STATE BANK OF INDIA,MUMBAI V. ADDL CIT CIR 2(2), MUMBAI

ITA 3868/MUM/2013

AI Insights

The case involves cross-appeals by the State Bank of India (the assessee) and the Additional Commissioner of Income Tax (the AO) against the appellate order passed by the Commissioner of Income Tax (Appeals). The appeals pertain to the assessment years 2006-07 and 2007-08 and involve common issues such as the taxation of deferred payment guarantee commission, disallowances under Section 14A, and the treatment of bad debts and broken period interest. The Tribunal considered extensive judicial precedents and submissions from both parties before arriving at its decisions.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 470059 (ITAT-MUMBAI)
• Duration Of Justice: 11 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 04-10-2024
• Assessment Year: 2006-2007
• Appeal Filed On: 15-05-2013
• Other Referred Cases: CIT vs. Travancore Cochin Chemicals, Mahindra and Mahindra Ltd vs. CIT, Venkata Satyanarayana Rice Mills vs. CIT, CIT vs. India Radiators Limited, CIT vs. Emtici Engineering Ltd, CIT vs. HDFC Bank Ltd, CIT vs. Catholic Syrian Bank Ltd, CIT vs. Maxopp Investment Ltd, CIT vs. South Indian Bank Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: REVENUE RECOGNITION OF ACCRUAL; ALSO; P C CHHHOTARAY
• Assessee Lawyers: KETAN VED
• Keywords: Set aside; Business income; Revised return; Revenue expenditure; Business expenditure; Question of law; Bad and doubtful debts; Corroborative evidences; Depreciation; Cost of acquisition; Reopening of assessment; Source of fund; Earning of tax free income; Avoidance of tax; Double taxation relief; Permanent establishment; Rule 8D; Benefit of exemption; Residential status
• Section: 147; 143(3); 119; 64; 48; 43; 22; 113; 13; 73; 145; 37; 14A; 72; 260A; 20; 101

Judgement Text

"` Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS KAVITHA RAJAGOPAL , JM ITA No. 3868/MUM/2013 [ by Assessee] & ITA No. 4952/MUM /2013 [By AO ] Vs. A.Y.2006-07 ITA No 4128/MUM /2014 [ By AO] & ITA no 4105/MUM/2014 [By Assessee] A.Y.2007-08 State Bank of India 3rd Floor, Corporate Centre Madam Cama Road Nariman Point Mumbai 400021 The Additional Commissionerof Income tax Circle 2 (2) Mumbai Room No 545, Aykar Bhavan Maharishi Karve Road Mumbai 400020 (Appellant) (Respondent) PAN AAACS8577K Assessee by Shri Ketan Ved &Abdulkadir Jawad Wala Revenue by Shri P C Chhhotaray Special Counsel Shri Dr Kishor Dhule CIT DR Date of last hearing 04-10-2024 Date of pronouncement 11.10.2024 O R D E R PER PRASHANT MAHARISHI, AM: ` Page | 2 1) We are concerned with the sets of cross appeals for two assessment Years i.e., AY 2006-07 and 2007-08 in case of Assessee, State bank of India involving common issues, having similar facts and also arguments of both parties. Both parties argued these appeals for long time and heard at length. Several written submissions are also made and considered.Plethora of judicial precedents were cited and read and so considered. Therefore, these appeals are disposed by this common order. 2) We first take up cross appeals for A.Y. 2006-07.The Decision reached for AY 2006-07 is then applied to cross appeals of AY 2007-08. 3) These are the cross appeals by State Bank Of India (Assessee/Appellant) and The Additional Commissioner Of Income Tax – 2 (2), Mumbai (The AO) against appellate order passed by The Commissioner Of Income Tax (Appeals) – 5, Mumbai [ The ld. CIT (A) ] dated 30/3/2013 wherein the appeal filed by the assessee against the assessment order passed under section 143 (3) of The Income Tax Act, 1961 (The Act) dated 20/3/2018 was partly allowed and therefore both the parties are aggrieved and are in appeal before us. 4) ITA number 3868/M/2013 is filed by the assessee wherein following grounds of appeal are raised:- 1. The learned CIT (A) erred in upholding the action of the assessing officer in taxing the deferred payment guarantee commission on receipt basis, without appreciating that such commission relates to subsequent years. ` Page | 3 2.1 The learned CIT (A) erred in confirming the action of the assessing officer in making the disallowance under section 14 A to the extent of Rs. 311,976,518/– as under: – 0.5% of average investments (including subsidiaries) Rs. 30,84,14,003 and 74/– Interest expenditure in foreign currency loans Rs. 3,562,144 2.2 The learned CIT – A erred in holding that the appellant’s contention that there should be no disallowance is clearly out of synchronization with the provisions of section 14 A. 2.3 The learned CIT (A) erred in holding that the disallowance under section 14 A based on the exempt income is incorrect and, on that basis, rejecting the claim of the appellant that 1% of the exempt interest on dividend income is to be disallowed. 2.4 The learned CIT (A) erred in holding that the interest expenses of foreign offices are to be disallowed under section 14 A. 2.5 Without prejudice to the above the learned CIT – A in considering the investment in subsidiaries while computing the amount of 0.5% of average investment. 3.1 The learned CIT (A) erred in upholding the action of the assessing officer in disallowing the appellant’s claim in respect of depreciation of Rs. 365,480,537/– on lease assets. 3.2 The learned CIT (A) erred in holding that the genuineness of the lease agreement was not ` Page | 4 proved, and it was a sham agreement to give colour of finance lease. 3.3 The learned CIT (A) erred in holding that the lease transaction is not even a case of finance lease but a mere case of advancing of the loan and the lessee was the actual real owner. 4.1 The learned CIT (A) erred in not allowing deduction of Rs. 14,968,666,681/– under section 36 (1) (vii)being the amount of bad debts written off (other than in respect of rural advances) 4.2 The learned CIT (A) erred in relying on explanation 2 to section 36 (1) (via) as proposed by the Finance Bill 2013 which is applicable from assessment year 2014 – 15 onwards. 5 The learned CIT – A erred in upholding the action of the assessing officer in reducing the depreciation/taxing appreciation in the value of securities held as available for sale (AFS) and held for trading (HFT) category. 6. 1 The learned CIT – Aerred in not directing the assessing officer to not tax the recovery of Baghdad’s return of income is of section 41 (4) as the appellant had not claimed the deduction for such advances under section 36 (1) (vii) 6.2 The learned CIT – A erred in holding that the ground of appeal is not maintainable as no claim was made in the original/revised return or during the course of assessment proceedings. 7 The learned CIT – A erred in not directing the assessing officer to not to tax the income earned by foreign branches of the appellant, based in ` Page | 5 countries with whom India has entered into a tax treaty. 7.2 The learned CIT – A erred in holding that the ground of appeal is not maintainable is no claim was made in the original/revised return or during the course of assessment proceedings. 5) Identical grounds are raised in the appeal of the assessee in ITA number 4105/M/2014 for assessment year 2007 – 08. 6) The learned AO in ITA number 4952/M/2013 has raised following grounds of appeal:- 1. The order of CIT (A) is opposed to law and facts of the case. 2. on the facts and circumstances of the case and in law, the learned CIT (A) has erred in deleting the disallowance of ₹ 62.09 lakhs incurred by the assessee on reservation of seats in the schools for the children of the bank officers without appreciating that the amount was not incurred bullion are usually for the purposes of its business. 3. (a) on the facts and circumstances of the case and in law, the learned CIT A has erred in holding that no disallowance under section 14 A with rule 8D (2) (ii) is called for, thereby granting the relief to the assessee, overlooking to the fact that the AO had correctly made the disallowance, as the assessee could not establish the Nexus between its own funds and investments made in tax-free income (b) on the facts and circumstances of the case and law in law, the learned CIT (A) has erred in ` Page | 6 restricting the disallowance under section 14 A of the IT Act to ₹ 31.19 crore without giving any specific reason and overlooking the detailed calculation made by the AO as per annexure 1 and 2 of the order 4. (a) on the facts and circumstances of the case and in law the learned CIT (A) has erred in allowing the broken period interest holding that it is revenue in nature and in process failing to appreciate that it is in the nature of cost of securities and therefore, capital in nature (b) on the facts and circumstances of the case and in law, the learned CIT (A) has erred in allowing the taxing of interest on securities on due basis, ignoring the fact that the assessee bank has been following mercantile system of accounting and therefore, interest on securities is to be accounted for on accrual basis, while arriving at the book profit 5. On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in allowing the assessee's appeal by holding the securities as stock in trade and loss on valuation as revenue expenditure. 6. on the facts and in the circumstances of the case and in law the learned CIT (A) has erred in allowing the assessee's appeal without appreciating the fact that the similar issue appeal has been filed for the assessment year 1995 – 96 before the honourable Bombay High Court vide ITXAL No. 625/2010 ` Page | 7 7) Identical grounds are raised by the learned assessing officer in ITA number 4128/M/2014 in appeal for assessment year 2007 – 08. 8) The assessee is a public sector bank, and it has earned income from banking operation, treasury operations and other related services. It filed its return of income on 14/12/2006 for assessment year declaring a total income of ₹ 39,931,886,160/–. The case was selected for scrutiny by issue of notice under section 143 (2) of the act. On scrutiny, the assessment order was passed under section 143 (3) of The Income Tax Act 1961 on 20/3/2018 determining the total income of the assessee at ₹ 55,159,074,492/–. Assessee vide letter dated 12/3/2000 date has clarified that the foreign taxes paid is of ₹ 582,463,026/– however the Double Taxation Relief and withholding tax claimed by the assessee is only ₹ 522,365,018/– and therefore the relief was allowed to that extent only. The learned assessing officer has made several disallowances/additions/rejected the claims, therefore the assessee is aggrieved with the same, preferred an appeal before the learned CIT – A who disposed of the appeal of the assessee by appellate order dated 30/3/2013 allowing the appeal of the assessee partly. Therefore, both the parties are aggrieved and in appeal before us raising above stated grounds. 9) Facts are similar for assessment year 2007 – 08 also as agreed by the parties. 10) We first take up the appeal of the learned assessing officer. 11) Ground number 1 of the appeal is general in nature and therefore same is dismissed as no specific arguments ` Page | 8 were raised, but the issue of grievance was raised in subsequent grounds. 12) Identically ground number 1 in the appeal of the learned assessing officer for assessment year 2007 – 08 is also dismissed. 13) As per ground number 2 of the appeal, the learned assessing officer is aggrieved by the deletion of the disallowance of ₹ 62.09 lakhs incurred by the assessee on reservation of seats in the schools for the children of the bank officer. The brief facts of the issue show that the bank has paid the above sum to various schools towards reservation of seats for the children of the officers of the bank. The assessee has claimed that this is staff welfare expenditure as the payment has been made to mitigate the hardship faced by the officers of the bank for children's education during the transfer. As the expenditure was incurred under the head staff welfare scheme, it should be treated as part of the normal business expenditure. The assessee relied on the ratio of Kerala High Court decision in the case of CIT versus Travancore Cochin chemicals [143 ITR 284] wherein it was held that the payment to school for children of employees is allowable as deduction under section 37 (1) and section 40 A (10) of the income tax act. The bank also relied on the ratio of the honourable Bombay High Court in the case of Mahindra and Mahindra Ltd [261 ITR 501], decision of the honourable Supreme Court in case of Venkata Satyanarayana rice mills versus CIT [223 ITR 101], honourable Madras High Court decision in the case of CIT versus India radiators limited [236 ITR 719] and ` Page | 9 honourable Gujarat High Court in the case of CIT versus Emtici engineering Ltd [242 ITR 86.] 14) The learned assessing officer held that in the case of the assessee these payments are in the nature of outright grants or deposits. It has been held in the earlier years that such expenditure is not really for the welfare of the staff but is meant to ensure that only the senior officers of the bank are able to secure their children admitted to the top-level schools. As such the ratio of the decision in the above cases are not directly applicable to the assessee's case. The payments amounts to donation and such donations are not allowable as expenditure incurred wholly and exclusively for the purposes of the business and therefore it was disallowed under section 37 (1) of the Act as per paragraph number 5 of the assessment order. 15) On challenged by the assessee before the learned CIT – A who dealt with the above issue as per paragraph number 4 of his appellate order, wherein he held that his predecessor in the assessee's own case relying upon the judgment in case of Mahindra and Mahindra Ltd versus CIT [261 ITR 501] has held that the contribution made by the assessee to societies which runs the schools in which children of the employees of the company study, is an allowable expenditure because it was incurred predominantly for benefit of staff. He further held that this issue has been decided in favour of the assessee by his predecessor in earlier assessment years 1999 – 2000, 2000 – 01, 2002 – 03, 2003 – 04, 2004 – 05 and 2005 – 06 in favour of assessee. He further held that the coordinate bench has also decided the issue in favour of ` Page | 10 the assessee for assessment year 1992 – 1993 to 1995 – 1996. Therefore, following the principles of judicial consistency, the disallowance made by the learned assessing officer was deleted. 16) The learned AO is aggrieved by the same. The learned special counsel and the learned CIT departmental representative argued that it may be appreciated that bank has spent money for the admission of children of senior bank officers. Such money is directly paid by the assessee to the schools. Such amount is not incurred for business purposes. It is not clear whether such amount paid by the assessee on behalf of the parents of such children is reflected as income of such parents or otherwise. It is also not clear whether such amount spent as a donation to the school or otherwise are eligible under Chapter-VI of the I.T.Act. Therefore, it may be appreciated that the burden or liability of the parents to educate their children was shared by the assessee. Therefore, such amount cannot be considered as incurred ‘wholly and exclusively’ for the purpose of the banking business. Therefore, such amount may be considered as disallowable while computing total income of the assessee. 17) It was also the argument of the learned departmental representative that indiscriminate reliance on citation on case law is laid down without looking to the facts of the case which is not proper. 18) The learned authorized representative vehemently submitted that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee's own case as mentioned by the learned CIT – ` Page | 11 Afor assessment year 1992 – 1993 to 1995 – 1996. He referred to chart of issues submitted before us wherein it was submitted that this issue is already decided in favour of the assessee by the coordinate bench in assessee's own case as per order dated:- a. 6 June 2023 for assessment year 2009 – 10 b. 22 March 2022 for the assessment year 2005 – 06 c. 30 September 2021 for the assessment year 2003 – 04 d. 12 July 2021 for the assessment year 2001 – 021 2002 – 03 e. 6 March 2020 for the assessment year 2000 – 01 f. 3 February 2020 for the assessment year 2008 – 09 g. 19 May 2008 for assessment year 92 – 93 h. 17 September 2009 four assessment year 95 – 96 i. 26 July 2013 for assessment year 1996 – 1997 19) It was further submitted that the honourable jurisdictional High Court on appeal by the income tax department against the order of the coordinate bench for assessment year 1996 – 1997 as per order dated 1 August 2016 has decided the issue in favour of the assessee. He referred to the several judicial precedents as stated above placed in his paper book. Accordingly, his argument was that this issue is squarely covered in favour of the assessee by the decision of the honourable High Court and therefore now there is no controversy left about the allowability of this expenditure. He further stated that it is not the case of the learned assessing officer that whether such amount paid by the assessee on behalf of the parents of the children is reflecting as ` Page | 12 income of such parents or otherwise because of the reason that the amount is paid by the assessee to facilitate the availability of seat for the employees of the bank. He submits that it is not the liability/ burden of the parents which is shared by the assessee, but it is the expenditure incurred by the assessee to facilitate the education of the children of the staff and therefore such expenses are incurred wholly and exclusively for the purposes of the business of the assessee. 20) We have carefully considered the rival contention and perused the orders of the learned lower authorities. As we find that this issue is squarely covered in favour of the assessee by the decision of the honourable High Court in case of the assessee for assessment year 1996 – 1997 as per order dated 1 August 2016, which is not disputed by the revenue before us, therefore, we confirm the order of the learned CIT – A on this issue deleting the disallowance of Rs 62.09 Lakhs. Further argument raised by the learned departmental representative that whether such amount is chargeable to tax in the hands of the parents of the children i.e., employees and whether it is reflected as income of those parents or not is irrelevant for the reason that, we are supposed to examine whether the assessee has incurred this expenditure for the purposes of the business or not. This is not the issue raised by the learned assessing officer also. In view of this, ground number 2 of the appeal is dismissed. 21) Similarly for assessment year 2007 – 08 the learned assessing officer has raised a ground against the disallowance deleted by the learned CIT – A of ₹ 3,817,620/–. Facts are identical and therefore as per our ` Page | 13 decision in ground number 2 of the appeal of the learned AO for assessment year 2006 – 07, we dismiss this ground also. 22) Ground number 3 (a) and (b)are with respect to the disallowance under section 14 A of the act. This issue has been dealt with by the learned assessing officer at paragraph number [7] of assessment order. In fact the assessee has claimed the exemption under section 10 of interest on tax-free bonds of ₹ 86,484,920/– under section 10 (15) (iv) (h), interest on foreign currency loan approved by central government of ₹ 865,301,178/– under section 10 (15) (iv), interest on long-term finance to infrastructure of ₹ 1,396,486,909/– under section 10 (23G) and a sum of ₹ 3,652,615,063 as dividend income exempt under section 10 (34) and section 10 (35) of the Act. Thus, assessee has claimed total exempt income of ₹ 6,000,888,070/–. 23) The learned assessing officer summarize the facts as per paragraph number 7.11 on following issues:- a) The assessee carries on the business of banking. In order to earn interest, the assessee borrows funds on interest on advances and invests such funds for earning interest and dividend income. The income of the assessee is the difference between interest received and paid and not the gross interest received. b) The assessee has a common pool of funds which is utilized for the purposes of making long-term advances, Foreign Exchange financing and investment in tax-free bonds and shares. The ` Page | 14 borrowings are used for the purpose of making advances and investments. c) The nature of activities carried out by the assessee is diverse. The assessee obtains income from treasury operations, corporate banking, leasing, project finance, retail banking and international banking. The source of funds is the deposit of the bank which constitutes 76.95% of the total funds available in the balance sheet. The reserve and surpluses account for only 5.49% of the assets. These figures are reported in the bank's annual statement for financial year 2005 – 06. d) Since the funds are not separately earmarked for each division, it can only be concluded that a common pool of funds, which is mainly in the nature of borrowings, is available to the different divisions for carrying on the business activity. The investment in securities is carried on by the Treasury division, while Foreign Exchange advances were made by the international division. The various business activities of the assessee are clearly demarcated, however there is no separate demarcation of funds. e) Therefore, the principles laid down in the decision of the honourable Supreme Court in Rajasthan warehousing versus CIT [242 ITR 450 ] that when all venture carried on by the assessee do not constitute one individual business, the principle of apportionment of expenditure will apply. The same principle has been laid down by the Supreme Court ` Page | 15 in case of waterfall Estates Ltd versus CIT [219 ITR 563]. 