (AR) REVENUE BY : SHRI. P CHANDRA SEKHAR (DR) DATE OF HEARING : 10-11-2016 DATE OF PRONOUNCEMENT : 30-12-2016 O R D E R PER P. MADHAVI DEVI, J.M.: THE ABOVE APPEALS ARE CROSS APPEALS FILED BY BOTH THE ASSESSEE AS WELL AS REVENUE FOR THE AYS 2010-11 AN D 2011-12 RESPECTIVELY AGAINST THE COMMON AND CONSOLIDATED OR DER OF THE CIT(A) - IV, HYDERABAD, DATED 18-02-2014. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE BA NK IS A SUBSIDIARY OF STATE BANK OF INDIA AND IS CARRYING O N THE BUSINESS OF BANKING. IT FILED ITS RETURNS OF INCOME FOR THE RE LEVANT A.YS. AND DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE I.T ACT, VARIOUS DETAILS WERE CALLED FOR AND PERUSED. 2 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. 3. ON PERUSAL OF THE COMPUTATION OF INCOME FILED AL ONG WITH RETURN OF INCOME FOR THE RESPECTIVE ASSESSMENT YEARS, THE A.O. OBSERVED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION ON INVES TMENTS IN HTM (HELD TO MATURITY) SECURITIES, AFS (AVAILABLE FOR S ALE)AND HFT(HELD FOR TRADING) SECURITIES. THE A.O. OBSERVED THAT IN THE BOOKS OF ACCOUNTS, THE ASSESSEE IS FOLLOWING THE ACCOUNTING POLICY FOR INVESTMENTS FOR VALUATION OF HMT CATEGORY INVESTMEN TS I.E. AT ACQUISITION COST OR MARKET VALUE WHICHEVER IS LOWER , AND THAT THE SECURITIES HELD UNDER AFS/HFT CATEGORY WERE VALUED SCRIP-WISE I.E. AT MARKET / ESTIMATED REALIZABLE VALUE AND ARE AGGREGA TED CLASSIFICATION WISE AND THE NET DEPRECIATION UNDER EACH GROUP OF C LASSIFICATION, IF ANY, IS FULLY PROVIDED FOR, WHILE NET APPRECIATION IS IGNORED. BUT FOR THE PURPOSES OF INCOME TAX, THE ASSESSEE HAS VALUED ALL THE THREE CATEGORIES OF INVESTMENTS I.E. HMT, AFS AND HFT AT COST OR MARKET VALUE WHICHEVER IS LOWER, TREATING THEM AS STOCK-IN -TRADE AND CLAIMED THE FALL / DEPRECIATION IN THE VALUE OF SECURITIES AS DEDUCTION FROM THE GROSS TOTAL INCOME IN THE COMPUTATION STATEMENT. T HEREFORE, THE A.O WAS OF THE OPINION THAT THE ASSESSEE IS NOT JUSTIFI ED IN ADOPTING DIFFERENT METHODS OF VALUATION OF INVESTMENTS IN IT S BOOKS OF ACCOUNT AND FOR THE PURPOSE OF INCOME TAX COMPUTATION. THE ASSESSEE WAS THEREFORE, ASKED TO EXPLAIN AS TO WHY THE DISALLOWA NCE OF THE CLAIM OF DEPRECIATION OF THE VALUE OF THE SECURITIES SHOULD NOT BE MADE. THE ASSESSEE VIDE LETTER DATED 08-02-2013 SUBMITTED A D ETAILED EXPLANATION JUSTIFYING THE CLAIM OF DEDUCTION. TH E A.O, HOWEVER, WAS OF THE OPINION THAT THE HTM CATEGORY OF INVESTMENTS CANNOT BE TREATED AS STOCK-IN-TRADE AND THEREFORE NO DEPRECIATION IS TO BE PROVIDED FOR ON SUCH INVESTMENTS. HE, THEREFORE, DISALLOWED THE CLAIM OF DEPRECIATION ON HTM CATEGORY OF INVESTMENTS AND CO MPUTED THE SAME FOR THE PURPOSE OF INCOME TAX. 3.1 FURTHER, AS REGARDS THE CLAIM OF DEPRECIATION O N AFS AND HFT INVESTMENTS, THE A.O OBSERVED THAT THE ASSESSEE, IN ITS BOOKS OF ACCOUNT, HAS VALUED THEM SCRIP-WISE AT MARKET VALUE /ESTIMATED 3 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. REALIZABLE VALUE AND OBSERVED THAT THE MARKET VALUE OR NET REALIZABLE VALUE OF SCRIP DO NOT