24) The learned assessing officer therefore considered the submission made by the assessee dated 4/3/2008 that there are cost free funds available with the bank in the form of capital, reserve and surplus, current account balances and profit of the year which can be linked to the investments for earning tax free income. However, rejected, as it failed to establish any direct link between such sources and investments. As already discussed in the earlier paragraphs, the funds available with the banks are mixed pool of cost bearing and not cost bearing funds and it is the net cost of borrowing which is material determining the expenses attributable to the tax exempt income. Thus, the Net cost of funds referred to by the bank is taken care of by leveraging the cost of borrowings. Accordingly, the learned AO made the disallowance under section 14 A of ₹ 3,814,037,203/–. 25) While making such disallowance the learned assessing officer further considered the decisions of coordinate bench in Deputy Commissioner of income tax versus SG investment and industries Ltd [(2004) 89 ITD 44 (KOL)], honourable Supreme Court in case of CIT versus United Gen trust private limited [(200 ITR 488)], Distributors(Baroda) private limited versus Union of India [155 ITR 120] and the decision of the honourable Bombay High Court in case of CIT versus Magan Lal Chhaganlal private limited (236 ITR 456). 26) Assessee aggrieved with the order of the learned assessing officer challenged the same before the learned CIT – A who decided the above ground of appeal as per ` Page | 16 paragraph number 5 of his appellate order. It was submitted before the learned CIT appeal that the learned assessing officer has failed to establish nexus between the exempt income and interest expenditure incurred by the bank to earn such exempt income. Only actual expenditure directly relatable to earning of exempt income can be considered and not notional expenditure. It was also contested that bank has sufficient interest frees funds by way of share capital/reserve and surplus and earned profit and therefore no interest disallowance can be made. The learned CIT – A agreed with the contention of the assessee that there should not be any disallowances of interest expenditure under section 14 A of the Act as it is clearly out of synchronization with the provisions of the law. He also rejected the working of the learned assessing officer applying the cost of earning the interest income compared with the investment. He asked the assessee to work out the disallowance in relation to interest on exempt income from foreign currency loans. Assessee submitted a detailed working in respect of such disallowances. Assessee also submitted that it has the share capital of ₹ 526 crores, reserve and surplus of 27,117 crores and current account balances on which no interest is payable of Rs. 67,995 crores along with the profit of the current year of ₹ 40 406 crores. Against this the average investment is only ₹ 6168 crores. The learned CIT – A considered the above explanation and found that in earlier year for assessment year 2003 – 04 to 2005 – 06, this issue was decided and disallowance out of only expenses was made. Based on this he ` Page | 17 computed the disallowance of ₹ 311,976,518/–. Against this both the parties are in appeal before us. 27) The learned AO challenging the deletion of the disallowance of ₹ 3,502,060,685/– and assessee is challenging the sustenance of disallowance to the extent of ₹ 31.19 crores as per ground number 2 of the appeal of the assessee. 28) The learned departmental representative vehemently submitted that:- i. It may be appreciated that the assessee has earned exempted income from the mixed funds used for investment. It is a matter of fact that assessee is engaged into the activity of banking. The funds available with the bank belong to the account holders/customers of the bank. The bank holds such fund in the fiduciary capacity or custodian. The bank is offering services to the customers. Such funds owned by the account holders/customers does not belong to the bank and the bank is paying certain interest charges on all such funds to the account holders/customers. Therefore, the majority of funds of the bank sourced from the account holder/customers are interest-bearing or cost bearing funds which are invested by the bank to earn income which is not part of total income. ii. It is also a matter of fact that the mixed funds have been used by the bank to earn exempt income as the assessee could not ` Page | 18 prove direct nexus between non-cost bearing funds ( source ) and investment made to earn the exempted income. Therefore, when the assessee is claiming that cost free funds were used to earn exempt income, it is duty of the assessee to prove with documentary evidence that the cost bearing funds were not used to earn exempt income. It is well established principle laid down by Hon. Supreme Court in case of Maxop Investment Ltd Vs CIT (402 ITR 640) that where the mixed funds are used and the assessee cannot established with documentary evidence that cost free funds were used to earn exempt income, in such situation proportionate disallowance of the expenditure incurred by the assessee for exempted income shall be made. The Hon’ble Supreme Court also held that the purpose for which the investment is made is not material and all investment which bears exempted income shall be considered for the application of provisions of section 14A. The Hon’ble Supreme Court in case of Maxop has also held that the assessee must have its own cost free funds on the date of investment and not at the closing date of the financial year. It is submitted that when the assessee claims that the cost bearing funds were not used for the purpose of investment and other exempted income, the assessee has to prove ` Page | 19 with documentary evidence that cost free funds (own funds) were used by the assessee to earn exempt income. This principle is laid down by the Hon’ble Supreme Court in the case of M/s Maxop Investment Ltd Vs CIT [ 91 TAXMANN.COM 154 (SC)].For the sake of reference the relevant portion from the decision of Hon’ble Supreme Court is reproduced as under-. “26. ------- 9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below ` Page | 20 rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.\" 27. We have already stated as to how the two divergent opinions have emerged from different High Courts and the respective reasons in support of these conflicting outcome. Obviously, assesses are banking upon the reasons which prevailed with the High Courts that have taken the view which are favorable to the assesses and the Revenue is relying upon the reasoning given by Delhi High Court as well as Calcutta High Court in Dhanuka& Sons case. Therefore, it may not be necessary to give a detailed narrative of the arguments which were advanced by various counsel appearing for the assesses as well as counsel for the Revenue. A brief resume of their submissions would serve the purpose.” iii. It is once again reiterated that where the assessee claims that the interest free funds (own funds) were used for making ` Page | 21 investment and to earn exempt income, the assessee has to prove with documentary evidence along with cash flow statement that he has used its own funds for the investment. In absence of such a finding of the fact if the mixed funds are used for the purpose of investment, then the theory of apportionment of expenses incurred for earning exempt income shall be applicable as held by the Hon’ble Supreme Court in the case of Maxop Investment Limited supra. It is also held by the Hon’ble Supreme Court that when the mixed funds were used for investment and the interest was paid on such mixed funds then the interest was also paid to earn exempt income. For the sake of reference, the relevant portion of the decision of Hon’ble Supreme Court is reproduced as under-. “42. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words: \"...Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is ` Page | 22 Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) at Rs.5,00,000/-. Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed...\" Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under: \"In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court.\" After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed”. iv. Further, it is submitted that when the assessee claims that its own funds were used for investment, the assessee has to prove ` Page | 23 that on the date of such investment interest free funds were available with the assessee and out of such interest free funds the investment was made to earn exempt income. The reliance is placed on the decision of Hon’ble Mumbai Tribunal in the case of HDFC bank Ltd Vs DCIT (ITA No. 3465/Mumbai/2012 and ITA No. 1795/Mumbai/2014). For the sake of ready reference, the ratio laid down by the Hon’ble Mumbai tribunal is reproduced as under- “(b) The existing paragraph 4 shall be substituted by the following paragraphs. “4. We notice that the assessee is putting forth its contentions against the impugned disallowance from different angles. All these contentions can be appreciated only if the relevant facts are available before us. The Ld. A.R further submitted that the presumption of use of own funds and interest free funds is available, when both the own funds & interest free funds” and “loan funds” are mixed up. For this proposition, he placed reliance on some of the decisions rendered by the jurisdictional High Court in its own case and also in some other cases. Even though the assessee has contended that it has used its own funds and interest free funds for making the investments, in our view, the said contentions require ` Page | 24 verification. Admittedly, the facts relating thereto are not available on record. Since full facts which are required to be considered in order to properly appreciate various contentions of the assessee are not available before us, the bench suggested that this issue may be set aside to the file of the assessment officer in order to enable him to examine this issue afresh. Both the parties agreed to the same. Accordingly we set aside the order passed by Ld. CIT(A) on this issue in all the three years and restore the same to the file of the assessing officer with the direction to examine this issue afresh in all the three years by duly considering the various case law relied upon by the assessee and also by duly addressing various types of contentions of the assessee and take appropriate decision in accordance with the law. 4.1 Before parting with this issue, we may state that we are of the view that the availability of own funds & interest free funds for making investments should be examined as on the date of making investments, even though the Ld. A.R contended that the said examination should be carried out as on the date of Balance sheet. We may explain our view with an example. Let us assume that the capital of the assessee is Rs. 1.00 lakh and the same ` Page | 25 was used to give rent advance and in purchasing office furniture. Let us further assume that the assessee borrows interest bearing loan of Rs. 10.00 lakh and uses the same for making investments. Hence, his Balance sheet as on the date of making investment would reflect as under:- LIABILITIES AMOUNT ASSETS AMOUNT Capital 1,00,000 Furniture 50,000 Loan funds 10,00,000 Office advance 50,000 Investments 10,00,000 Total 11,00,000 Total 11,00,000 If one examines the above Balance sheet, he can easily conclude that the investments have been made out of loan funds. Let us further elaborate this matter. Let us assume that the assessee has made a profit of Rs. 20.00 lakhs during the year under consideration. Then the Balance Sheet at the yearend would reflect as under: - LIABILITIES AMOUNT ASSETS AMOUNT Capital 21,00,000 Furniture 50,000 Loan funds 10,00,000 Investments 10,00,000 Current assets 20,00,000 ` Page | 26 Office advance 50,000 Total 31,00,000 Total 31,00,000 If the contention of the assessee is accepted, then it would appear that the Investments have been made out of Capital (own funds) only, since the own funds exceeds the amount of investment. A comparison of both the tables would show that the comparison of own funds & interest free funds vis-a-vis the investment should be made as on the date of investment only and not as on the date of Balance Sheet, since the comparison made as on the date of Balance sheet would given misleading results. Accordingly, we direct the assessing officer to examine the contentions of the assessee in the light of discussion made above.” 5. In the result, all the miscellaneous applications are allowed”. v. Therefore, considering the facts and circumstances of the case and the ratio laid down by the Hon’ble Supreme Court in case of Maxop as mentioned supra, it is most respectfully prayed that the addition made by ` Page | 27 the AO may be upheld. It is not out of place to mention that the assessee may place reliance on the decision of Hon’ble Supreme Court in the case of South Indian Bank Vs CIT (130 taxmann.com 178 )to support its claim. However, it may be appreciated that In the Case of South Indian Bank loan of the Supreme Court has decided the issue on the facts of the case wherein a factual finding was given that the assessee has invested its own funds, interest free funds and the income was accrued to the assessee. However, in the impugned case no such factual finding is inferred directly or indirectly by the assessing officer, CIT(A) or even by the assessee. Therefore, the ratio laid down by the Hon’ble Supreme Court in the case of South Indian Bank is not applicable to the case of assessee. For the sake of relevance, the decision of condo Supreme Court in the case of South Indian Bank is reproduced as under-. “26. Reverting back to the situation here, the Revenue does not contend that the Assessee banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular. ` Page | 28 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favoring the assessees. 28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work - The Wealth of Nations may aptly be quoted: \"The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the ` Page | 29 quantity to be paid ought all to be clear and plain to the contributor and to every other person.\" Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a taxpayer and the Government should endeavor to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.” 29) The learned departmental representative extensively referred to the decision of the honourable Supreme Court in case of Maxopp investment versus CIT 402 ITR 640, the decision of the honourable Punjab and Haryana High Court in case of A- one cycles Ltd versus CIT 53 taxmann.com 297, the decision of the HDFC Bank Ltd of the coordinate bench in miscellaneous application number 18 – 20/M/2015 in ITA number 375/M/2012 dated 31/3/2015 and also the decision of the honourable Supreme Court in case of South Indian bank Ltd versus CIT 130 taxmann.com 178 to support his contention. ` Page | 30 30) The learned authorized representative referred to the submissions made before the learned CIT – A and stated that assessee has sufficient owned interest free funds available to the tune of ₹ 95,639.73 crores whereas the average investment made by the assessee earning tax free income is merely Rs. 6168 crores. It was further stated that the issue stands covered in the assessee's own case by the decision of the honourable Supreme Court in case of South India bank versus CIT wherein the assessee was one of the party in civil appeal number 2963 of 2012 wherein it has been held that in case where the interest free own funds exceed investment, proportionate disallowance of interest is not warranted under section 14 A of the income tax Act 1961 for investment made in tax-free bonds, securities which yielded tax-free dividend and interest to the assessee. The learned authorized representative heavily relied upon the decision of the honourable Supreme Court in case of Principal Commissioner Of Income Tax Versus Syntax Industries (2018) 93 taxmann.com 24, honourable Bombay High Court in case of CIT versus HDFC Bank Ltd (2016) 383 ITR 529, CIT versus HDFC bank (2014) 366 ITR 505, principal Commissioner of income tax versus Sapnco Ltd in ITA number 488/2016 dated 26th number 2018 and principal Commissioner of income tax versus JSW power trading Co Ltd in ITA number 1075/2014. It was the claim of the learned authorized representative that no disallowance is required under rule 8D (2) (ii) when the assessee has sufficient own fund is covered by the decision of the coordinate bench in assessee's own case for assessment year 2009 – 10 in ITA number ` Page | 31 3645/M/2016 and ITA number 4564/M/2016 dated 6 June 2023. Therefore, it was submitted that no disallowance of interest could have been made which is rightly deleted by the learned CIT – A. 31) The learned authorized representative further submitted that the assessee has challenged the same issue in ground number 2 of the appeal wherein the learned CIT – A has upheld the disallowance to the extent of ₹ 311,976,518/– under section 14 A of the act. He submitted that the disallowance in case of Bank under section 14 A could not have been made based on the decision of the honourable Supreme Court in case of Max opp investments Ltd versus CIT (2018) 402 ITR 640. He further relied on the decision of honourable Delhi High Court in case of principal Commissioner of income tax versus Punjab and Sindh bank in ITA number 904 and 906/2019, MUFC bank Ltd versus ACIT of the coordinate bench in case of ITA number 7895/del/2019, Union Bank of India versus DCIT in ITA number 180421807/M/2018 and also of the central bank of India versus DCIT in ITA number 3739 and 3673/M/2018. 32) The learned authorized representative further stated that rule 8D does not apply for the assessment year 2006 – 07 as held in case of Godrej & Boyce manufacturing Co Ltd versus DCIT (2010) 328 ITR 81. He further referred to the decision of honourable Rajasthan High Court in case of state bank of Bikaner & Jaipur versus CIT (ITA number 141 of 2010 wherein the disallowance has been upheld under section 14 A of the act. He further relied upon the decision of the coordinate bench dated 11 August 2021 in case of state bank of Mysore versus ACIT ` Page | 32 in ITA numbers 2263/2262/2191 and 2192/M/2019. He submits that these are now banks merged with the assessee and therefore it is the case of the assessee. He further stated that in assessee's own case for assessment year 1996- 97 and 1997 – 1998 has held that the gross amount of interest is exempt under section 10 (15) (iv) of the act. 33) He further stated that when the securities are held by the assessee as stock in trade, the provisions of section 14 A do not apply relying on the decision of the honourable Punjab and Haryana High Court in case of PCIT versus state bank of Patiala (2017) 78 taxmann.com 3. 34) The learned authorized representative further stated that section 14 A applies only when an expenditure is actually incurred relying upon the several judicial precedents and stated that when the assessee has stated that no expenditure is incurred for earning exempt income. 35) The learned authorized representative without prejudice also stated that coordinate bench in assessee's own case has restricted the disallowance to the extent of 1 % of the same to income for the assessment year 2005 – 06 as per order dated 22 March 2022 and for assessment year 2003 – 04 and 2004 – 05 as per order dated 30 September 2021 and further the order of the coordinate bench for assessment year 2001 – 02 and 2002 – 03 dated 12 July 2021 and for assessment year 1982 – 83 to 83 – 84. The learned authorized representative also placed reliance on the decision of the coordinate bench in case of American Express bank Ltd versus additional CIT (2013) 55 SOT 136 (MUM). ` Page | 33 36) The learned authorized representative also submitted a cash flow chart for assessment year 2006 – 2007 and 2007 – 2008 wherein it is specifically shown that no new investments have been made during the assessment year 2006 – 07. Even otherwise it was stated that if only those categories of investments are to be considered where there is an increase as compared to assessment year 2005 – 06, that would still amount to iron and 5010 crores as the cash flow of the bank during the current year is ₹ 45,909 crore, it is evident that the bank had sufficient own funds to make investments during the year. He further stated that though the above statement includes all the investments whether from that any exempt income is on during the year or not are included but if there is any disallowance under section 14 A, such investments must be excluded from which no exempt income is earned during the year. He accordingly demonstrated that the bank had sufficient own interest free funds to make the investments during the year. 37) In view of above facts, he submitted that there could not be any disallowance under section 14 A of the Act based on the above judicial precedents in case of the assessee itself which is also supported by the decision of the various high courts and coordinate benches. 38) We have carefully considered the rival contention and perused the orders of the learned lower authorities. 39) Now the issue that whether the provisions of rule 8D is prospective in operation or applies to the appeals for assessment year 2006 – 07 and 2007 – 08 pending before us has already been concluded by the honourable Supreme Court in case of CIT versus Essar Tele Holdings ` Page | 34 Ltd in 401 ITR 445 (2008) (SC) wherein it has been held that it is prospective in operation and cannot be applied to any assessment year prior to assessment year 2008 – 09. In view of this now there is no disallowance which can be made for these assessment years under section 14 A by invoking rule 8D of the income tax rules. Even examining the annexure – 1 wherein the disallowance under section 14 A is made by the learned assessing officer of ₹ 3,814,037,203/–, we do not find that the learned assessing officer has invoked the provisions of these rules. The learned assessing officer has made the disallowance holding that assessee has earned total tax free domestic interest income of ₹ 5,135,586,892/–, the learned AO computed the total interest income and total interest expenditure. Based on this he worked out the percentage of interest expenses to interest income which is 54.72%. He also assumes the administrative expenses at the rate of 5% of the income. Therefore, he made a total of 59.72 percentage of the cost of earning tax-free income as a percentage of gross income. Accordingly, he estimated the cost of earning domestic tax free income of ₹ 3,066,793,808/–. He further worked out that there is a foreign interest income which is exempt under section 10 (15) of the act of ₹ 865,301,178/–. He worked out the total interest income of foreign offices and total interest expenditure of such foreign offices and worked out the ratio of expenditure to the income in percentage terms which is 81.36%. Over and above, he assumed 5% administrative expense which comes to the cost of earning exempt income at the rate of 86.36% of such income. Accordingly, on the interest income of foreign ` Page | 35 interest of ₹ 86,53,01,178/– he determined the total disallowance of ₹ 747,243,395/–. Thus, according to him the total claim of tax-free income is ₹ 6,000,888,070/– the disallowance under section 14 A is ₹ 3,814,037,203/– . Thus, the learned assessing officer has disallowed 63.56 percentage of the exempt income under section 14 A of the act. Out of this 58.56 percentage is the interest expenditure disallowed and 5% is the administrative expenses disallowance. The learned CIT – A sustained the disallowance of 0.5% of the average investment resulting into sustenance of such disallowance of ₹ 311,976,518/–. 40) The issue here is bank has sufficient own interest free funds then the amount of investment from which tax-free income is earned during the year, therefore, no disallowance on account of interest can be made in the case of a bank under section 14 A of the act. This issue has already been decided by the honourable Supreme Court in case of South Indian bank Ltd versus CIT [2021] 130 taxmann.com 178 (SC)/[2021] 283 Taxman 178 (SC) wherein it has been held as under:- \"7. At outset it is clarified that none of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee. In other words, the expenditure incurred towards interest paid on funds borrowed such as deposits utilized for investments in securities, bonds and shares which yielded the tax-free income, cannot conveniently be related to a separate account, maintained for the purpose. The situation is same so ` Page | 36 far as overheads and other administrative expenditure of the assessee. 8. In absence of separate accounts for investment which earned tax-free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax-free income. The assessees in these appeals had earned substantial tax-free income by way of interest from tax-free bonds and dividend income which also is tax-free. It is manifest that substantial expenditure is incurred for earning tax free income. Since actual expenditure figures are not available for making disallowance under section 14A, the Assessing Officer worked out proportionate disallowance by referring to the average cost of deposit for the relevant year. The CIT (A) had concurred with the view taken by the Assessing Officer. 9. The ITAT in Assessee's appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax-free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock-in-trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee's case that investments were not made out of interest or cost bearing funds alone. In consequence, it was held by the ITAT that disallowance under section 14A is not warranted, in absence of clear identity of funds. 10. The decision of the ITAT was reversed by the High Court by acceptance of the contentions advanced by the Revenue in their appeal and accordingly the Assessee Bank is before us to challenge the High Court's decision which was against the assessee. 11. Since, the scope of section 14A of the Act will require interpretation, the section with sub-clauses (2) and (3) along with the proviso is extracted hereinbelow:— \"14A. Expenditure incurred in relation to income not includible in total income – (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having ` Page | 37 regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.\" 12. The sub-section (2) and (3) were introduced to the main section by the Finance Act, 2006 with effect from 1-4-2007. 13. The question therefore to be answered is whether section 14A, enables the Department to make disallowance on expenditure incurred for earning tax-free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income. 14. We have heard Mr. S. Ganesh, Mr. S.K. Bagaria, Mr. Jehangir Mistri and Mr. Joseph Markose, learned Senior Counsel appearing for the appellants. Also heard Mr. Vikramjit Banerjee, learned Additional Solicitor General and Mr. Arijit Prasad, learned Senior Counsel on behalf of the respondent/Revenue. 15. The appellants argue that the investments made in bonds and shares should be considered to have been made out of interest free funds which were substantially more than the investment made and therefore the interest paid by the assessee on its deposits and other borrowings, should not be considered to be expenditure incurred in relation to tax-free income on bonds and shares and as a corollary, there should be no disallowance under section 14A of the Act. On the other hand, the counsel for the revenue refers to the reasoning of the CIT(A) and of the High Court to project their case. 16. As can be seen, the contention on behalf of the assessee was rejected by the CIT(A) as also by the High Court primarily on the ground that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such ` Page | 38 proportionate amount was disallowed applying section 14A of the Act. 17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No. 1225 of 2015, dated 28-11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was justified in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition of law of the Bombay High Court would now be appreciated in the following discussion. 18. In the above context, it would be apposite to refer to a similar decision in CIT v. Reliance Industries Ltd. [2019] 102 taxmann.com 52/261 Taxman 165/410 ITR 466 (SC), where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds. 19. In HDFC Bank Ltd. v. Dy. CIT [2016] 67 taxmann.com 42/383 ITR 529 (Bom.), the assessee was a Scheduled Bank and the issue therein also pertained to disallowance under section 14A. In this case, the Bombay High Court even while remanding the case back to Tribunal for adjudicating afresh observed (relying on its own previous judgment in same assessee's case for a different Assessment Year) that, if assessee possesses sufficient interest free funds as against investment in tax-free securities then, there is a presumption that investment which has been made in tax-free securities, has come out of interest free funds available with assessee. In such situation section 14A of the Act would not be applicable. Similar views have been expressed by other High Courts in CIT v. Suzlon Energy Ltd. [2013] 33 taxmann.com 157/215 Taxman 272/354 ITR 630 (Guj.), CIT v. Microlabs Ltd. [2017] 79 taxmann.com 365/[2016] 383 ITR 490 ` Page | 39 (Kar.) and CIT v. Max India Ltd. [2016] 75 taxmann.com 268/388 ITR 81 (Punj. & Har.). Mr. S Ganesh the learned Senior Counsel while citing these cases from the High Courts have further pointed out that those judgments have attained finality. On reading of these judgments, we are of the considered opinion that the High Courts have correctly interpreted the scope of section 14A of the Act in their decisions favouring the assessees. 20. Applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A of the Act. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under section 14A cannot be made. 21. On behalf of Revenue Mr. Arijit Prasad, the learned Senior Advocate refers to SA Builders Ltd. v. CIT [2007] 158 Taxman 74/288 ITR 1 (SC), where this Court ruled on issue of disallowance in relation to funds lent to sister concern out of mixed funds. The issue in SA Builders is pending consideration before the larger bench of this Court in Addl.CIT v. Tulip Star Hotels Ltd. [SLP (C) No. 14729 of 2012, dated 7-2-2019]. The counsel therefore, argues that there is no finality on the issue of disallowance, when mixed funds are used. On this aspect, since the issue is pending before a larger Bench, comments from this Bench may not be appropriate. However, at the same time it is necessary to distinguish the facts of present appeals from those in SA Builder Ltd. Tulip Star Hotels Ltd.'s case (supra). In that case, loans were extended to sister concern while here the Assessee- Banks have invested in bonds/securities. The factual scenario is different and distinguishable and therefore the issue pending before the larger Bench should have no bearing at this stage for the present matters. 22. The High Court herein endorsed the proportionate disallowance made by the Assessing Officer under section 14A of the Income-tax Act to the extent of investments made in tax-free bonds/securities primarily because, separate account was not maintained by assessee. On this aspect we wanted to know about the law which obligates the assessee to maintain separate accounts. However, the learned ASG could not provide a satisfactory answer and instead relied upon Honda Siel Power Products Ltd. v. Dy. CIT [2012] 20 taxmann.com 5/206 Taxman 33 (Mag.)/340 ITR 64 (SC), to argue that it is the responsibility of the assessee to fully disclose all material facts. The cited judgment, as can be seen, mainly dealt with reopening of assessment in view of escapement of income. The contention of department for reopening was that the assessee had earned tax-free dividend ` Page | 40 and had claimed various administrative expenses for earning such dividend income and those (though not allowable) was allowed as expenditure and therefore the income had escaped assessment. On this, suffice would be to observe that the action in Honda Siel Power Products Ltd. (supra), related to reopening of assessment where full disclosure was not made. An assessee definitely has the obligation to provide full material disclosures at the time of filing of Income-tax Return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. In absence of any statutory provision which compels the assessee to maintain separate accounts for different types of funds, the judgment cited by the learned ASG will have no application to support the Revenue's contention against the assessee. 23. It would now be appropriate to advert in some detail to Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Taxman 325/402 ITR 640 (SC). This case interestingly is relied by both sides' counsel. Writing for the Bench, Justice Dr. A.K. Sikri noted the objective for incorporation of section 14A in the Act in the following words:- \"3…………. The purpose behind section 14-A of the Act, by not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income……..\" The following was written explaining the scope of section 14- A(1): \"41. In the first instance, it needs to be recognised that as per Section 14-A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee \"in relation to income which does not form part of the total income under this Act\". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.\" Adverting to the law as it stood earlier, this Court rejected the theory of dominant purpose suggested by the Punjab & Haryana High Court and accepted the principle of ` Page | 41 apportionment of expenditure only when the business was divisible, as was propounded by the Delhi High Court. Finally adjudicating the issue of expenditure on shares held as stock-in-trade, the following key observations were made by Justice Sikri: \" 50. It is to be kept in mind that in those cases where shares are held as \"stock-in-trade\", it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. v. CIT 2011 SCC OnLine Del 4855 : (2012) 347 ITR 272] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in- trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits……….\" The learned Judge then considered the implication of Rule 8D of the Rules in the context of Section 14-A(2) of the Act and clarified that before applying the theory of apportionment, the Assessing Officer must record satisfaction on suo motu disallowance only in those cases where, the apportionment was done by the assessee. The following is relevant for the purpose of this judgment: \"51. ………… It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect.………….\" 24. Another important judgment dealing with section 14A disallowance which merits consideration is Godrej & Boyce Mfgr. Co. Ltd. v. Dy. CIT [2017] 1 SCC 421. Here the assessee had access to adequate interest free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of total income of the Assessee. Justice Ranjan Gogoi writing the opinion on behalf of the Division Bench observed that for disallowance of expenditure incurred in earning an income, it is a condition precedent that such income should not be includible in total income of assessee. ` Page | 42 This Court accordingly concluded that for attracting provisions of Section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary. The relevant portion of Justice Gogoi's judgment reads as follow: \"36. ……… what cannot be denied is that the requirement for attracting the provisions of section 14-A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income………….\" 25. Proceeding now to another aspect, it is seen that the Central Board of Direct Taxes (CBDT) had issued the Circular no. 18 of 2015 dated 2-11-2015, which had analyzed and then explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments and income arising out of those is attributable, to business of banking. This Circular came to be issued in the aftermath of CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 160 Taxman 48/289 ITR 6 (SC), wherein this Court had held that investments made by a banking concern is part of their banking business. Hence the income earned through such investments would fall under the head Profits & Gains of business. The Punjab and Haryana High Court, in the case of Pr CIT v. State Bank of Patiala [2017] 88 taxmann.com 667/393 ITR 476 (Punj. & Har.), while adverting to the CBDT Circular, concluded correctly that shares and securities held by a bank are stock-in- trade, and all income received on such shares and securities must be considered to be business income. That is why section 14A would not be attracted to such income. 26. Reverting back to the situation here, the Revenue does not contend that the Assessee Banks had held the securities for maintaining the Statutory Liquidity Ratio (SLR), as mentioned in the circular. In view of this position, when there is no finding that the investments of the Assessee are of the related category, tax implication would not arise against the appellants, from the said circular. 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees. 28. The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have ` Page | 43 failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work - The Wealth of Nations may aptly be quoted: \"The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.\" Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay, is a matter of planning for a taxpayer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.\" 41) Now therefore there cannot be any interest disallowance in the hands of the bank which has sufficient own / interest free funds more than the amount invested in the stock securities earning tax free income. In view of this even in absence of separate books of accounts, even in absence of showing direct Nexus of the funds, no interest disallowance could have been made in the hands of the assessee under section 14 A of the act. 42) Now the issue comes with respect to the disallowance of administrative expenditure for earning the exempt income. We find that in the case of the assessee for assessment year 2005 – 06 the coordinate bench in its order dated 22nd of March 2022 and for other years also has retained the disallowance to the extent of 1% of the exempt income. It is not shown before us that nature, ` Page | 44 quantum of expenditure is different in this year compared to earlier years, or there are specific expenditure incurred for earning exempt income , which exceeds the 1 % of the exempt income, Therefore, in absence of any change in the facts and circumstances of the case and because of the non-applicability of rule 8D for these assessment years, we direct the learned assessing officer to retain the disallowance under section 14 A of the act to the extent of 1% of the exempt income earned by the assessee. 43) Accordingly ground number 3 of the appeal of learned assessing officer is dismissed andground number 2 of the appeal of the assessee is partly allowed. 44) For assessment year 2007 – 08 ground number 4 is raised by the learned assessing officer which is also connected to ground number 1 of the appeal of the assessee for assessment year 2007 – 08 involving similar facts and circumstances. Both the parties also confirmed that their arguments are similar. We also appreciate provisions of rule 8D also do not apply to this assessment year. The sufficient availability of interest free funds then the amount of investment is also factually established for this year also. Therefore, as we have reached at the conclusion for assessment year 2006 – 07 that disallowance under section 14 A is restricted to the extent of 1% of the exempt income earned by the assessee is also apply to this case. Accordingly ground number 4 of the appeal of the AO and 1 of the appeal of the assessee are decided accordingly. ` Page | 45 45) Ground number 4 (a) of the appeal is against the broken period interest expenditure where the facts are mentioned in paragraph number 9 of the assessment order. Broken period interest relating to government securities refers to the interest relatable the period from due date for payment of interest to the date of purchase or sale of such securities. When a security is purchased by a bank, the interest from the last due date of payment of interest till the date of purchase, is an interest which is considered as broken period interest. Therefore, the accounting treatment of such interest is given by the banks by debiting it to the profit and loss account. Similarly, when a security is sold, interest accrued from the last due date of payment of interest to the date securities are sold is broken period interest income recognized by the banks to the profit and loss account as income. Thus, when securities are purchased, any broken period Interest expenditure is debited to the profit and loss account and when securities are sold, such broken period interest income is credited to the profit and loss account. 46) It is stated that assessee has debited ₹ 5,152,157,074/– as broken period interest paid on purchase of securities and treated the same as revenue expenditure. Assessee has also credited as income an amount of ₹ 12,496,589,527/– on account of broke period Interest received on sale of securities. Assessee has claimed this broken period interest paid as expenditure allowable in the year irrespective whether the securities are sold during the year or carried forwards as closing stock to next year. The contention is that the bank deals in ` Page | 46 securities and these securities are the stock in trade of the bank. The interest is paid therefore incurred for investments and it is allowable as revenue expenditure. Since the bank has consistently followed the system , hence, it has no impact on profit in the long-term. The assessee has paid broken period Interest on outright purchases where the relevant securities were sold in the same assessment year amounting to ₹ 5,001,145,102/–. In case of securities purchased and sold during the year it makes no difference whether broken period interest is treated as capital or revenue expenditure because profit/ loss/ gain is to be treated for tax purposes in the same year. However, when broken period interest is paid on securities which were held as closing stock at the end of the year is ₹ 151,011,972, The allowability of which as expenditure is questioned and claimed that it should have been included in the valuation of closing stock as at the end of the year for the reason that it become the cost of that securities. 47) The learned assessing officer is of the view that the contention of the assessee treating the broken period interest paid on purchase of securities as revenue expenditure has not been accepted by the revenue in earlier years based on the decision of the honourable Supreme Court in case of CIT versus Vijaya bank [187 ITR 541]. Honourable Supreme Court has held that any amount paid at the time of purchases is part of the purchase consideration of the asset and thus it is the capital cost. The amount in dispute is with respect to the disallowance of ₹ 151,011,972/– on securities which are held as closing stock at the end of the year. ` Page | 47 48) The claim of the assessee is backed by the decision of the honourable Bombay High Court in case of American Express international banking Corporation (income tax reference number 173 of 1983/75 of 1986 and 346 of 1987 dated 25/9/2002) (2002) (125 taxman 488) and in the case of Union Bank of India (income tax reference number 149 of 1995 dated 9/10/2002) wherein it has been held by the honourable High Court that interest paid on broken period should be allowed as revenue expenditure. The learned assessing officer has categorically held that the decision of the honourable Bombay High Court has not been accepted by revenue and therefore the disallowance of ₹ 151,011,972/– was made. 49) The assessee aggrieved with the same, challenged it before the learned CIT – A as per ground number 8 which has been decided as per paragraph number seven of his order. He deleted the above addition. He held that in assessee's own case for assessment year 2003 – 04 the learned CIT – A following the decision of the honourable Bombay High Court in case of American Express international banking Corporation (supra) and honourable Supreme Court in case of Citibank NA has deleted the above addition. Further in assessee's own case for assessment year 91 – 92 to 94 – 95 the coordinate bench has also allowed the claim of the assessee. 