CHANGE, WHETHER IT IS CONSIDE RED FOR INCOME TAX PURPOSES OR BALANCE SHEET PURPOSES. HE CONSIDERED THE FACT THAT THE ASSESSEE HAS PAID PREMIUM ON HTM SECURITIES AND AMO RTIZED IT OVER THE REMAINING PERIOD OF MATURITY AND HELD THAT IT S HOWS THAT THE ASSESSEE IS TREATING HTM SECURITIES AS LONG TERM/PE RMANENT SECURITIES NOT MEANT FOR TRADING, UNLIKE, AFS AND H FT SECURITIES. IN VIEW OF THE ABOVE DISCUSSION, THE A.O OBSERVED THA T THE DEPRECIATION OF HFT AND AFS SECURITIES IS TO BE ALLOWED TO THE E XTENT PROVIDED IN THE BOOKS OF ACCOUNT, AND SINCE THE ASSESSEE HAS NO T MADE ANY PROVISION FOR THE DEPRECIATION OF HFT AND AFS SECUR ITIES IN ITS BOOKS FOR THE RELEVANT A.YS, HE DISALLOWED THE CLAIM OF D EPRECIATION ON THESE SECURITIES AS WELL. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(A), WHO ALLOWED THE SAME BY FOLLOWING THE DECIS ION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO. 12332/HYD/2006, DATED 28/11/2008 FOR AY 2003-0 4, WHEREIN THE INVESTMENTS WERE HELD TO THE STOCK-IN-TRADE AND FAL L IN THE VALUE WAS ALLOWED AS DEPRECIATION IN RESPECT OF ALL THE SECUR ITIES HELD UNDER ALL THESE CATEGORIES. AGAINST THIS RELIEF GRANTED BY T HE CIT(A), THE REVENUE IS IN APPEAL BEFORE US FOR THE BOTH THE AS SESSMENT YEARS UNDER CONSIDERATION. 5. THE LD. DR, SUPPORTED THE ORDERS OF THE A.O, WHI LE THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDERS OF THE CIT(A) AND ALSO PLACED RELIANCE UPON THE DECISION OF THE COORD INATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEARS WHICH ARE PLACED IN THE PAPER BOOK FILED BY THE ASS ESSEE. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL PLACED ON RECORD, WE FIND THAT THE COORDINATE BENCH OF THI S TRIBUNAL IN ITA NO. 666/HYD/2015 AND 584/HYD/2015 FOR THE ASSESSMENT YE AR 2009-10, VIDE ORDER DATED 29-11-2013 AT PARA 5 OF ITS ORDER HAS HELD AS UNDER: 4 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. 5. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE MATERIALS ON RECORD, WE ARE OF THE VIEW THAT THE ISSUE IS SQUARE LY COVERED IN FAVOUR OF THE ASSESSEE NOT ONLY BY VIRTUE OF DECISION OF THE JURISDICTIONA L HIGH COURT IN ASSESSEE'S OWN CASE REPORTED IN 151 ITR 703 BUT BY ATLEAST THREE SEPARA TE ORDERS OF THE ITAT, HYDERABAD BENCH IN ASSESSEE'S OWN CASE FOR DIFFERENT ASSESSME NT 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 DECIDIN G THE ISSUE HELD AS UNDER : '28. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. THE HON'BLE JURISDICTIONAL HIGH COURT IN AS SESSEE'S OWN CASE (151 ITR 703 ) HELD THAT MAIN BUSINESS OF THE BANKING COMPAN Y BEING TO ACCEPT DEPOSITS TO ADVANCE LOANS TO APPROPRIATE PERSONS, MONEY CONS TITUTES ITS STOCK IN TRADE. THE AMOUNT REQUIRED TO KEPT IN INDIA AS PER SECTION 24 OF THE BANKING REGULATION ACT, 1949 IN THE FORM OF CASH, GOLD AND UNENCUMBERED SECURITIES IS PART OF STOCK IN TRADE OF THE ASSESSEE. WHILE IDENT ICAL ISSUE OF CLAIM OF DEPRECIATION ON HTM SECURITIES CAME UP BEFORE THE I NCOME-TAX APPELLATE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2003-04 