50) The revenue has challenged this disallowance deleted by the learned CIT – A and argued thatCBDT vide Instruction No.17/2008 dated 26-11-2008 (file No.228/3/2008-ITA-III) has instructed that where an ` Page | 48 assessee bank purchases securitiesundercapitalinvestmentatapriceinclusiveofanyac cruedinterest, then entirepurchaseconsiderationisinthenatureofcapitaloutlay. Therefore, any interest element included in the purchase consideration is not allowable as expenditure against income accruing on these securities. A correct method, therefore,wouldbetolinkbrokenperiodinterestpaymentsons ecuritiestothenatureofsecuritiesasdeterminedforthepurpos eofallowingdepreciation on investment. The broken period interest linked to capital investment (held to maturity category) would not be allowable while the broken period interest corresponding to the other securities will normally be allowable in view ofdecisionofBombayHighCourtinthecaseofAmericanExpres sBankaffirmed byHon'bleSupremeCourtinthecaseofCITIBankN.A. Importantly, thebrokenperiodinterestcorrespondingtoinvestmentofreve nuenaturein government securitiesmayalsonotbeallowableintotality iftheassesseeclaimsinterestaccruedbutnotdueasadeductio n,because,if theincomeaccruedbutnotdueisnotofferedfortaxation,thent hebroken periodinterestcorrespondingtothesecuritiesinclosingstockis claimed withoutthecorrespondingrevenuebeingrealized.Thisgoesag ainstthetheory of real income as well as matching concept which are fundamental to accounting. ` Page | 49 51) The AO has contested that the interest for broken period should go out to increase the cost of investment and is therefore, not allowable as deduction from the interest income. The AO has relied upon decision of Hon'ble Supreme Court in the case of Vijaya Bank Ltd.vs.CIT[1991] (187ITR541) where it was held that \"amount spent on purchase of securities being capital outlay cannot be set off against interest income\". Accordingly, the deduction for broken period interest was being disallowed. Contrary, the assessee has relied upon the decision of Hon’ble Bombay High Court in the case of American Express International Banking Corporation 125 Taxman 488 (Bombay). 52) The learned departmental representative further give an example that if a government security with face value of Rs 100/- and 12% interest per annum, wherein the date of interest is November and first May respectively, if in the month of January the assessee buy the Security for Rs 102/– out of which ₹ 2 is broken period interest and if it remains unsold and Rs 100/- is debited as purchase price of security which remains in the value of the closing stock and Rs. 2 is debited in profit and loss account as broken period interest expenditure. Since the interest is not offered for taxation on due basis, there is no realization of profit in connection with broken period interest expenditure of Rs. 2/–. This would clearly distort the picture of correct profit. In short , his contention is that the value of security in closing stock should be Rs 102/- and not Rs 100/-. 53) It was further contended that merely because the assessee has credited broken period interest in respect of ` Page | 50 some other securities, it would not justify debiting the broken period interest against book profit in anticipation of future profit of following years. 54) The learned departmental representative also gave example that if the assessee buys two securities for Rs 102/– each out of which Rs. 4/- is broken period Interest, one security sold on first March and on which broken period interest ₹ 4 is realized and another security remains unsold on which to 31st of March interest of ₹ 5 accrues in the books of account, the assessee is crediting income of ₹ 5 accrued on unsold security and broken period interest received on securities order to the extent of Rs 4/- . Thus, the revenue corresponding to both sold and security lying in the closing stock is being realized in the books of account however in the computation of income the assessee has reduced income of ₹ 5 accrued on unsold security. The accrued interest of ₹ 5 also include Rs 2/- paid as broken period interest on purchase of Unsold security. The broken period interest received credited by the assessee is in respect of securities which have been sold and it has nothing to do with the broken period interest paid in respect of unsold security. Therefore, the broken period interest in respect of unsold security cannot justifiably debited against broken period interest received in respect of sold security without violating matching principles. Therefore, to arrive at the correct and true picture of profit, assessee should have included broken period interest in the cost of securities while making valuation of closing stock. ` Page | 51 55) It was further stated that the decision of the honourable High Court in case of American Express Bank and Citibank does not apply to the facts of the case because those decisions are not with respect to securities lying in closing stock. 56) It was further argued that if the decision of the honourable Supreme Court in case of Vijaya bank is to be followed in letter &spirit, then broken period interest should be added to the cost of purchases [ in closing stock also ] as adopted by the assessee. In this situation the component of broken. Interest will also appear in the credit side in profit and loss account in the form of valuation of closing stock. He submits that in case of the assessee broken period interest is claimed as an expenditure and the valuation of the closing stock is shown at the face value of the security/purchase cost. Therefore, the broken period interest which relates to securities bought in the year but held as stock in trade on the last day of the financial year requires to be disallowed and added to the income of the assessee. 57) The learned authorized representative stated that the issue stands decided in favour of the assessee by the coordinate bench in assessee's own case for last several assessment years and the appeal filed by the assessee against the order of the coordinate bench before the honourable Bombay High Court for assessment year 1996 – 1997 was dismissed as per order dated 1 August 2016. The assessee submitted the copies of such decisions of the coordinate bench and the decision of the honourable Bombay High Court. He submits that when honourable high court has decided these issues, all these ` Page | 52 permutation and combination argued by the ld. DR, may also have been considered, though not mentioned in the orders, but that does not give permission to lower court to question it now. In view of this, it was submitted that in view of the principles of consistency, the issue must be decided in favour of the assessee. 58) We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that identical issue arose in the case of the assessee bank itself wherein the honourable Telangana High Court has decided this issue in CIT versus Bank of Hyderabad [ 146 taxmann.com 355] wherein identical question was admitted and decided as under:- \"4. However, we find from the appeal memo that appellant has proposed the following questions as substantial questions of law: i. Whether on the facts and in the circumstances of the case, Tribunal was justified in holding that interest paid by the assessee on purchase of securities constituting stock-in-trade but paid for the broken period is allowable as a deduction? ii. Whether on the facts and in the circumstances of the case, assessee is entitled to claim deduction of interest paid on purchase of securities constituting stock for the broken period till the date of acquisition in terms of Section 37 of the Act? 5. Respondent is an assessee under the Act having the status of a banking company. For the assessment year 1998-99, it filed return of income declaring taxable income at Rs. 183,25,58,560.00. In the course of the assessment proceedings, assessee claimed that it had paid an amount of Rs.22,95,11,354.00 as broken period interest on purchase of securities during the previous year relevant to the assessment year 1998-99. 6. After hearing the assessee and considering its objection, assessing officer vide the assessment order dated 19-3-2002 passed under section 143(3) of the Act held that claim of the assessee was required to be disallowed in the light of the decision of the Supreme Court in Vijaya Bank Ltd. v. Addl CIT [1991] 57 Taxman 152/187 ITR 541 wherein it was held that such an expenditure is required to be capitalized and cannot be allowed as a deduction. Explanation of the ` Page | 53 assessee that the securities be treated as stock-in-trade thereby treating the broken period interest as revenue expenditure was turned down. Consequently, the aforesaid amount was added back to the income of the assessee and assessed accordingly. 7. The aforesaid order of the assessing officer was assailed by the assessee before the first appellate authority i.e., Commissioner of Income-Tax (Appeals) IV, Hyderabad (for short, 'CIT(A)' hereinafter). By the order dated 19-8-2002, CIT(A) upheld the order of the assessing officer by relying on the decision of the Supreme Court in Vijaya Bank Ltd. (supra) holding that expenditure claimed being broken period interest is not allowable as a revenue expenditure. 8. Aggrieved by the aforesaid order, assessee preferred further appeal before the Tribunal. 9. Tribunal framed the question for consideration as under: Whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock-in-trade? 10. After hearing rival submissions and on perusal of the decision of the Supreme Court in Vijaya Bank Ltd. (supra), Tribunal noted that the decision of the Supreme Court in Vijaya Bank Ltd. (supra) was explained by the Central Board of Direct Taxes (for short, 'CBDT' hereinafter). On the same lines, Kerala High Court in CIT v. Nedungadi Bank Ltd. [2003] 130 Taxman 93/264 ITR 545 distinguished the decision of the Supreme Court in Vijaya Bank Ltd. (supra), which held that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute an allowable deduction in the hands of the assessee. Tribunal held that admittedly assessee had purchased the securities to hold them as stock-in-trade. Therefore, the interest paid for the broken period is allowable as a deduction. 11. Mr. J.V.Prasad, learned Standing Counsel, Income-tax Department for the appellant has placed before us the two-Judge Bench decision of the Supreme Court in Vijaya Bank Ltd. (supra). In that case, assessee had purchased securities. It was contended that the price paid by the securities was determined with reference to their actual value as well as the interest which had accrued on them till the date of purchase. But Supreme Court noted that whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities. Relying on the said decision, he further submits that claim for deduction can be sustained only when an assessee is in a position to show that any reasonable expenditure had been incurred for the purpose of realizing the interest on securities. 12. Mr. Prasad has also placed reliance on a decision of the Rajasthan High Court in CIT v. Bank of Rajasthan Ltd. [2009] 178 Taxman ` Page | 54 304/316 ITR 391 wherein the question before the Court was whether taxability of interest on securities subject to transaction price on sale or security continues to be governed by the ratio of the decision in Vijaya Bank Ltd. (supra). In that case, Rajasthan High Court applied the decision of the Supreme Court and answered the above question in favour of the Revenue. Mr. Prasad submits that ratio laid down by the Supreme Court in Vijaya Bank Ltd. (supra) still holds the field. Therefore, the questions framed may be answered in favour of the Revenue. 13.Per contra, Mr. Karthik Ramana Puttam Reddy, learned counsel for the respondent submits that decision of the Supreme Court in Vijaya Bank Ltd. (supra) is distinguishable in the facts of the present case. He submits that Bombay High Court in American Express International Banking Corpn. v. CIT [2002] 125 Taxman 488/258 ITR 601 has distinguished the judgment of the Supreme Court in Vijaya Bank Ltd. (supra) and held in the facts of that case that the Income-tax Department ought to have allowed deduction for the broken period interest paid. According to him, after the decision of the Rajasthan High Court, Supreme Court has delivered a judgment in CIT v. Citibank NA [Civil Appeal No. 1549 of 2006, dated 12-8- 2008] where the question which fell for consideration was whether the interest paid for broken period should not be considered as part of the purchase price but should be allowed as revenue expenditure in the year of purchase of securities? He submits that in the said decision, Supreme Court accepted the distinction pointed out by the Bombay High Court in American Express International Banking Corpn. (supra) and agreed with the view expressed that judgment in Vijaya Bank Ltd. (supra) would have no application. He therefore submits that appeal by the Revenue has no merit and should be dismissed. 14. Submissions made by learned counsel for the parties have received the due consideration of the Court. 15. Issue before the Court is whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock-in-trade? 16. To appreciate the above question, it would be appropriate to first examine the meaning of the expression \"broken period interest\". This has been explained by the Bombay High Court in American Express International Banking Corpn. (supra) in the following manner: \"6. Before coming to the facts of the case, a short preface needs to be mentioned. This preface explains the concept of broken period interest. Every bank is required to maintain Statutory Liquidity Ratio (hereinafter referred to as \"SLR\"). For that purpose, every bank subscribes to Government securities. One such security is known as SGL (Subsidiary General Ledger). This ledger is maintained in the Public Debt Office in the Reserve Bank of India. Every bank is required, as a part of ` Page | 55 banking business, to subscribe to this loan. This loan/SGL is also transferable like any other security. In this case, for example, we are concerned with 4.75 per cent. Government of India Loan, 1980, f. v. Rs. 5 lakhs. On the SGL, the Reserve Bank of India pays half yearly interest. In the case of the said 4.75 per cent. Government of India Loan, 1980, f. v. Rs. 5 lakhs, the Reserve Bank of India was required to pay half yearly interest on May 12, 1976, and November 12, 1976. The Reserve Bank of India pays interest on due dates on such securities to the holders of the securities, every six months. The Reserve Bank of India pays interest on the balance to the banks, whose names appear as holders in the PDO ledger. After subscribing to the said loans, the banks were free to transfer such loans for consideration to the other banks. Consequently, the Reserve Bank of India pays interest to the holder on the balances in a security if, in its books, the said security stood in the name of that holder on the due date for payment of interest. As stated above, to maintain SLR levels, every bank subscribes to such loans. This is a part of banking business. However, after so subscribing, the banks are free to deal with such securities like any other trader. Therefore, there are two activities involved--one activity is that of subscribing to the loan and the other is trading. Now, if a bank purchased 4.75 per cent. GOI Loan, 1980, f. v. Rs. 5 lakhs on August 11, 1976, then, on purchase, the said bank was required to lodge the transfer form with the PDO. On such lodgement, the name of the bank was entered in the PDO ledger. Therefore, on the next due date for payment of interest, namely, November 12,1976, the bank was entitled to receive half yearly interest from the Reserve Bank of India for the period May 12, 1976, up to November 12, 1976, even though it had bought the said security on August 11, 1976. Therefore, it receives interest for the entire six months, though it bought the security on August 11, 1976. In the above example, since the security was sold/transferred on August 11, 1976 (i.e., after due date for payment of interest), interest had accrued to the transferor/seller from the last due date, i.e., May 12, 1976 up to August 11, 1976.\" 17. As explained by the Bombay High Court, every bank is required to maintain a Statutory Liquidity Ratio (SLR). For that purpose, every bank subscribes to government securities. One such security is known as Subsidiary General Ledger (SGL) which is maintained in the Public Debt Office in the Reserve Bank of India. Every bank is required as a part of its banking business to subscribe to this loan. Like any other security, such a loan/SGL is also transferable. Reserve Bank of India pays interest on due dates on such securities to the holders of the securities every six months. After subscribing to the said loans, banks are free to transfer such loans for consideration to other banks. Reserve Bank of India pays interest to the holder on the balances in a security if in its books the said security stands in the ` Page | 56 name of that holder on the due date for payment of interest. The above exercise, if we may say so, is a part of the banking business. However, after so subscribing, the banks are free to deal with such securities like any other trader. Therefore, there are two activities involved - one of subscribing to the loan and the other is trading. 18. One of the questions before the Bombay High Court was whether broken period interest payment by the assessee was allowable as a revenue expenditure under the head 'income from business or profession'? While answering this question, Bombay High Court examined the decision of the Supreme Court in Vijaya Bank Ltd. (supra). 19. In Vijaya Bank Ltd. (supra), during the assessment year under consideration, Vijaya Bank had entered into an agreement with Jayalakshmi Bank Ltd. whereby Vijaya Bank took over the liabilities of Jayalakshmi Bank. It also took over the assets belonging to Jayalakshmi Bank. One of the two items taken over by Vijaya Bank represented interest which accrued on securities taken over by Vijaya Bank from Jayalakshmi Bank. Such amount was brought to tax by the assessing officer under section 18 of the Act. However, assessee claimed that such amount was deductible under sections 19 & 20 of the Act. It was in the light of such facts that the decision in Vijaya Bank Ltd. (supra) was rendered. 20. Therefore, Bombay High Court in American Express International Banking Corpn. (supra), in the facts of that case, held that having assessed the income of the assessee under section 28 of the Act, Revenue ought to have taxed the broken Period interest received but at the same time ought to have allowed deduction for the broken period interest paid. 21. As already noticed above, this decision of the Bombay High Court has found favour with the Supreme Court in Citibank NA (supra) where Supreme Court agreed with the views expressed by the Bombay High Court. Decision of the Supreme Court in Citibank NA (supra) is dated 12-8-2008 whereas decision of the Rajasthan High Court in Bank of Rajasthan Ltd. (supra) is dated 24-3-2008. 22. Before we advert to the facts of the present appeal, we may refer to the decision of the Kerala High Court in Nedungadi Bank Ltd. (supra). In that appeal, Kerala High Court also examined the effect of the decision of the Supreme Court in Vijaya Bank Ltd. (supra). Out of the four substantial questions of law which were considered by the Kerala High Court, question No. 1 pertained to whether investments made by the assessee in the form of government securities acquired for the purpose of complying with the requirements of the provisions of the Banking Regulation Act i.e., to maintain SLR, could be treated as trading asset/stock-in-trade of the business of the assessee? The 4th question considered by the Kerala High Court was as to whether interest paid for the broken period in the purchase of securities is an allowable deduction? Referring to the ` Page | 57 Circular dated 24-4-1991 issued by the CBDT, Kerala High Court held that securities held by banks constitute their stock-in-trade or investment and consequently loss claimed by banks on the valuation of their securities should be allowed as a deduction in computing the taxable profits. Therefore, Kerala High Court confirmed the view taken by the Tribunal that securities held by the assessee bank were stock-in-trade of the business of the assessee bank and that the notional loss suffered on account of revaluation of the said securities at the close of the year was an allowable deduction in the computation of profits of the assessee bank. Finally, in respect of the 4th question as to whether the Tribunal was justified in allowing the claim for deduction of interest paid for the broken period for acquisition of the securities till the date of such securities, Kerala High Court held that the said question was squarely covered by its earlier decision in CIT v. South Indian Bank Ltd. [1999] 105 Taxman 173/[2000] 241 ITR 374 wherein it was held that interest paid for the broken period would constitute allowable outgo in the hands of the assessee and was an admissible deduction in the computation of total income of the assessee (bank) under the head 'profits and gains of business or profession'. 23. Adverting to the facts of the present case, we find that it is the contention of the respondent that respondent had been holding its securities all along as stock-in-trade which is not in dispute. For successive assessment years, Revenue has accepted the fact that respondent had been holding the securities as stock-in-trade. Circular No. 665 dated 5-10-1993 of the CBDT has clarified the decision of the Supreme Court in Vijaya Bank Ltd. (supra). CBDT has clarified that where the banks are holding securities as stock-in-trade and not as investments, principles of law enunciated in Vijaya Bank Ltd. (supra) would not be applicable. Therefore, CBDT has clarified that assessing officer should determine on the facts and circumstances of each case as to whether any particular security constitute stock-in- trade or investment taking into account the guidelines issued by Reserve Bank of India from time to time. 24. It is in the above back drop that Tribunal has held that the respondent had purchased securities to hold them as stock-in-trade. Therefore, interest paid on such securities would be an allowable deduction. 25. We are in agreement with the finding returned by the Tribunal. That apart, this is a finding of fact rendered by the Tribunal and in an appeal under section 260A of the Act, we are not inclined to disturb such a finding of fact, that too, when the legal position is very clear.\" 59) The honourable High Court has categorically held in paragraph number 24 -25 that the legal position is very ` Page | 58 clear on this issue. In view of the decision of honourable high court we also do not incline to the argument of the ld. CIT DR. with respect to broken period interest paid on securities which are on closing stock. Thus, we do not find any merit and hence we confirm the order of the ld. CIT (A) in allowing the broken period interest included in the cost of securities at the time of purchase correctly written off/ debited to profit and loss account as allowable interest. Accordingly Ground no 4 (a) is dismissed. 60) Ground number 5 (a) for assessment year 2007 – 08 about disallowance deleted of ₹ 600,785,375/– is also of the similar nature. Therefore, as we have already discussed the issue and decisions of the honourable High Court, while deciding ground number 4 (a) for assessment year 2006 – 07, we also dismiss ground number 5 (a) for assessment year 2007 – 08. 61) Ground number 4 (b) for AY 2006-07 is with respect to the interest on securities on due basis, whereas the claim of the learned AO is that when the assessee is following mercantile system of accounting the interest on securities to be accounted for on accrual basis while arriving at profit. 62) During the course of the proceedings the assessee submitted the details of interest accrued but not due as on 31st of March 2006 of ₹ 34,745,979,218/–. It was further stated that interest accrued but not due as on 31/3/2005 which was offered for tax as it has become due in assessment year 2006 – 07 of ₹ 4,432,896,608/–. Thus, due to this the income of the assessee stood enhanced by amount of ₹ 5,686,917,390/–. Therefore, ` Page | 59 assessee stated that it is the practice of the bank to account for the interest on securities on accrual basis while arriving at the book profit however as per note number 26 of the return of income it was claimed that like in earlier years the interest on securities may be taxed on due basis. The appellant relied on the decision of the CIT – A in assessment year 1997 – 1998 and 1998 – 1999 wherein the learned CIT (A) has held that interest on securities is taxable on due basis. This explanation of the assessee was not considered and therefore assessee challenged the same before the learned CIT – A. 63) The learned CIT – A following the decision of the Union Bank of India ITA number 8817/B/22 held that if the income has not been found to have accrued to the assessee in the sense that assessee did not have a right to receive the same, it cannot be brought to tax merely because the assessee is found to be following the Mercantile system of accounting. 64) The learned AO is aggrieved, and the learned departmental representative submitted that the assessee bank has reduced income ‘accrued but not due’ on government securities in its computation of income but not from the income computed as per the books of accounts. Thus, the income offered for taxation is less than the income reflected in the books of accounts. It was further stated that the above deduction is not allowable because as per the provisions of section 145 (1) of the Act, the taxable income is computed on the basis of method of accounting regularly employed by an assessee, unless it is against the normal accountancy principal or there are income tax provisions giving ` Page | 60 contrary/different treatment to some items. Accordingly, interest ‘accrued but not due’ claimed in the computation of income as deduction shall not be allowed. It is submitted that the claim of the assessee that the right to receive interest on securities arises only on due date which falls after the accounting year, therefore it cannot be taxed in the accounting year itself is flawed. It was further stated that the decision given by the coordinate benches and High Court is relying on the charging provision contained in section 5 and is based on the stand that Section 145 cannot override provisions of section 5 of the act. It was submitted that while interpreting charging provisions the tribunal has missed an important link that is the definition of total income in which charge of income tax has been created by virtue of provisions of section 4 and 5 and therefore the link of charging provision with provisions of section 145 has also been missed. It was further stated that when the assessee on accrual method of accounting has stated in its books of accounts that the above income has accrued to the assessee, now the assessee is precluded from saying that the income has not accrued for the purpose of taxation. It was further submitted that provisions of section 145 (1) are mandatory, and the proper method of accounting regularly followed by the assessee is binding for the computation of total income of the assessee. The learned departmental representative vehemently placed reliance on the decision of the honourable Supreme Court in case of Saharanpur cotton manufacturing Co Ltd 6 ITR 36. The learned departmental representative vehemently stated that as per the accounting system of the assessee ` Page | 61 in accounting, interest accrued which is in accordance with the accounting standards and are based on sound and acceptable accountancy principles, interest income has accrued to him, by virtue of definition of 'total income ‘provided under section 2 (45) they ought to have been part of 'total income' because they have been computed in the manner laid down in this act. It cannot be held that such income has accrued as per accounting standard employed by the assessee himself but has not been accrued for the scope of charging for taxation purpose as 'total income'. The learned departmental representative vehemently supported his argument based on paragraph number 5.1 of master circular of Reserve Bank Of India dated 2/7/2007 wherein it has been held that that the banks may book income on accrual basis on securities of corporate bodies/public sector undertakings in respect of which the payment of interest and repayment of principles have been guaranteed by the central government or State government provided interest is serviced regularly and as such not in areas. It is further stated in the circular that banks may book income from government securities, bonds and debentures of corporate bodies on accrual basis, wherein interest rates on these instruments are predetermined and provided interest is serviced regularly and is not in areas. The learned departmental representative also supported his view from the theory of real income and principles of matching. 65) The learned CIT DR also referred to the revenue recognition method regularly deployed by the assessee wherein it is stated that income and expenditure ` Page | 62 unaccounted for on accrual basis, he referred to note number 9 being the revenue recognition policy of the assessee wherein also the income is recognized on accrual basis. He therefore submitted that in the books of accounts the income is credited on the basis of accrual whereas for the income tax computation, income is offered on due basis which is not correct. 66) The learned authorized representative submitted that identical issue is decided in favour of the assessee by the several decision of the coordinate benches for several assessment years and further the jurisdictional Bombay High Court on appeal of the learned assessing officer against the order of the coordinate bench for assessment year 1996 – 1997 as per order dated 1 August 2016 has decided the issue in favour of the assessee and therefore now this issue is squarely covered in favour of the assessee and cannot be disturbed. 67) The learned DR submitted that the honourable High Court in assessee's own case has held following the decision of Director of income tax (International taxation) versus Credit Suisse first Boston (Cyprus) Ltd (2013) 351 ITR 323. Thus, it was stated that if the above logic is applied then the assessee also cannot be granted any deduction of interest expenditure which has accrued unless it is paid by the assessee. He submits that the principles of accrual cannot be different in the books of accounts and for income tax purposes and further it can also not be different for accrual of expenditure and accrual of income. 68) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The ` Page | 63 point here is that as per the accounting policies of the bank, the revenue is recognized on accrual basis. Thus, when interest accrues but not due then it is recognized as income. However, in the income tax return assessee is showing only those interest income as income, which has ‘accrued and due.’ Thus, according to assessee the claim of the assessee is that for income tax only those interest which are accrued and due can only be considered as income. We find that concept of accrual cannot be different for different statutes unless there is specifically defined. Therefore, it is unusual that for drawing the profit and loss and balance sheet of the assessee, the income has accrued but for the purpose of income tax, it will accrue only when it becomes due. 'Interest accrued but not due' is the interest that has accumulated on a loan or investment but has not yet been paid by the borrower as due date for payment has not arrived. It is a feature of accrual accounting, which records accounting transactions when they occur, not when they are received. 69) Section 5 (1) (b) of The Act also does not support view of the assessee where it is provided that Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during such year . 70) However, it is the claim of the learned authorized representative that this issue is squarely covered in favour of the assessee by the decision of honourable Bombay High Court wherein the appeal filed by the ` Page | 64 learned AO against the tribunals order for assessment year 96 – 97 dated 1/8/2016 has decided the issue in favour of the assessee. In that case in ITA number 254 of 2014 dated 1 August 2016, question ( c ) before the honourable High Court was as under:- \"( c) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in accepting the plea of the assessee that the interest income of ₹ 38.24 crores on the securities has to be taxed on the due basis only, instead of accrual basis as per the mercantile system of accounting followed by the assessee. The honourable High Court held that it is agreed position between the parties that the issue arising here in stand concluded against revenue and in favour of the respondent assessee by the decision of the honourable Bombay High Court in director of income tax (International taxation) versus Credit Suisse first Boston (Cyprus) Ltd (2013) 351 ITR 323. 71) Thus, respectfully following the decision of the honorable high court , on carefully consideration of the argument of the learned departmental representative, various examples given by the learned departmental representative, the accounting methodology applied by the assessee for revenue recognition of accrual, and also the method adopted by the assessee of offering income only which is accrued in the due instead of accrual as on the last day of the accounting year, but, respectfully ` Page | 65 following the decision of the honourable High Court, we find that the addition to the income cannot be made of interest accrued as on the last day of the accounting year but only the income which has accrued and due can be charged to tax, therefore, this ground of appeal no 4 (b)does not survive, hence, dismissed. 72) Identical ground is raised by the learned assessing officer for assessment year 2007 – 08 as per ground number 5 (b) and ground number 8 of his appeal. As we have already decided ground number 4 (b) for assessment year 2006 – 07, we also dismiss ground number 5 (b) of the appeal of the AO for assessment year 2007 – 08. 73) Ground number 5 (a) and (b) for AY 2006-07 are with respect to the loss on revaluation of investments allowed by the learned CIT – A. The fact shows that the assessee has booked a total loss of ₹ 4,426,789,141/– on account of depreciation of securities on the last day of the financial year. As per the information furnished, it was found that this includes ₹ 12,799,950,899 on account of amortization of securities in ‘held to maturity’ category. The assessee was asked to explain why the loss on amortization should not be disallowed since held to maturity category investments are held long and should be carried at cost. The assessee furnished the circular dated 12/7/2005 of the reserve bank of India which lays down the rules regarding valuation of investment by the banks wherein the investment in held to maturity category should be carried at acquisition cost only. As the purchase price is higher than the face value, the premium is required to be amortized over the remaining period of the maturity of the security. The loss on evaluation of ` Page | 66 permanent security reflected in the bank's profit and loss account is on account of amortization of the premium paid while purchasing the securities. The learned AO questioned the above claim. 74) The assessee contested that as per the guidelines issued by the reserve bank of India investments in held to maturity category should be carried at acquisition cost. If the purchase price is higher than the face value, the premium so paid about the face value of the shares is required to be amortized over the remaining period of maturity of the security. Thus, the bank has amortized a sum of ₹ 12,999,950,899/– being lost in respect of amortization of investment held in that category. It was also claimed that investments are held by the assessee as trading securities classified into different buckets. However, classification of the asset in different bucket does not take a by the fact that all securities are trading securities of the bank. Thus, the above amortization of premium is allowable as a deduction like other securities. Thus, it was claimed that the amortization of premium is in the nature of deferred revenue expenditure and is deductible in terms of the decision of the honourable Bombay High Court in case of Taparia tools Ltd versus joint Commissioner of income tax (2003) 260 ITR 102 and the decision of the honourable Supreme Court in case of Madras Industrial Investment Corporation Ltd versus CIT (1997) 225 ITR 802. It was also contested that securities of the bank are in the nature of stock in trade and as held in the decision of the honourable Supreme Court in case of United Commercial Bank Versus Cit 240 ITR 355 that a bank is entitled for ` Page | 67 depreciation in valuation of closing stock. Several other judicial precedents were pressed into service. Thus, it was contested that the amortization of premium in respect of investments ‘held in ‘held to maturity’ category is another method of valuation which is prescribed by the reserve bank of India and is consistently followed by the bank. Alternatively, assessee also contested that the excess of cost price over face value should be allowed as a deduction in the initial year in itself and further alternatively the entire premium should be allowed as revenue deduction in the year in which the securities are redeemed. 75) The learned assessing officer held that in respect of held to maturity securities the assessee follows different systems which are inconsistent with each other. When the purchase price is less than the face value at which security is sold, the difference is booked as profit only in the year of sale, but when the cost price is more than the face value, the loss is not booked in the year of sale but is spread over the period of holding. If the securities are held as investment, there is no question of elements of any amount till such time as they are sold or redeemed. Even if the securities are held as stock in trade the method of valuation of closing stock adopted in respect of securities in held to maturity category is cost price which is one of the two recognized methods of valuation. As the cost is constant, there is no question of deduction of any amount under the commercial principles even if held to maturity securities are accepted to be stock in trade of the assessee. Whatever losses suffered on sale of redemption of securities will constitute the loss of the ` Page | 68 year in which those securities are sold or redeemed. By claiming amortization, the assessee neutralizes the effect of valuing the securities in held to maturity category on cost price which is one of the two recognized methods of valuation of the closing stock. The learned AO further noted that for assessment year 1995 – 1996 the learned CIT-A decided this issue as per order dated 30/3/1999 holding that the premium amortized as a capital loss based on the held to maturity securities or investment and not stock in trade against the assessee. With respect to the RBI guidelines, it was held that the income is required to be computed in accordance with the provisions of the Income Tax Act and the reserve bank of India guidelines does not help the case of the assessee. Accordingly, the amount of premium amortized in respect of held to maturity securities of ₹ 12,799,950,899 was disallowed. 76) When assessee challenged the same before the learned CIT – A, he allowed the claim of the assessee holding that reserve bank of India has given a guideline that investment in securities held to maturity category should be carried at acquisition cost, therefore, if the purchase price is higher than the face value, the premium should be amortized over the remaining period of the security. Honourable Supreme Court in case of Madras Industrial Investment Corporation Ltd (Supra) has accepted the concept of deferred revenue expenditure and as the assessee has claimed only the amortized amount relevant to the previous year under the question out of the total premium paid, the same is as per the RBI guidelines, hence, allowable. He further followed that in assessee's ` Page | 69 own case for assessment year 2002 – 03 and 2003 – 04, the learned CIT – A has allowed the claim of the assessee and accordingly he deleted the disallowance of ₹ 12,799,950,899/– being the amortized amount of total premium in investment held in held to maturity category of the investment. 77) The learned departmental representative aggrieved with the same and reiterated findings of the learned AO. It was further submitted that the learned CIT – A has allowed the appeal of the assessee without appreciating the fact that on similar issue appeal has been filed for the assessment year 95 – 96 before the honourable High Court in ITA number 625/2010. 78) The learned authorized representative referred to his note on amortization of premium paid in held to maturity category of investment placed at page number 287 – 291 of the paper books. It was further stated that the issue is decided in favour of the assessee by the several decision of the coordinate bench in assessee's own case and further the honourable jurisdictional High Court has decided the issue in favour of the assessee for assessment year 96 – 97 as per order dated 1 August 2016, for assessment year 97 – 98 as per order dated 18 June 2019 and therefore the issue is squarely covered in favour of the assessee. 79) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The claim of the assessee that in accordance with the guidelines issued by the reserve bank of India investments in held to maturity category should be carried at acquisition cost. In case the purchase price is ` Page | 70 higher than the face value, the premium should be amortized over the remaining period of maturity of the security. The bank as amortized the sum of Rs. 12,999,950,899/– being amortization cost of investment held in that bucket i.e., held to maturity [HTM] . No doubt the investments held by the assessee are trading securities therefore such amortization premium is claimed as allowable by relying on the decision of the honourable Bombay High Court in assessee’s own case for assessment year 96 – 97 dated 1 August 2016 wherein the appeal of the revenue was dismissed on this count. Similarly for assessment year 97-98 also the honourable Bombay High Court as per order dated 18 June 2019 decided the issue in favour of the assessee. Therefore, respectfully following the decision of the honourable Bombay High Court in case of the assessee for assessment year 96 – 97 and 97 – 98, ground number 5 (a) and (b) for AY 2006-07 are dismissed. 80) Identically we find that for assessment year 2007 – 08 ground number 6 (a) and (b) are raised wherein the addition deleted by the learned CIT appeal to the extent of ₹ 1,367,945,303/– is contested. As there is no change in the facts and circumstances of the case and are similar to ground number 5 (a) & (b) for assessment year 2006 – 07 which are dismissed, therefore these grounds are also dismissed. 81) For assessment year 2007 – 08, we now address ground number 3 of appeal learned AO. It is submitted that the learned assessing officer has made disallowance of contribution to pension fund by applying provisions of section 40A (9) of the act amounting to ₹ ` Page | 71 4,766,946,356/–. During course of assessment proceedings, the AO has found that the contribution to provident fund and pension fund was excess by 27% of basic salary and DA. The assessing officer invoked provisions of section 40 A(9) of Income Tax Act, Rule 87 and 88 of Income Tax Rules which has prescribed the of ordinary initial contribution made to any provident fund/superannuation fund. As per rule 87 of the IT Rules, the ordinary annual contribution by the employer to the fund in respect ofany particular employee shall not exceed 27% of his salary for each year as reduced by the employer's contribution to any provident fund in respect of the same employee for that year. Secondly, as per rule 88 Of IT Rules the amount to be allowed as a deduction on account of initial contribution whichan employer make in respect of past services of an employee admitted to the benefit of the fund shall not exceed 27% of employee’s salary. Aggrieved, assessee preferred an appeal before the CIT (A). The CIT (A) placed reliance on the decision of Hon’ble Bombay High Court in the case of Glaxo Smith Kline Pharmaceuticals Ltd (ITA No. 2232 of 2011) and ruled in favor of the assessee. 