IN ITA NO.1232/HYD/2006 DATED 28-11-2008, THE INCOME- TAX APPELLATE TRIBUNAL FOLLOWING THE RATIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN 151 ITR 703 AND HON'BLE KERALA HIGH COURT IN CASE OF CIT V/S. N EDUNGADI BANK LTD (264 ITR 545) HELD THAT WHEN THERE IS NO DISTINCTION BETWEEN THE THREE CATEGORIES OF SECURITIES VIZ.,HTM, AFS AND HFT. THE ASSESSEE CAN PROVIDE FOR DEPRECIATION IN ALL THE SECURITIES ON THE SAME FOOTING. IN VIEW OF THE RATIO LAID DOWN BY THE CO- ORDINATE BENCH OF THIS TRIBUNAL, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDING OF THE CIT (A) ON THIS ISSUE. ACCORDINGLY, THE GROUND RAISED BY THE DEPARTMENT IS DISMISSED'. 6. RESPECTFULLY FOLLOWING THE AFORESAID FINDING OF THE COORDINATE BENCH, WE UPHOLD THE DECISION OF THE CIT(A) AND DISMISS THE GROUND RAISE D BY THE DEPARTMENT. 6.1 WE FIND THAT THE CIT(A) HAS DELETED THE ADDITIO N MADE BY THE ASSESSING OFFICER FOLLOWING THE DECISION OF THE COO RDINATE BENCH IN ASSESSEES OWN CASE. THEREFORE, WE SEE NO REASON T O INTERFERE IN THE ORDER OF THE CIT(A) AND ACCORDINGLY THE SAME IS HER EBY UPHELD. 7. FURTHER, DURING THE ASSESSMENT PROCEEDINGS, THE A.O ALSO DISALLOWED THE CLAIM OF BROKEN PERIOD INTEREST PAI D ON PURCHASE OF SECURITIES. THE A.O WAS OF THE OPINION THAT THE IN TEREST PAID BY THE BANK AT THE TIME OF PURCHASE OF SECURITIES IS A PAR T OF PURCHASE CONSIDERATION OF THE ASSET AND IS A CAPITAL EXPENDI TURE. HE THEREFORE, DISALLOWED THE SAME. 8. ON APPEAL, THE CIT(A) ALLOWED THE SAME BY THE FO LLOWING THE DECISION OF COORDINATE BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10. AGGRIEVED, TH E REVENUE IS IN 5 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. APPEAL BEFORE US BY RAISING A GROUND IN BOTH THE AP PEALS AS GROUND NO. 11. 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE (CITED SUPRA) AND THE TRIBU NAL VIDE PARA NOS. 8 TO 10 HAS HELD AS UNDER: 8. DURING THE ASSESSMENT PROCEEDINGS, THE A.O. NOT ICED THAT THE ASSESSEE HAS CLAIMED EXPENDITURE OF AN AMOUNT OF RS.157,60,72,614/- ON A CCOUNT OF BROKEN PERIOD INTEREST. THE A.O. HOWEVER, DISALLOWED THE ASSESSEE'S CLAIM B Y TREATING IT AS CAPITAL EXPENDITURE. WHILE DECIDING ASSESSEE'S APPEAL ON THE ISSUE, THE CIT(A) ALLOWED ASSESSEE'S CLAIM BY FOLLOWING THE ORDER OF THE ITAT IN ASSESSEE'S OWN C ASE IN ITA.NO. 578 & 779/HYD/2010 DATED 07.09.2012 FOR THE ASSESSMENT YEAR 2007-2008. 9. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI AL ON RECORD. AS CAN BE SEEN FROM THE ORDER OF THE COORDINATE BENCH OF THIS TRIBUNAL WHILE CONSIDERING THIS ISSUE IN ASSESSEE'S OWN CASE FOR THE A.Y. 2008-09 IN ITA. NO . 847 & 1002/HYD/2012 DATED 28.03.2012 HELD AS UNDER : '30. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES. ON PERUSAL OF THE ORDERS OF THE REVENUE AUTHORITIES AND MATERIALS ON RECORD WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDERS OF CO-ORDINATE BENCH PASSED IN ASSESSEE'S OWN FOR THE ASSESSMENT Y EARS 1999- 2000 AND 2007-08. THE TRIBUNAL IN THE ORDER FOR THE ASSESSME NT YEAR 2007-08 IN ITA NO.578 AND 779/HYD/10 DATED 7-9-2012 HAVE HELD AS U NDER:- 'THE FIRST ISSUE IN THE APPEAL IS REGARDING DISALLO WANCE OF BROKEN PERIOD INTEREST OF RS.58.51 CRORES. THE BANK WHICH HAVE PU RCHASED GOVERNMENT SECURITIES HAVE PAID RS.58.51 CRORES TOWARDS INTERE ST 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 AL SO RECEIVED INTEREST OF RS.36.84 CRORES IN RESPECT OF SECURITIES SOLD BY TH EM 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 TH E BROKEN PERIOD UPTO THE DATE OF PURCHASE AS DEDUCTION ON THE GROUND THAT TH E SECURITIES WERE HELD STOCK IN TRADE. THE AO HOWEVER REJECTED THE APPELLA NT'S CLAIM HOLDING THAT THE APPELLANT'S CONTENTION THAT THE SECURITIES CONSTITU TED STOCK IN TRADE. IT HAS NOT BEEN ACCEPTED SINCE IT WAS FOUND THAT THE SECURITIE S HELD IN THE CATEGORY OF HTM (HELD TO MATURITY) DID NOT FORM PART OF THE STO CK. HOWEVER, THE CIT(A) ALLOWED THE CLAIM ON THE GROUND THAT THE SAME WAS I N STOCK IN TRADE AND HENCE THE INTEREST FOR THE BROKEN PERIOD IS AN ALLOWABLE DEDUCTION, FOLLOWING THE DECISION OF ITAT HYDERABAD DATED 18/03/05. AGGRIEV ED REVENUE IS ON APPEAL. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION O F THE MUMBAI BENCH IN THE CASE OF JCIT VS. DENA BANK 139 TTJ 81 (MUM). THEY H AD FOLLOWED THE DECISION OF SPECIAL BENCH IN THE MUMBAI IN JCIT BANK OF BEHA RAIN, 132 TTJ 505 AND THE DECISION OF MUMBAI HIGH COURT IN THE CASE OF AM ERICAN EXPRESS 6 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. INTERNATIONAL BANKING CORPORATION VS. CIT 258 ITR 6 01, WE FIND THAT KERALA HIGH COURT., CIT VS. NEDUNGADI BANK 264 ITR 545 HAS HELD THAT THE BROKEN PERIOD INTEREST IS AN ALLOWABLE DEDUCTION. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, WE UPHO LD THE ORDER OF CIT(A) AND REJECT THE REVENUE'S APPEAL 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 REPRESENTATIVE, THE HON'BLE RAJASTHAN HIGH COURT HA S TAKEN A CONTRARY VIEW BY HOLDING THAT THE PAYMENT TOWARDS BROKEN PERIOD INTE REST IS A CAPITAL EXPENDITURE. HOWEVER, AS THE CO-ORDINATE BENCH HAS DECIDED THE ISSUE AFTER FOLLOWING THE VIEW EXPRESSED BY THE HON'BLE BOMBAY HIGH COURT IN CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION (SUPRA) AND HON'BLE KERALA HIGH COURT IN CASE OF CIT V/S. NEDUNGADI BAN K (SUPRA), WE RESPECTFULLY FOLLOW THE SAME AND UPHOLD THE ORDER OF THE CIT (A) . THE GROUND RAISED BY THE DEPARTMENT IS DISMISSED.' 10. RESPECTFULLY FOLLOWING THE AFORESAID FINDING OF THE COORDINATE BENCH, WE UPHOLD THE DECISION OF THE CIT(A) AND DISMISS THE GROUND RAISE D BY THE DEPARTMENT. RESPECTFULLY FOLLOWING THE SAME, WE SEE NO REASON T O INTERFERE WITH THE ORDER OF THE CIT(A) AND THE REVENUES GROUND OF APPEAL IN BOTH THE APPEALS IS REJECTED. 