82) The learned departmental representative vehemently submitted that It may be appreciate that in the case of Commissioner of Income Tax, Trivandrum v. State Bank of Travancore (50 taxmann.com 240), Hon. Kerala HC held that the when the expenditure incurred by the assessee for pension fund is not admissible u/ s 36 of the act , the same cannot be allowed u/ s 40(A) (9) of the Act, Therefore, considering the facts and circumstances ` Page | 72 of the case and provision of the IT Act, the addition made by the AO may be upheld 83) The learned authorized representative vehemently submitted that the issue stands covered in favour of the assessee by the decision of the coordinate bench in case of ACIT versus GlaxoSmithKline pharmaceuticals (ITA number 444/M/2007) which has been upheld by the honourable Bombay High Court in ITA number 2232 of 2011. 84) We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that as this issue is squarely covered by the decision of the honourable Bombay High Court in case of ACIT versus GlaxoSmithKline pharmaceuticals Ltd which is not disputed by the revenue, ground number 3 do not survive and hence dismissed. 85) Ground number 7 of the appeal of the learned assessing officer for assessment year 2007 – 08 is with respect to the deletion of the disallowance made by the learned assessing officer under section 36 (1) (viii) of the act amounting to ₹ 2,630,783,918. 86) During the course of assessment proceedings for assessment year 2007 — 08, the Revenue has raised Ground No. 7 with respect to the disallowance of Rs. 263.07 crores made under section 36 (1) (viii) without appreciating that the deduction was available to the financial corporation and as per the existing provision till assessment year 2007 — 08 , financial Corporation did not include any banking company. Cross objection is raised by the assessee vide ground No. 3 wherein it is contested by assessee that the CIT (A) erred in not ` Page | 73 considering the updated working of the deduction under section 36(1) (viii) of Rs. 352.13 crores as submitted by the assessee. 87) The learned departmental representative vehemently submitted that:- 1. As per the provisions of section 2 (g) of such act 'State Bank of India' is defined as \"State Bank\" means the State Bank of India constituted under this Act i.e. The State Bank of India It is not disputed that the Assessee bank came into existence under The State Bank of India Act, 1955 and further reorganized/nationalized under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970. 2. Act, 1955. As such, the assessee is not established or incorporated within the meaning of any Financial Corporation Act as has been noted by the assessing officer. The assessee bank is also not incorporated as a corporation within the meaning of Companies Act. As per section 3 (1) of The State Bank of India Act, 1955,.— ''A Bank to be called the Stale Bank of India shall be constituted to carry on the business of banking and other business in accordance with the provisions of this Act andfor the purpose of taking over the undertaking of the Imperial Bank\". 3. As such, it is found that a assessee bank is neither an Indian company registered under the provisions of Companies Act, 1956 nor a Corporation established by Central or State or ` Page | 74 Provincial Act nor any institution or association or body declared by the Board or any other institution and not included in the definition of the eligible entities to claim deduction under section 36(1)(viii) of Income Tax Act. Therefore, considering the facts and circumstances of the case and in law the assessee is not eligible for the deduction under section 36(1)(viii) of the Income Tax Act 88) The learned authorized representative vehemently submitted that this issue stands covered in favour of the assessee by the order of the ITAT in assessee's own case for the assessment year 2006 – 07 dated 26 June 2019 and further attention in this regard was also invited to the decision of the coordinate bench in the case of Union Bank of India versus ACIT reported in (2011) 16 taxmann.com 304. 89) We have carefully considered the rival contention and perused the orders of the learned lower authorities. According to provisions of section 36 (1) (viii) allows deduction in respect of any special reserve created and maintained by a financial Corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructural facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for specified activities, the deduction is amount not exceeding 40% of the profits derived from such business before making any deduction under this subsection. Now such deduction is available only to financial Corporation which shall include a public ` Page | 75 company and the government company, the claim of the revenue raised before us for the first time is that state bank of India does not qualify for this deduction as it is neither a company, nor a financial corporation and also not a government company. Therefore, state bank of India, assessee is not eligible for this deduction at all for impugned assessment year. Though the issue is decided in favour of the assessee as stated by the learned authorized representative however we do not find that those decisions have looked into this aspect. The learned authorized representative also could not show us whether this aspect is examined by the coordinate benches in earlier year or not. Further ground number 3 in appeal of the assessee is also on this issue wherein assessee has stated that the learned CIT – A has not at all adjudicated this issue as far as computation is concerned. In view of these facts where the eligibility itself of the assessee is contested by the revenue to claim this deduction, we restore this ground of appeal back to the file of the learned assessing officer with a direction to the assessee to satisfy the learned assessing officer that how assessee qualifies for this deduction showing that it falls into the category of either financial Corporation or a public company or a government company. Accordingly ground number 7 of the appeal of the learned AO is allowed and ground number 3 of the appeal of the assessee is also allowed. 90) Accordingly, appeal filed by the learned AO for assessment year 2006 – 07 is dismissed and appeal for assessment year 2007 – 08 stands partly allowed. ` Page | 76 91) Now we come to the appeal of the assessee in ITA number 3868/M/2013 for AY 2006-07 and ITA No 4105/MUM/2014 for AY 2007-08. 92) As per ground number 1 for AY 2006-07, the assessee has challenged the order of the learned CIT – A wherein the order of the learned AO was upheld about the taxing the deferred payment guarantee commission on receipt basis without appreciating that such commission relates to subsequent years. The fact shows that during the year the assessee has received commission on deferred payment guarantee in advance covering the entire period of guarantee. The commission was relatable to future years was not included in the current year's income but is credited to the deferred payment guarantee commission adjustment account. The assessee has received guarantee commission during the year of ₹ 148,241,129/– but has credited the same to the profit and loss account, ₹ 176,806,013/– being commission a portion from the past. So, it was a dispute between the revenue and the assessee whether the deferred guarantee commission received during the year of ₹ 148,241,129/– accrue to the assessee as income during the year of receipt or over a period of deferred guarantee provided. In case of deferred payment guarantee, the commission is always received in advance. In case the guarantee is encashed after the period the same would in any case be a loss suffered in the course of business and the assessee would debit to the relevant account. The learned assessing officer therefore held that the amount of commission received is an income having accrued at the time the bank issues the guarantee. For this ` Page | 77 proposition he relied upon the decision of Kerala and development Finance Corporation versus CIT 266 ITR 245 holding that the right to receive the commission and the actual receipt of it happened during the relevant accounting period relating to the assessment year. Thus, the learned assessing officer treated the deferred guarantee commission received of ₹ 148,241,129/– as income of the assessee for the previous year. As the assessee has offered income of ₹ 176,806,013/– credited to the profit and loss account as the guarantee commission which is pertaining to the previous year which was already taxed in the earlier assessment years on receipt basis, therefore a relief of ₹ 28,564,884/– was granted to the assessee. Thus, the learned assessing officer has taxed the income of the guarantee commission as soon as the assessee issues the guarantee whereas the claim of the assessee is that it should be chargeable to tax on the basis of time for which guarantee is issued. 93) Assessee challenged the above before the learned CIT – A as per ground number 4. The learned CIT – A noted that this issue is recurring issue in case of the assessee for last several years wherein his predecessor had occasion to hold that the income from deferred guarantee commission cannot be spread over the period of guarantee but should be taxed at the time of its receipt or issue of guarantee. Accordingly, he confirmed the action of the learned assessing officer. 94) The learned authorized representative submitted that this issue is decided in favour of the assessee by the tribunal in its own case as per the several orders and further the ` Page | 78 assessing officer has given effect of the order of the coordinate bench and has allowed the deduction for the deferred payment guarantee commission for the assessment year 1984 – 85 to 1989 – 90 and 1996 – 97. 95) The learned departmental representative supported the order of the learned assessing officer and further held that assessee cannot claim that such amount received by the assessee is in the nature and character of service fee which can be spread over for the period of bank guarantee and therefore considering the facts and circumstances of the case and the provision of the Act the assessing officer and the learned CIT – A is correct in taxing the guarantee fee income as and when the guarantee is issued by the bank. It was further stated that the learned assessing officer has placed reliance on the decision of Kerala Urban Development & Finance Corporation[266 ITR 245]. 96) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The only issue in this ground of appeal is that when the bank issues guarantee, and receives the guarantee commission, whether guarantee commission should be accrued and chargeable to tax in the hands of the bank as and when it is received [at the time of issuing the guarantee] or such income can be spread on the basis of the time for the period for which guarantee is persisting. 97) Revenue recognition policy of the bank as per accounting policy number 9.2 (a) wherein the commission other than the commission on deferred payment guarantee and government transactions) is recognized on realization basis. Thus, the deferred payment guarantee is ` Page | 79 recognized as income not on realization basis. We also do not find any revenue recognition policy with respect to commission on deferred payment guarantee in the annual accounts of the assessee. Therefore, those are accounted for on accrual basis as per policy number 9.1. 98) The decision of the coordinate bench in assessee’s own case for assessment year 1984 in ITA number 2448/bomb/1988 (22 August 2006) in ground number 4 has discussed this issue and following the decision of the Calcutta High Court in case of Bank of Tokyo Ltd (71 taxmann 85) the issue was restored to the file of the learned assessing officer to decide afresh after taking into the decision into consideration. However, decision for the assessment year 2005 – 06 rendered on 22 March 2022 in ITA number 3685/M/2013 as per paragraph number 6 – 9 following the decision in assessee's own case has allowed the claim. 99) Hon Calcutta High court in case of bank of Tokyo Limited 971 taxmann 85 ) relied on by the ITAT while allowing the claim of the assessee has following fact that the Tribunal has also recorded a finding of fact that the assessee-bank has been refunding guarantee commission to its different clients in those cases where guarantee contract was revoked prematurely. In other words, the assessee-bank has been refunding guarantee commission for the unexpired period of guarantee in case the guarantee contract was revoked earlier. This finding negatives the stand taken and/or allegation made by the IAC (Assessment) to the effect that the guarantee contract was irrevocable, and the bank was not refunding the guarantee commission for the unexpired period. It ` Page | 80 was contended on behalf of the revenue that the commission was payable initially and not year by year. That being the mandatory requirement, the right to receive accrued at the point of time the guarantee agreement is entered.Further Under rule 16 framed by the Foreign Exchange Dealers' Association of India the guarantee commission was refundable, if the guarantee is cancelled before the expiry of the full period. 100) Facts do not show that such deferred guarantee commission is refundable at all subsequently. Thus, facts in the case of assessee are distinguishable. If such guarantee commission is not received on the basis of time period for which guarantee is issued, but at the time of issue of guarantee , there is no logic and reason in saying that such guarantee commission will accrue as per period of time for which guarantee is issued. Further the facts of the decision of Honourable Kerala High court are more near and adjunct to the case of assessee. 101) We find that the learned Departmental Representative has correctly relied on the judgment rendered by the Hon'ble Kerala High Court in Kerala Urban Development Finance Corpn. Ltd. v. CIT [2004] 266 ITR 245 / 136 Taxman 24 in which case the administration and supervision charges were collected and retained by the assessee, a nodal agency for disbursement and loan realized by HUDCO to various urban local bodies. It has been held in this case that the income accrued to the assessee at the time of disbursal of loan and hence assessable to tax in the year in which the loan amount was disbursed. Certain other decision relied by the learned Departmental Representative reiterate the same view. ` Page | 81 102) We also find that Mumbai Bench of the Tribunal in the case of Dy. DIT (International Taxation) v. Chohung Bank [2010] 126 ITD 448 considered almost a similar case in which that the assessee bank gave guarantee for the period extending the close of the year. The question arose as to whether such commission should be considered for the period of guarantee or charged to tax in the year in which the guarantee was given. The Tribunal held that the entire commission accrued at the time of giving guarantee and no part of it can be spread to next year. 103) Accordingly, respectfully following the decisions of the tribunal in assessee's own case for the earlier years, we find that the commission on deferred guarantee issued by the bank is chargeable to tax as and when deferred guarantee is issued and commission is received. Accordingly ground number 1 of the appeal is dismissed. 104) Ground number 2 for AY 2006-07 of the appeal is with respect to the disallowance of expense of ₹ 311,976,518 for earning exempt income by applying the provisions of section 14 A read with rule 8D of the Act has already been considered while deciding the ground number 2 of the appeal of the learned AO. The learned AO was directed therein to restrict the disallowance under section 14 A of the act to the extent of only 1% of the exempt income covering the administrative expenses only as assessee has higher own interest free funds available than the amount invested in securities earning tax free income, resulting into nil disallowance of interest ` Page | 82 expenditure. In view of above ground number 2 of the appeal of the assessee is partly allowed. 105) As ground number 1 of the appeal for assessment year 2007 – 08 is identical to ground number 2 of the appeal of the assessee for assessment year 2006 – 07 and the facts and circumstances also remain the same, we allow ground number 1 of the appeal for assessment year 2007 – 08 partly with similar directions. 106) Ground number 3 for AY 2006-07 is with respect to the disallowance confirmed of depreciation of ₹ 365,480,537/– on lease assets. Identical ground is raised for assessment year 2007 – 08 as per ground number 2 wherein the disallowance of depreciation on leased assets of ₹ 267,535,992/– is contested. 107) The fact shows that in computation of income ₹ 376,913,650/– has been claimed as a depreciation on lease assets pertaining to various leases transactions entered into by the assessee during the previous year as well as earlier years. Assessee has entered into several lease transactions as per standardized lease agreement called master lease agreement which the assessee has entered into with the lessees in respect of all these transactions. In all these cases the lessee approaches the assessee for the lease finance purchase assets required by the borrower. Assessee has claimed to have acquired new assets or equipment’s at the instances of such lessees and have given them on lease in the capacity of absolute honour of such new assets and the lessees to possession of such assets directly from the manufacturers. The bank's sanction is the advance after examining the request of the applicant in the same ` Page | 83 manner as it does when the loan is sanctioned. In this case the invoices are raised in the name of the bank and ability gate to treat itself as the owner and claimed depreciation. The learned assessing officer examine such lease agreement and held that main intention of the assessee is to reduce taxable income by claim of depreciation because mostly those assets which are released carry higher depreciation rate for income tax purposes. The bank gets higher depreciation to offset its tax liability and the lessee has to pay lower interest as some benefits obtained by the bank are passed on in the form of lower interest rates. The learned assessing officer examined the master lease agreement. He held that assessee did not assume any risk of ownership of these machineries. Therefore the learned assessing officer concluded that the claim of ownership of the bank of the leased assets cannot be accepted because the bank has paid for the cost of acquisition of the assets only at the instance of the lessee which the bank is ensured to recover irrespective of whatever happens to the asset and such payments were made only after the lease agreements were entered into as part of the indivisible transaction of ostensible purchase and lease. The bank did not accept the risk or loss of deterioration of the assets which is natural and essential ingredient of the ownership of the asset. The bank is rather ensure that it held the title to the asset as a security for the loans advanced therefore he concluded that bank was not entitled to any depreciation allowance under section 32 on the actual cost of the leased assets which were not really owned by bank but actually owned by the lessee ` Page | 84 but were merely held for the purpose of security of the loans given to various borrowers in the garb of the lease transaction whereby way of new asset lease on sale lease back transaction. However, the capital or on repayment component of lease rental received during the previous year in respect of those lees alleged lease transaction which have been offered for taxation by the bank in its return of income was excluded from the assessed income. Thus, the claim of the assessee of depreciation on lease assets of ₹ 376,913,615 was bifurcated where some of the assets were held to be genuine lease and depreciation on same was allowed in earlier years. It was found that such depreciation for the current assessment year is ₹ 11,433,113. Therefore, the learned assessing officer disallowed the balance depreciation claim of ₹ 365,480,537/– 108) The assessee approached the learned CIT – A as per ground number 7 which was decided as per paragraph number 6 of his appellate order wherein it was held that it is a mere case of advancement of loan by the assessee. Wherein it has been held that there is no genuine leasing. Accordingly, he confirmed the disallowance of depreciation. 109) The learned authorized representative submitted that this issue is decided against the assessee by the Tribunal in its own case by several orders of the coordinate benches however the jurisdictional Bombay High Court has admitted the said issue on appeal by the assessee for assessment year 96 – 97, 97 – 98 and 98 – 99. 110) The learned departmental representative submitted that as the issue is decided against the assessee by the ` Page | 85 coordinate benches for several assessment years, this ground on similar facts and circumstances deserves to be dismissed. 111) We have carefully considered the rival contention and perused the orders of the learned lower authorities. This issue is admitted by the learned authorized representative that it has been decided against the assessee by the coordinate benches in assessee's own case, therefore respectfully following those decisions and reasons provided therein, we confirm the disallowance of depreciation of ₹ 365,480,537/– on such leased assets. Accordingly ground number 3 of the appeal of the assessee for assessment year 2006 – 07 and ground number 2 for assessment year 2007 – 08are dismissed. 112) Ground number 4 for AY 2006-07 of the appeal is with respect to the disallowance of write-off of bad debt is in respect of non-rural advances of ₹ 14,968,666,681/–. Identical ground number 5 is raised for assessment year 2007 – 08 wherein disallowance is with respect to non- rural advances of ₹ 1,775,300,977/–. 113) The facts are leading to the above issue is mentioned by the learned assessing officer at paragraph number 11 of his assessment order where from the fact shows that the assessee as per note number 13 attached to the return of income has claimed that the deduction should be allowed in respect of write-off of non-rural branch advances amounting to ₹ 14,968,666,681. 114) Note number 13 appended to the computation of total income placed at page number 6 – 7 of the paper books reads as under :- \"13 – write-off of bad debts: – ` Page | 86 write-off of bad debts is allowable under the proviso to section 36 (1) (vii), which states as under:- \"Provided that in 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 exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.\" Accordingly, bad debts written off during the year eligible for deduction under section 36 (1) (vii) is worked out as under: - credit balance in provision for bad debts 36 (1) (viia) as on 1/4/2005 Rs. 2,981,21,08,531 bad debts written off during 2005 – 06 Rs. 1,721,26,01,032/– amount written off in excess of balance in provision under section 36 (1) (viia) account and eligible for deduction under section 36 (1) (vii) Nil The honourable income tax appellate tribunal, special bench, Cochin in a case relating to Catholic Syrian bank Ltd held as under:- \" If the amount of bad debts actually return of India accounts of the bank represents only debts arising out of nonrural (urban) advances, the allowance thereof in the assessment is not affected, controlled, or limited in any way by the proviso to section 36 (1) (vii)\" ` Page | 87 a similar view has been taken by honourable Kerala High Court in case of South Indian bank Ltd versus CIT (262 ITR 579) (Kerala). Accordingly, the debts actually written off, which does not arise out of rural advances, are not affected by the proviso to clause (vii) and that only those bad debts which arise out of rural advances are to be limited in accordance with the proviso. Four the assessment year 2006 – 07, we have not claimed for any deduction on account of bad debts written off. However, it should be allowed deduction in respect of write-off of non-rural branch advances amounting to ₹ 14,968,666,681/– based on the decisions mentioned above.\" 115) The claim of the assessee is that in case of an assessee to which clause (viia) applies the amount of deduction relating to any such debt and part thereof shall be limited to the amount by which such debt part thereof exceeds the credit balance in the provision for bad and doubtful debts accounts made under that clause. This is relevant for claim of bad debts allowance under the proviso to section 36 (1) (vii) of the act. The assessee has relied upon the decision of special bench in case relating to Catholic Syrian bank Ltd wherein it has been held that if the amount of bad debt is actually written off in the accounts of the bank the presence only debts arising out of non-rural advance is, the allowance thereof in the assessment is not affected, controlled, or limited in any way by the proviso to section 36 (1) (viii). Similar view was also of the honourable Kerala High Court in case of South Indian Ltd in 262 ITR 579. Accordingly, debtsthat is actually written of which are not arising out ` Page | 88 of the rural advances, are not affected by the proviso to clause (vii) and that only those bad debts which arise out of rural advances are to be limited in accordance with the proviso. 116) The learned assessing officer rejected the contention of the assessee based on the circular dated 464 dated 18/7/1986 wherein according to the learned AO it is clear that the provisions under section 36 (1) (viia) is available both for rural and non-rural advances. However same has not been appreciated in the decision of the honourable Kerala High Court and the special bench against which the Department has filed the special leave petition. Accordingly, the claim of the assessee was dismissed. 117) On appeal before the learned CIT – A this issue is discussed at paragraph number 9. The learned CIT – A rejected the contentions of the assessee holding that explanation (ii) to section 36 (1) by the finance Act 2013 is clarificatory in nature. It states that the proviso to clause (vii) and clause (v) of subsection 2 shall related to all types of advances including advances made by rural branches. The proviso to clause (vii) of section 36 (1) therefore shall limit the application to both rural advances and non-rural advances. Therefore, there cannot be double deduction i.e., one on provision bases and then again on actual write off bases separately and independently. Accordingly, the learned CIT – A rejected the claim of the assessee. 118) The learned authorized representative referred to the notes to the return of income placed at page number 06 – 07 of the paper books and stated that this issue has been decided in favour of the assessee by the coordinate ` Page | 89 bench in assessee's own case by several assessment years wherein the same issue has been restored back to the assessing officer. He further invited our attention to the decision of the honourable Supreme Court in case of Catholic Syrian bank Ltd versus CIT (2012) 343 ITR 270, the decision of the honourable madras High Court in case of CIT versus city Union Bank Ltd (2007) 291 ITR 144 and of the honourable Karnataka High Court in case of Deputy Commissioner of income tax versus Karnataka bank Ltd (2012) 349 ITR 705. He further referred to the decision of the coordinate bench in case of Punjab and Sindh bank versus ACIT (2008) 23 SOT 103. 119) He fairly invited our attention also to the decision of the coordinate bench in assessee's own case passed on 12 July 2021 for assessment year 2001 – 02 and 2002 – 03 wherein identical issue has been inadvertently decided against the bank assessee against which the miscellaneous application was filed which has been decided on 24 June 2022 and the issue has been decided now in favour of the assessee. 120) The learned departmental representative vehemently supported the order of the learned assessing officer and the learned CIT – A . He submits that the assessee being a bank is eligible for deduction under section 36 (1) (vii) and 36 (1) (viia) of the income tax Act. Provisions of section 36 (1) (viia) provides for a deduction to the assessee for the bad debts actually written off in the books of the accounts. The provisions of section 36 (1) (viia) provide for deduction out of provision for bad and doubtful debts. It is a settled principle that if there is no provision for bad and doubtful debts in the books of ` Page | 90 accounts of the assessee, the deduction of provision under section 36 (1) (viia) shall not be available to the assessee. The provision for bad and doubtful debts is created by the assessee in the books of accounts as per the Prudential norms prescribed by the reserve bank of India. As per such norms, the assessee categorizes its debts into different categories such as standard assets, substandard assets, non-performing assets and bad assets. On the basis of the provision created in the books of accounts for bad and doubtful debts as per the prudent norms of the RBI, the assessee is eligible for deduction of certain percentage of total income of the year in which such provision exists. Such deduction is available to the assessee for all advances including rural advances are nonrural advances. Therefore, it needs to be appreciated that the provisions of section 36 (1) (viia) and 36 (1) (viia) of the Act operates for different set of debts treatment in the books of accounts, however part of total loans and advances made by the bank in the capacity as the lender. As per annexure 6 of the computation of income they assessee has created provision for bad and doubtful debts of ₹ 1392 crores and the same is added back to the computation of the income. The assessee has reduced equal amount while computing the total income. The assessee has not claimed any bad debts written off within the meaning of the provisions of section 36 (1) (viia) in the computation of total income. As per note number 13 the assessee has mentioned that that credit balance in provision for bad debts under section 36 (1) (viia) as on 1/4/2005 is ₹ 29,812,108,531. The bad debts written off during 2005 – 06 was ₹ 17,212,601,032. The ` Page | 91 number of debts written off is in excess of balance in provision under section 36 (1) (viia) and eligible for deduction under section 36 (1) (viia) is Rs Nil. It is submitted that it should be appreciated that the provisions of section 36 (1) (viia) have provided for deduction of bad debts actually written off in the books of account of the assessee. It was submitted that section 36 (1) (viia) provides for any benchmark for computing the amount of bad debts actually written off in the books of accounts of the assessee. The opening balance of the provision for bad and doubtful debts in the books of accounts of the assessee is an initial benchmark or starting point to compute such deduction. The amount of bad debt is actually written off in the books of account of the assessee as irrecoverable shall exceed the opening balance for provision for bad and doubtful debts in the accounts of the assessee. Therefore, if such opening balance is nil, entire bad debt would be allowed as a deduction. However, if there is some positive amount of opening balance into (credit balance) in the provision for bad and doubtful debts account such opening balance would be reduced from the actual bad debts written off and such excess amount over the credit balance would be allowed as a deduction. The amount of such write off related to all advances during normal course of business including rural advances and non-rural advances. The assessee cannot buy for bad debts written off in the multiple categories for the purpose of provisions of section 36 (1) (Viia) of the act. Accordingly, it was submitted that the disallowance of Rs. 1496.86 crores was rightly made by the AO as such amount does not ` Page | 92 exceed the opening credit balance in provision for bad and doubtful debts account. 121) It was further submitted without prejudice that the assessee has arrived at an amount of bad debts actually written off to the eligible deduction under section 36 (1) (Viia) at Rs. 1496.86 crores. However, it is not clear how this amount was arrived at after adjusting the credit balance for provision for bad and doubtful debts in the books of accounts of the assessee. It is also not clear whether the assessee has actually written off this amount in the books of accounts of the assessee considering it irrecoverable. Therefore, may be verified and substantiated with documentary evidence as how such amount was computed as eligible deduction. In absence of such documentary evidence and method for accounting such amount, the deduction claimed by the assessee cannot be allowed. 122) The learned authorized representative submitted that the coordinate benches have decided this issue in its favour forced last several years and further it is also made from to consider the decision of the Catholic Syrian bank Ltd versus CIT (2012) 343 ITR 270 (SC), CIT versus CT Union Bank Ltd (2007) 291 ITR 144 (Madras), DCIT versus Karnataka bank Ltd (2012) 349 ITR 705 (SC) and Punjab & bank versus ACIT (2008) 23 SOT 103 (Delhi). 123) We have carefully considered rival contentions and perused the orders of the learned lower authorities, the notes to the return of income, several judicial precedents of the coordinate benches placed before us and also the decision of the honourable Supreme Court and tribunals in other cases. Though in principle this issue is covered in ` Page | 93 favour of the assessee by the decision of the coordinate bench in assessee's own case for earlier years. However, the issue has been raised by the learned departmental representative that the assessee has arrived at an amount of bad debts actually written off to the eligible deduction under section 36 (1) (Viia) at Rs. 1496.86 crores. However, it is not clear how this amount was arrived at after adjusting the credit balance for provision for bad and doubtful debts in the books of accounts of the assessee. It is also not clear whether the assessee has actually written off this amount in the books of accounts of the assessee considering it irrecoverable. Therefore, may be verified and substantiated with documentary evidence as how such amount was computed as eligible deduction. In absence of such documentary evidence and method for accounting such amount, the deduction claimed by the assessee cannot be allowed. In view of the above, we restore these grounds of appeal back to the file of the learned assessing officer for the above verification only. Accordingly ground number 4 for assessment year 2006 – 07 and ground number 5 for assessment year 2007 – 08 are allowed as indicated above. 124) Ground number 5 for AY 2006-07 is with respect to the action of the learned CIT – A wherein reduction and appreciation and taxing appreciation in the value of securities held as ‘available for sale’ and ‘held for trading ‘category. Identical ground number 6 is raised for assessment year 2007 – 08. 125) The facts are mentioned at paragraph number 14 of the assessment order. It shows that valuation of securities ` Page | 94 held under assets for sale and held for trading categories have been made script wise and diminish in/depreciation in the value of that script has been recognized in the profit and loss account for the year. If there is any appreciation over the carrying value of such securities, same is ignored. According to AOit is also contrary to the circular of CBDT number 665 dated 5/10/1993 wherein the board has clarified that the assessing officer should determine on the facts and circumstances of each case as to whether any particular security constitute stock in trade or investment considering the guidelines issued by the reserve bank of India in this regard from time to time. 126) Assessee submitted that that assessee valued each of the security at the end of year falling into the bracket of assets held for sale and held for trading after netting of classification wise depreciation and appreciation, computed script wise and provided format depreciation in each classification while ignoring that appreciation, as permitted by the guidelines issued by the reserve bank of India. This practice is consistently followed by the assessee for tax purposes. Accordingly, the depreciation of same is allowable to the assessee. It was also stated that these securities are stock in trade which are required to be valued at lower of cost or market value whichever is less, the assessee has followed the same and therefore it should be allowed in view of several judicial precedents. 127) The learned AO did not accept the argument of the assessee and held that these investments should be valued at its fair value which is to be arrived at ` Page | 95 individually without differentiating for appreciation and appreciation as per RBI guidelines. The profit/loss arising on the basis of above valuation has to be offered to tax on the basis of this valuation. He further supported his argument by the decision of the coordinate bench in case of Dy’s bank AG versus Deputy Commissioner of income tax appeal number 1401 and 1726 of 1993 dated 17/6/2002. The learned assessing officer was of the view that assessee or to have included the full appreciation on the value of securities as per RBI guidelines. For these reasons, the total income of the assessee is required to be determined in accordance with the provisions of section 145 (3) of the act. As the assessee has already included such income in its statement of income filed with the return of income no fresh addition was made. The learned AO rejected the claim of the assessee made by letter dated 4/3/2008 subsequent to filing of the return of income that such income is not to be included in the total income was rejected. 128) Assessee carried this matter before the learned CIT – A who dealt with this issue as per paragraph number 10 were held to decide in ground number 11 of the appeal. He also rejected the contention of the assessee holding that by recognizing the depreciation script wise and ignoring the script wise appreciation without netting eight of the resulted in over statement of depreciation to the extent of script wise appreciation ignored by the bank. He therefore agreed with learned AO that depreciation/appreciation in individual script sale be aggregated for each category of classification and thereafter only netted depreciation shall be allowed in the ` Page | 96 profit and loss account as per RBI guidelines on valuation of securities and recognition of income and loss. Accordingly, he upheld the order of the AO. 129) The learned authorized representative referred to letter dated 4 March 2008 wherein such claim was made by way of a letter. It was stated that this issue has already been decided in favour of the assessee by the coordinate benches for assessment year 2009 – 10, 2005 – 06, 2004 – 05 and 2008 – 09. The learned AR further placed reliance on the decision of the honourable madras High Court in 17 ITR 1 and UCO bank in case of 240 ITR 355. 130) The learned CIT DR submitted that assessee has not made such claim in the return of income. During the course of assessment proceedings letter dated 4 March 2008 was submitted wherein such claim was made. The learned CIT – A confirmed the action of the AO holding that the depreciation/appreciation in individual script wise shall be aggregated for each category of classification and thereafter only netted appreciation cell be allowed in the profit and loss account as per the guidelines issued by the reserve bank of India on valuation of securities and income recognition which is regularly followed by the assessee. He therefore submitted that there is no infirmity in the order of the learned lower authorities. 131) We have carefully considered the rival contention and perused the orders of the learned lower authorities. It is an admitted fact that there was no claim in the return of income by the assessee, the claim was made by filing a letter before the learned assessing officer, which was rejected by the learned lower authorities on merits. It is contested that the issue is decided in favour of the ` Page | 97 assessee in assessee’s own case by the coordinate bench for several assessment years. Therefore, respectfully following the decision of the coordinate bench in assessee’s own case, we direct the learned assessing officer to allow the above claim of the assessee. Accordingly ground number 5 of the appeal for assessment year 2006 – 07 and ground number 6 for assessment year 2007 – 08 are allowed. 132) Ground number 6 of the appeal for assessment year 2006 – 07 and ground number 7 for assessment year 2007 – 08 are regarding the issue that whenever bad debts written off is recovered should not be liable to tax under section 41 (4) of the act for the reason that assessee has not claimed any deduction of such advances under section 36 (1) (Vii) of the act. The claim of the assessee is that whenever there is a recovery of bad debts written off not claimed as a deduction under section 36 (1) (Viia) should not be taxed under section 41 (4) of the act. The assessee has relied upon the decision in case of state bank of Mysore ITA number 647/Bangalore/2008. This was not raised before the assessing officer and therefore an additional ground was raised (number 13) before the learned CIT – A. He dealt with the same in paragraph number 11 dismissing the same for the reason that there was no claim in the original return/revised return or during the course of assessment proceedings before the learned assessing officer. Even otherwise the explanation (vii) to section 36 (1) inserted by the finance act 2013 is clarificatory in nature. It states that the proviso to clause (viia) and clause (vi) of subsection 2 related to all types of ` Page | 98 advances including advances made by rural branches. The proviso to clause (viia ) of section 36 (1) therefore shall limit the application to both rural advances and non- rural advances. Therefore, there cannot be double deduction one on the provision basis and again on actual write-of basis separately and independently. He further relied upon the judicial precedent of Privy Council Maharajkumar Gopal Saran Narain Singh [3 ITR 237]. Accordingly, since the ground of appeal does not arise out of the issue in assessment proceedings, he held it to be not maintainable and dismissed. 133) The learned authorized representative submitted that this issue is covered squarely in favour of the assessee by the decision of the coordinate bench Bangalore tribunal in case of state bank of Mysore versus DCIT reported in [33 SOT 7] . Further this issue has also been decided in case of assessee by the coordinate bench wherein the issue was remanded back to the assessing officer for the purpose of verification for assessment year 2009 – 10 as per order dated 6 June 2023 and similarly for assessment year 2008 – 09 per order dated 3 February 2020. It was submitted that for assessment year 2005 – 06 (22 March 2022, assessment year 2003 – 04 (30 September 2021), for assessment year 2000 – 01 (6 March 2020), assessment year 96 – 97 (3 January 2014), assessment year 1997 – 1998 and 1998 – 1999 (29 April 2016) and for assessment year 99 – 2000 (31 January 2018). It was further stated that the learned CIT – A in assessee’s own case for the assessment year 1996 – 1997 on exactly similar facts as decided the issue in favour of the bank as per order dated 1/7/2016. Further the learned assessing ` Page | 99 officer as per order dated 20th 8 December 2016 giving effect to the above order of the learned CIT – A wherein the AO was directed to follow the order of the coordinate bench, has granted relief for recovery of bad debts. Therefore, now this issue has been accepted by the revenue, decided by the coordinate bench in its favour, therefore the orders of coordinate benches covers the issue. 