10. DURING THE ASSESSMENT PROCEEDINGS, THE A.O ALSO DISALLOWED THE PROPORTIONATE EXPENDITURE ON EXEMPTED INCOME U/ S 14A OF THE ACT. ON APPEAL, THE CIT(A) RESTRICTED THE DISALLOWANCE T O TWO MONTHS SALARY OF THE TREASURY BENCHES AS DIRECTED BY THE T RIBUNAL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR S. AGGRIEVED BY THE PART RELIEF GRANTED BY CIT(A), THE REVENUE IS I N APPEAL BEFORE US. 11. THE LD. DR SUBMITTED THAT THE CIT(A) HAS FOLLOW ED THE ITAT ORDER IN THE CASE OF CORPORATION BANK IN ITA NO. 13 10/B/ 2012, DATED 19-09-2014 AND ANDHRA BANK IN ITA NO. 31/HYD/2015, DATED 24-04- 2015 FOR THE ASSESSMENT YEARS 2010-11AND 2011-12 RE SPECTIVELY WHEREAS, IN THE ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2008- 09, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE REV ENUE. THEREFORE, ACCORDING TO HIM, THE CIT(A)S ORDER ON THIS ISSUE HAS TO BE MODIFIED. 7 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. 12. THE LD COUNSEL FOR THE ASSESSEE, HOWEVER, RELIE D UPON THE ORDER OF THE CIT(A) AND ALSO THE DECISIONS OF THE TRIBUNA L CITED (SUPRA) BY THE DR. 13. HAVING REGARD TO THE RIVAL CONTENTIONS, WE FIND THAT IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 , THE TRIBUNAL HAS CONSIDERED THIS ISSUE AT PARA 12 TO 15 AND HAS HELD AS UNDER: 12. ITA.NO.584/HYD/2013 (ASSESSEE'S APPEAL) : IN T HIS APPEAL THE ASSESSEE HAS RAISED 4 GROUNDS. GROUNDS NO.1 AND 4 ARE GENERAL IN NATURE AND THEREFORE, IT NEEDS NO ADJUDICATION. GROUNDS NO. 2.1 TO 2.4 ARE RELATING T O SUSTAINING THE DISALLOWANCE OF RS.1,79,11,875/- BY THE CIT(A) UNDERSECTION 14A READ WITH RULE 8D OF I.T. RULES. 13. BRIEFLY THE FACTS ARE, DURING THE ASSESSMENT PR OCEEDINGS THE A.O. NOTICED THAT THE ASSESSEE HAS DECLARED EXEMPT INCOME OF RS.5,11,21,0 49/-. ON FURTHER EXAMINING THE DETAILS CALLED FOR WITH REGARD TO EXPENDITURE INCUR RED FOR EARNING THE EXEMPT INCOME AS WELL AS ASSESSEE'S EXPLANATION TO THE EFFECT THAT T HE TOTAL EXPENDITURE WHICH COULD BE APPORTIONED TOWARDS EARNING THE EXEMPT INCOME IS TH E EXPENDITURE INCURRED BY THE 'TREASURY AND INVESTMENT DIVISION' OF THE BANK, THE A.O. HELD THAT IT WAS NOT ONLY THE INVESTMENT DIVISION BUT THE ENTIRE RESOURCES OF THE BANK WHICH WOULD BE PUT TO USE FOR EARNING THE INCOME, WHICH WILL ALSO INCLUDE THE EXE MPTED INCOME. HE ALSO REJECTED ASSESSEE'S CONTENTION THAT THE BANK HAD SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, FREE RESOURCES AND INTERNAL ACCRUALS BY OBSERVING THAT BANKS ARE REQUIRED TO KEEP A CONTAIN PERCENTAGE OF THE PROFITS IN THE STATUTORY RESERVES. THE A.O. NOTICED THAT AS PER THE P & L ACCOUNT, THE ASSESSEE HAD INC URRED OPENING EXPENDITURE OF RS.933.14 CRORES AND INTEREST EXPENDITURE OF RS.424 2.71 CRORES, TOTALING TO RS.5175.85 CRORES, FOR EARNING THE TOTAL INCOME OF RS.6478.81 CRORES WHICH WORKED OUT TO 79.88%. HE, THEREFORE, WAS OF THE VIEW THAT THE ASSESSEE WO ULD HAVE SPENT THE SAME PERCENTAGE OF EXPENDITURE FOR EARNING THE EXEMPT IN COME ALSO. ACCORDINGLY, THE A.O. HELD THAT 79.88% OF THE EXEMPTED INCOME OF RS.5,11, 26,104/- IS TO BE DISALLOWED. THE ASSESSEE ITSELF HAVING DISALLOWED AN AMOUNT OF RS.1 4,11,575/-, THE A.O. WORKED OUT THE DISALLOWANCE TO RS.3,94,23,918/-. THE ASSESSEE CHAL LENGED THE DISALLOWANCE IN AN APPEAL PREFERRED BEFORE THE CIT(A). 14. DURING THE HEARING OF APPEAL BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT AS PER THE VIEW OF THE ITAT, ESTABLISHMENT CHARGES INCURRE D IN THE FORM OF SALARY OF OFFICERS AND STAFF WORKING IN THE INVESTMENT DIVISION, INCUR RED FOR A PERIOD OF TWO MONTHS COULD BE ALLOCATED AS EXPENDITURE INCURRED FOR EARNING DI VIDEND INCOME. HOWEVER, CONSIDERING THE INTRODUCTION OF RULE 80D OF THE I.T . RULES, THE ASSESSEE SUBMITTED A WORK OUT BEFORE THE CIT(A) COMPUTING THE DISALLOWAN CE UNDER RULE 8D(2) FOR AN AMOUNT OF RS.1,93,23,450/-. THE CIT(A) AFTER CONSID ERING THE SUBMISSIONS OF THE ASSESSEE VIS--VIS THE COMPUTATION SUBMITTED BY THE ASSESSEE WORKING OUT THE DISALLOWANCE IN TERMS WITH RULE 8D(2) ACCEPTED THE ASSESSEE'S CLAIM BY RESTRICTING THE DISALLOWANCE TO RS.1,79,11,875/- (RS.1,93,23,450 - RS.14,11,575/-). 15. HAVING CONSIDERING THE SUBMISSIONS OF THE PARTI ES AND ON PERUSAL OF THE MATERIALS ON RECORD, WE DO NOT FIND ANY INFIRMITY IN THE ORD ER PASSED BY THE CIT(A) ON THIS ISSUE. AFTER INTRODUCTION OF RULE 8D INTO THE INCOME TAX R ULES FROM A.Y. 2008-09 DISALLOWANCE 8 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. OF EXPENDITURE RELATING TO EARNING OF EXEMPTED INCO ME UNDER SECTION 14A OF THE ACT, HAS TO BE DETERMINED AS PER THE METHOD PROVIDED UND ER RULE 8D. IN FACT, AS CAN BE NOTICED FROM PARA 7.4 OF THE CIT(A) ORDER, THE ASSE SSEE ITSELF DURING THE PROCEEDING BEFORE THE CIT(A) HAS WORKED OUT THE DISALLOWANCE T O BE MADE IN TERMS WITH RULE 8D(2) WHICH HAS BEEN ACCEPTED BY THE CIT(A). IN THESE CIR CUMSTANCES, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) IN THIS REGARD. ACCORDINGLY, WE DISMISS THE GROUNDS RAISED BY THE ASSESSEE. RESPECTFULLY FOLLOWING THE SAME, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS ISSUE AND REVENUES GROUND OF APPEAL NO. 12 RAISED IN BOTH ASSESSMENT YEARS IS REJECTED. 14. GROUND OF APPEAL NO. 13 OF THE REVENUE, AND THE ASSESSEES GROUNDS OF APPEALS ARE INTER-RELATED. THE BRIEF FA CTS RELATING TO THIS ISSUE ARE THAT THE A.O NOTICED THAT THE ASSESSEE BA NK HAS MADE A CLAIM TOWARDS BAD AND DOUBTFUL DEBTS UNDER SECTION 36(1)(VII) OF THE ACT, IN RESPECT OF NON RURAL BRANCH ADVANCES AND A LSO CLAIMED DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT, RES PECT OF RURAL BRANCH ADVANCES. THE A.O. OBSERVED THAT THE ASSESSEES CL AIM OF DEDUCTION UNDER THE PROVISIONS OF SECTION 36(1)(VIIA) OF THE ACT, WHICH WAS IN EXCESS OF THE PROVISION MADE BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. THE A.O. THEREFORE, RESTRICTED THE CLAIM OF THE DEDUCTION U/S 36(1)(VIIA) OF THE ACT TO THE EXTENT OF PROVIS ION MADE BY THE ASSESSEE BY FOLLOWING THE DECISION OF THE HONBLE HIGH COURT OF PUNJAB AND HARYANA IN THE CASE OF STATE BANK OF PAT IALA VS CIT REPORTED IN 272 ITR 54. 15. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A), BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 5.1 THE LEARNED ASSESSING OFFICER IN NOT ALLOWING CLAIM 299.18 & 12.17 CRORES FOR THE AYS 2010-11 & 2011-12 RESPECTIVELY, U/S 36(1)(VIIA) OF THE INCOME TAX ACT. 5.2 THE LEARNED ASSESSING OFFICER IS NOT CORRECT I N HOLDING THAT THE PROVISION U/S 36(1)(VIIA) OF THE ACT IS ALLOWED TO THE APPELLANT BANK SUBJECT TO MAKING PROVISIONS IN THE BOOKS OF ACCOUNTS WHICH WE CONTEND AGAINST THE SPIRIT OF LAW. 5.3 THE LEARNED ASSESSING OFFICER FAILED TO NOTE T HAT THE APPELLANT BANK BEING GOVERNMENT UNDERTAKING PARTICIPATING IN THE P UBLIC POLICIES, RURAL 9 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. DEVELOPMENT PROGRAMS IS ALLOWED ADDITIONAL ALLOWANC E U/S 36(1)(VIIA) OF ACT WITHOUT CREATING PROVISIONS IN THE BOOKS OF ACC OUNT. 5.4 THE APPELLANT CONTENDS THAT CLAIM U/S 36(1)(VI IA) OF THE ACT IS MADE IN ACCORDANCE WITH LAW AND DECISIONS RENDERED BY CO URTS. 5.5 WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT CONTENDS THAT THE PROVISION U/S 36(1)(VIIA) OF ACT IN RESPECT OF RURAL BRANCH ADVANCES 436.70 & 526.89 CRORES FOR AYS 2010-11 & 2011-12 RESPECTIVELY IS AL LOWABLE AS THE APPELLANT DID NOT CLAIM BAD DEBTS 13.39 & 16.52 CRORES FOR AYS 2010-1 1 & 2011-12 IN RESPECT OF RURAL ADVANCES. BAD DEBTS IN RURAL ADVANCES ARE REQUIRED TO BE SET-OFF AGAINST PROVISION ALLOWABLE IN RESPECT OF RURAL ADVANCES ONLY AND OU T CONTENTION IS BASED ON THE LAW AND THE DECISIONS OF THE COURTS. 6. THE APPELLANT THEREFORE CONTENDS THAT THE ASSES SING OFFICER BE DIRECTED NOT TO SET-OFF OTHER DEBTS AGAINST DEDUCTION U/S 36(1)(VIIA) OF THE ACT ALLOWED TO THE BANK IN RESPECT OF RURAL ADVANCES. 16. THE CIT(A), HOWEVER, CONFIRMED THE ORDER OF THE A.O. WITH REGARD TO RESTRICTING THE DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT ONLY TO THE EXTENT THE PROVISION MADE BY THE ASSESS EE IN ITS BOOKS OF ACCOUNT BU ALSO OBSERVED THAT THE CLAIMS UNDER SECT ION 36(1)(VII)) AND 36(1)(VIIA) OF THE ACT OPERATE IN INDEPENDENT FIELD S AND THUS ALLOWED THE GROUND NO. 6 OF APPEAL. 17. AGAINST RESTRICTION OF THE PROVISION U/S 36(1)( VIIA) OF THE ACT TO THE EXTENT OF PROVISION MADE IN THE BOOKS OF ACCOUN T THE ASSESSEE IS IN APPEAL BEFORE US, WHILE, THE REVENUE IS IN APPEA L AGAINST THE OBSERVATION OF THE CIT(A) THAT THE CLAIMS U/S 36(1) (VII) AND 36(1)(VIIA) OF THE ACT OPERATE IN INDEPENDENT FIELDS. 18. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE, IN ITS BOOKS OF ACCOUNT, HAS MADE THE PROVISION U/S 36 (1)(VIIA) OF THE ACT, AND WHILE CLAIMING THE DEDUCTION U/S 36(1)(VII A) OF THE ACT IN THE COMPUTATION OF INCOME, THE BANK HAS SET OFF THE RUR AL ADVANCES BAD DEBTS WRITTEN OFF TO FOLLOW PROVISO TO SECTION 36( 1)(VII) OF THE ACT. IT IS SUBMITTED THAT THE BANK HAS ALSO CLAIMED DEDUCTI ON U/S 36(1)(VII) OF THE ACT FOR BAD DEBTS WRITTEN OFF TO THE EXTENT OF URBAN BAD DEBTS WRITTEN OFF. IT IS SUBMITTED THAT THE HONBLE SUP REME COURT IN THE CASE OF CATHOLIC SYRIAN BANK LTD VS CIT, [2012] 18 TAXMANN.COM 282 (SC) HAS HELD THAT THE DEDUCTION ON ACCOUNT OF PROVISIO N FOR BAD AND DOUBTFUL 10 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. DEBTS U/S 36(1)(VIIA) OF THE ACT, IS DISTINCT AND INDEPENDENT FROM THE CLAIM U/S 36(1)(VII) RELATING TO ALLOWANCE OF BAD D EBTS WRITTEN OFF AND THEREFORE THE ASSESSEES CLAIM U/S 36(1)(VIIA) SHOU LD BE ALLOWED TO THE EXTENT PRESCRIBED IN THE SECTION AND NOT NOT TO THE EXTENT OF THE PROVISION MADE BY THE ASSESSEE. 19. THE LD DR, ON THE OTHER HAND, SUPPORTED THE ORD ER OF THE CIT(A) AND ALSO PLACED RELIANCE UPON THE DECISION OF THE H ONBLE HIGH COURT OF PUNJAB AND HARYANA IN THE CASE OF STATE BANK OF PATIALA VS CIT CITED SUPRA. FURTHER, IT IS SUBMITTED THAT WHILE C OMPLETING THE ASSESSMENT ORDER, THE A.O. ALLOWED THE DEDUCTION F ULLY CLAIMED BY THE ASSESSEE U/S 36(1)(VII) OF THE ACT IN BOTH THE ASSESSMENT YEARS AND ACCORDINGLY, THERE WAS NO ISSUE WITH REGARD TO SETTING OFF OTHER DEBTS AGAINST DEDUCTION U/S 36(1)(VIIA) IN RESPECT OF RURAL ADVANCES. THEREFORE, ACCORDING TO HIM, THE GROUND OF APPEAL N O. 6 RAISED BY THE ASSESSEE BEFORE THE CIT(A) IS INFRUCTUOUS AND THE CIT(A)S OBSERVATION ON THIS ISSUE IS UNCALLED FOR. 20. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS MADE A PROVIS ION U/S 36(1)(VII)(A) OF THE ACT AND WHILE COMPUTING OF INC OME, IT HAS SET OFF THE BAD DEBTS WRITTEN OFF UNDER SECTION 36(1)(III) OF THE ACT AND HAS CLAIMED THE DEDUCTION U/S 36(1)(VIIA) OF THE ACT TO THE EXTENT PROVIDED FOR IN THE SECTION. WE FIND THAT THIS ISSUE IS COVE RED BY THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE C ASE OF THE STATE BANK OF PATIALA VS CIT CITED (SUPRA), WHEREIN IT H AS BEEN HELD THAT THE CLAIM U/S 36(1)(VIIA) CAN BE ALLOWED ONLY TO TH E EXTENT OF PROVISION MADE BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. THE FORMULA ON THE LIMIT PRESCRIBED UNDER SECTION 36(1)(VIIA) IS THE MAXIMUM PROVISION WHICH CAN BE ALLOWED AND IS NOT A STANDARD DEDUCTI ON AS CLAIMED BY THE ASSESSEE. WE FIND THAT THE CIT(A) HAS THEREFOR E, RESTRICTED THE CLAIM U/S 36(1)(VIIA) TO THE EXTENT OF PROVISION MA DE BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, WE SEE NO REAS ON TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS ISSUE. FURTHER, AS RIGHTLY POINTED BY 11 ITA NOS. 735 & 736/H/14 AND 835 & 835/HYD/2014 STATE BANK OF HYDERABAD, HYDERABAD. THE LD DR, THE A.O HAS ALREADY ALLOWED THE CLAIM OF DEDUCTION U/S 36(1)(VII) OF THE ACT, AND THERE CAN BE NO OTHER GR IEVANCE OF THE ASSESSEE AND THEREFORE THE GROUND OF APPEAL NO. 6, RAISED BY THE ASSESSEE BEFORE THE CIT(A) IS WITHOUT ANY BASIS AND THE CIT(A)S OBSERVATION AT PAGE 9 OF HER ORDER IS ALSO NOT WA RRANTED. THEREFORE, THE GROUND OF APPEAL NO. 6 IN THE CASE OF THE REVENUE IS ALLOWED AND THE ASSESSEES APPEAL IS DISMISSED. 21. IN THE RESULT ASSESSEES APPEALS ARE DISMISSED AND THE REVENUES APPEALS ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 30 TH DECEMBER, 2016. SD/- SD/- (J SUDHAKAR REDDY) (P. MA DHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 30 TH DECEMBER, 2016 KRK COPY TO:- 1) DY GM, SBH, FINANCE & ACCOUNTS DEPARTMENT, HYBANK TOWERS, HEAD OFFICE, GUNFOUNDRY, HYDERAB AD - 500001 2) ACIT, RANGE3(2); HYDERABAD. 3) CIT(A) IV, HYDERABAD 4) THE CIT-3, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., H YDERABAD. 6) GUARD FILE