134) The learned CIT DR vehemently argued that no such claim was made before the AO, the learned CIT – A has given his own reasons following a judicial precedent. He categorically submitted that it is not in dispute that assessee has claimed deduction under section 36 (1) (viia) of the act for preceding years. It is also not in dispute that the assessee has recovered a certain amount given in the year under consideration, therefore according to the provisions of section 36 (1) (via) read with provisions of section 41 (4) are squarely applicable in the case. He further stated that the coordinate bench in assessee’s own case has remanded matter back to the file of the assessing officer for verification for last several years and therefore considering the facts and circumstances of the case and provisions of the act, the amount recovered by the assessee which is previously allowed as a bad debt should be added to the total income of the assessee in terms of the provisions of section 41 (4) of the act. 135) We have carefully considered the rival contention and perused the orders of the learned lower authorities. We have also carefully considered the several judicial precedents of the coordinate benches in assessee’s own ` Page | 100 case on the similar issue wherein the issue has been set- aside to the file of the learned assessing officer to decide it in accordance with the law. The learned CIT – A in one of the cases also set-aside following the decision of the coordinate bench giving a direction to the learned assessing officer to follow the order of the coordinate bench the learned assessing officer in pursuance of that order of the learned CIT – A himself accepted that such addition cannot be made under section 41 (4) of the act. In view of these facts, this issue has been decided by the coordinate benches in assessee’s own case, on remand before the assessing officer, the learned assessing officer himself has accepted the same, therefore, now this issue is squarely covered in favour of the assessee. 136) Provisions of section 41 (4) of the act provides that where the assessee is allowed any deduction in respect of bad debt or part of bad debt under the provisions of clause (viia) of subsection (1) of section 36, then if such amount is subsequently recovered which is greater than the difference between the debt and the amount so allowed, the excess albeit deemed to be the profits as business income and accordingly chargeable to income tax in which such sum is recovered, irrespective of existence of such business. Therefore, it needs to be decided that whether the assessee has been allowed any deduction under section 36 (1) (viia) of the act. The second aspect required to be examined is whether the assessee has recovered anything greater than the difference between the debt and the amount of deduction allowed under section 36 (1) (viia) of the act. If such recovery is in excess of the difference between ` Page | 101 the debt and the amount allowed, such excess albeit deemed to be the profits in the year in which recovery is made. 137) The reliance is mainly on the decision of the Bangalore bench in case of state bank of Mysore in ITA number 647/Bangalore/2008. The coordinate benches in assessee’s own case has also set-aside the issue back to the file of the learned assessing officer following the above decision of the coordinate bench in case of state bank of Mysore. 138) Therefore, it is imperative now to examine what that decision of the coordinate bench decided. According to paragraph number 9.4 of that decision it held that: – “9.4 We have considered the issue carefully. The ld. Assessing Officer has brought these amounts to tax by invoking the provisions of section 41(4) of the Act as the assessee-bank has made provision for bad and doubtful debts under section 36(1)(viia) of the Act by writing off in the P&L account and the said amounts are recovered subsequently. On analyzing the provisions of the Act reproduced supra, we observe that by virtue of section 36(1)(viia) certain assessees like the appellant- bank are allowed to provide in a particular manner provision for bad and doubtful debts as a charge to P&L account, irrespective of the actual bad debts. Further proviso to section 36(1)(vii) of the Act stipulates that an assessee to which clause (viia) applies, the amount of the reduction relating to any such debts or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. This makes it clear that when the assessee identifies the actual bad debt, it should be first adjusted against the reserve created by virtue of section 36(1)(viia) and excess, if any, will be allowed to be written off in the P&L account as bad debts by invoking section 36(1)(vii) of the Act. In other words, if such bad debts exceed the reserve, the excess amount alone can be charged to P&L account as per section 36(1)(vii) of the Act, in such event section 41(4) comes to play, when the excess amount so charged to P&L account under section 36(1)(vii) of the Act is subsequently recovered from bad debts. In this given case, the assessee asserts that the actual amount of Rs. 39,38,25,324 is adjusted against the reserve created by virtue of section 36(1)(viia) of the Act and had not exceeded the reserve account. Therefore, the assessee claims no amount was charged to P&L account by invoking section 36(1)(vii) of the Act. Since the assessee has not claimed bad debts under section 36(1)(vii) of the Act, but purely adjusted the amount against the reserve created under ` Page | 102 section 36(1)(viia) of the Act, section 41(4) cannot be invoked. Considering the facts and the circumstances of the issue is concerned, we are in agreement with the contentions of the assessee on the basis of materials made available. Accordingly, this issue goes in favour of the assessee-Bank. However to verify the following aspects— (i) Whether the assessee-Bank has debited the amounts so recovered out of bad debts against Reserve created by virtue of section 36(1)(viia) of the Act ? (ii) Whether the amounts recovered against the bad debts have not exceeded the reserve so created ? (iii) Whether the amounts recovered against the bad debts have not been charged to profit & loss account of assessee-Bank as per the provisions of section 36(1)(vii). this issue is remitted back on the file of the Ld. Assessing Officer for the limited purpose only. The Ld. Assessing Officer is directed to ascertain the facts of the case with reference to books of account and to take appropriate action in conformity with our findings on the legal issue.” 139) Therefore, in view of the above, it is crystal clear that it is for the assessee to first establish that what is the outstanding amount of that debt, whether out of such that any deduction has been allowed to the assessee under section 36 (1) (viia) of the act, whether there is any recovery of debts subsequently from that account, what is the difference between the amount outstanding as at that date and the amount of deduction allowed as a provision to the assessee, thereafter give an effect to the provisions of section 41 (4) of the act. It is the duty of the assessee to give these primary details to the assessing officer, thereafter the learned assessing officer may look at each of such accounts against which the deduction of provision under section 36 (1) (viia) of the act is allowed to the assessee and then apply the provisions of section 41 (4) of the act. Undoubtedly, it would be the duty of the assessee to show before the learned assessing officer that in such cases where there ` Page | 103 is a recovery of outstanding that, assessee has not claimed deduction under section 36 (1) (viia) of the act. On furnishing of such information, the learned AO is duty-bound to examine the same. Accordingly with above direction, the issue is restored to the file of the learned AO. 140) Accordingly ground number 6 of the appeal for assessment year 2006 – 07 and ground number 7 for assessment year 2007 – 08of the assessee are allowed and the issue is restored back to the file of the learned assessing officer to consider the provisions of section 41 (4) of the act and to determine whether the assessee has claimed any deduction under section 36 (1) (viia) of the act with respect to that debt, ld. AO may consider the issue in accordance with the law. 141) Ground number 7 is the issue which was not raised before the assessing officer but raised for the first time before the learned CIT – A. Identical ground is raised in ground number 8 of the appeal for assessment year 2007 – 08. 142) This ground states that: a) state bank of India has earned income from its foreign branches. The profits of such foreign branches should not be included in the income of the resident assessee, state bank of India, as such profits are earned by such foreign branches are not liable to tax in India in terms of the relevant tax treaties and relying on the following judicial precedents:- ` Page | 104 i. PAVLKulandagan Chettiar (3 ITD 426) (special bench)upheld by the honourable High Court and by the honourable Supreme Court in 267 ITR 654 wherein the review petition was also dismissed in 300 ITR 5 ii. CIT versus VRSRM form (208 ITR 400) Madras) iii. CIT versus RM Muthiah(202 ITR 508 (Karnataka) iv. DCIT versus Patni computer systems limited (114 ITD 159 (Pune) v. Apollo hospitals Enterprises Ltd (53 SOT 103) (Chennai) vi. DCIT versus Turquoise Investment and Finance Limited (2008) ( 300 ITR 1) (SC) vii. Pooja Bhatt versus DCIT (2008) 26 SOT 574 (MU M) viii. DCIT versus Mideast India Ltd (2009) 28 SOT395 (Delhi) ix. DCIT versus SRO Ltd (2011) (47 SOT139) (MU M) x. Bank of India versus Deputy Commissioner of income tax (2012) (27 taxmann.com 335) MU M) b) It was contested before him that the relevant tax treaty provided that such business income ‘may be taxed’ in a particular state in respect of the specified income and therefore the tax would only be chargeable by the other State. ` Page | 105 c) So, if an income is held to be taxable in foreign jurisdiction ( Source state ) under a treaty, unless there is a specific mention that it can also be taxed in the other jurisdiction (State of Residence) , the State of Residence i.e.,other tax jurisdiction does not have any power to tax the same. d) Thus, income of such foreign branches are covered by the tax treaty jurisdictions, where the power of taxing such income is given to those other tax jurisdictions, therefore, same cannot be taxed in the hands of the assessee in India. e) Assessee also submitted a chart where the foreign income earned by such foreign branches covered by various treaties entered into. f) Assessee has also claimed that there is a loss in foreign branches at Sydney and United Kingdom which should be chargeable to tax in India and such losses must be allowed to the assessee against the income earned by assessee in India. g) The assessee contested that the provisions of section 90 (2) provides that the assessee has an option to adopt either the domestic tax provisions or treaty provisions, whichever is more beneficial to it. h) It also relied on the decision of honourable Calcutta High Court in case of Hindustan paper Corporation Ltd 77 taxmann 450. 143) The learned CIT – A rejected the contention that no such claim has been made in the original return is revised return or during the course of assessment proceedings before the AO and further the ground does not arise out ` Page | 106 of the issue in the assessment proceedings and therefore it is not maintainable and hence dismissed. 144) The learned authorized representative categorically submitted that this issue has already been decided in case of the assessee for assessment year 2008 - 2009 by order dated 3 February 2020, for assessment year 2001 – 02 and 2002 – 03 as per order dated 12 July 2021. Further for assessment year 2005 – 06, 2003 – 04, 2000 – 2001, 1996 – 1997, 1997 – 98 and 1998 – 99 as well as 1999- 2000 has been remanded back to the assessing Officer for fresh examination and adjudication. It was further stated that the CIT – A in assessee’s own case for the assessment year 1996 – 1997 in an appeal filed against the assessment order passed under section 143 (3) read with section 254 has decided the issue in favour of the assessee as per order dated 1/7/2016. The assessing officer as per his order dated 28 December 2016 giving effect to the order of the learned CIT – A , has already excluded the income earned by such foreign branches while computing the total income of the assessee. 145) However, he also pointed out that this issue has also been decided against the assessee in an order dated 6 June 2023 for assessment year 2009 – 10. He referred to that decision and stated that the said decision has been applicable only prospectively from assessment year 2009 – 10 and therefore is not applicable for the year under consideration i.e., assessment year 2006 – 2007. 146) The learned CIT DR vehemently submitted that. ` Page | 107 a) Assessee has not submitted any details during the course of appellate proceedings or assessment proceedings with respect to the income earned by the assessee from foreign branches. The assessee also did not give the details of return of income filed in respect of jurisdiction where taxes paid as per the provisions of the act in such foreign countries, nature and character of the income accruing to the assessee and whether such income is taxable or exempted in foreign countries, details of tax paid and credit claimed in India, copies of relevant documents to prove that income accrued and considered for payment of taxation and return of income prepared and tax certificates or other related documents submitted before the AO for verification. None of such documentary evidence have been submitted by the assessee before the assessing officer, or before the CIT – A, or before the tribunal. Therefore, such claim cannot be entertained now. b) It is also not clear in which countries the assessee has earned such income. It is also not supported with documentary evidence such as name of countries, provision for taxation of income in such countries along with the Double Taxation Avoidance Agreement. Therefore, in absence of such documentary evidences to prove that the income has accrued to the assessee in foreign countries and the assessee has complied with the provisions of the act in such foreign country and also complied with the provisions of Double Taxation Avoidance Agreement between that foreign country and India, assessee ` Page | 108 cannot claim such benefit automatically on basis of above statement with additional grounds of appeal raised before the appellate authorities. c) Assessing officer or the appellate authorities do not have any documentary evidence submitted by the assessee before them about eligibility of claim of the assessee. Therefore, CIT (A) could not have allowed the claim of the assessee including tax credit, to the extent, for the taxes so paid abroad on incomes of the branch abroad and in tax jurisdictions with which India has entered into a Double Taxation Avoidance Agreement. d) Also, the assessing officer/CIT (A) could not examine the provisions of the respective tax treaty and compute the admissibility of tax credits separately for each jurisdiction in accordance with the scheme of related treaty. e) He further relied upon the decision of the coordinate bench in the case of Bank of India versus Assistant Commissioner of Income Tax (122 taxmann.com 247) wherein the tribunal remanded the matter back for verification of claim of the assessee. f) He further placed reliance on the decision of the tribunal in case of Tecnimont private limited [116 taxmann.com 996] wherein it was held that with effect from 1 April 2004 subsection 3 was inserted in section 90 and thereby effect of honourable Supreme Court judgement in the case of Kulunagan Chettiar was clearly overruled by the legislative development. It was specifically stated that mere fact of taxability in the treaty partner jurisdiction will ` Page | 109 not take it out of the ambit of taxable income of the assessee in India and that of such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the income tax act and relief shall be granted in accordance with the method of elimination or avoidance of double taxation provided in such agreement. g) He further referred to the decision of the coordinate bench in case of Essar oil Ltd (42 taxmann.com 21) also proceeded to hold that notification number 91 of 2008 dated 2 August 2000 date was applicable from 1 April 2004. h) It was further submitted without prejudice that assessee made certain income from the banking operation in foreign countries. It may be appreciated that under the scheme of the law as it prevailed particularly in the light of provisions of section 90 (3) read with NOTIFICATION NO. 91/2008 [S.O. 2123(E)] [(F.NO. 500/82/2004-FTD-I)], DATED 28- 8-2008, entire global income of an Indian resident assessee was to be taxed in India and that where a double taxation avoidance agreement provided that any income of a resident of India be taxed in the other country, such income would be included in his total income chargeable to tax in India, in accordance with the provisions of the income tax act and relief would be granted in accordance with the method of elimination or avoidance of double taxation provided in such agreement. i) It was further stated that provisions of section 90A has prescribed the applicability of the double ` Page | 110 taxation avoidance agreement and further it is clarified by the board by notification number 90/2008 dated 28/8/2008 wherein ‘may be taxed’ was given a meaning to. Therefore, harmonious reading of the provisions of section 90, 90A and the above notification, it is clear that the assessee can claim benefit of double taxation avoidance agreement between either country or claim credit of tax paid in one state while filing the return of income can claim exemption of taxes in that state. j) He therefore submitted that it is most appropriate to restore it to the file of the learned assessing officer for the purpose of granting tax credit, in terms of related Double Taxation Avoidance Agreement, if any, and to the extent, admissible. k) The double taxation avoidance agreement cannot be used for double non taxation or double dipping in both the states. As it is mandatory to declare taxes paid in one state and claim it by way of exemption or exclusion in the other state after producing the documentary evidence of payment of taxes and complying tax laws of either state in accordance with the provisions of such agreement. In absence of any documentary evidence of tax compliance in either country or state the assessee cannot claim exemption or exclusion of income in the state of residence i.e., India. l) Therefore, it was submitted that the claim of the assessee should be tested on the basis of the provisions of the Double Taxation Avoidance Agreement with the respective state that with the ` Page | 111 provisions of the income tax act for taxing such income on door accrued in foreign state with supporting evidence and whether any exemption is to be granted or credit of taxes. Unless the Double Taxation Avoidance Agreement which each of the country is verified, examined, such claim of the assessee cannot be allowed. m) He therefore submitted that it is most appropriate to restore it to the file of the learned assessing officer for the purpose of granting tax credit, in terms of related Double Taxation Avoidance Agreement, if any, and to the extent, admissible. 147) During the course of hearing the bench also asked the assessee to submit certain details such as details of branches for which exemption is being claimed, the countries in which the branches are registered, the profit of such branches, relevant Double Taxation Avoidance Agreement with those countries entered into by India, whether such relevant Double Taxation Avoidance Agreement has ‘exemption method’ for elimination of Double Taxation Avoidance Agreement. 148) The assessee submitted a statement giving the details of branches of the assessee company for which exemptions is being claimed along with the amount of income to be eliminated as per the relevant Double Taxation Avoidance Agreement. According to that statement the assessee has submitted the relevant Double Taxation Avoidance Agreement between India and Belgium, Bangladesh, Germany, South Africa, Oman, Japan, France and Singapore. The learned authorized representative also submitted that provisions of article 7 of business profits ` Page | 112 of each of the relevant Double Taxation Avoidance Agreement provides that tax ‘may be’ charged in a particular state in respect of specified income. Thus, it was submitted that it is implied that the other State would not charge taxi.e., India. Accordingly, once income is held to be taxable in a particular jurisdiction under a tax treaty, unless there is a specific mention that it can be taxed in the other jurisdiction, the other jurisdiction is denuded of its power to tax the same. Thus, it was submitted that profits of the above foreign branches which have the clause of ‘may be taxed’ in the other country and is taxed so in the other country, should be excluded from the total income of the assessee. 149) Assessee placed reliance on the coordinate bench decision in the case of Bank of India versus Deputy Commissioner of income tax (2012) 27 taxmann.com 335 upheld by the honourable Bombay High Court in 64 taxmann.com 215 and decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09 in ITA number 3644/M/2016 dated 3 February 2020. 150) As far as the method of granting of tax credit in respect of Double Taxation Avoidance Agreement are concerned the assessee tabulated that in all such countries only the credit method is the method of eliminating Double Taxation as per article 23 or 25 or 22 of the respective Double Taxation Avoidance Agreement. It was specifically stated that with these countries, the Double Taxation Agreement does not provide exemption method of elimination of double taxation. 151) Assessee vehemently submitted that issue for this year is specifically covered in favour of the assessee by ` Page | 113 Decision of Honourable Supreme court and series of decision of Tribunal. 152) The learned departmental representative vehemently submitted that the a) decision of the honourable Bombay High Court does not apply to the current assessment year in these appeals i.e., assessment year 2006 – 07 and 2007 – 08 because that decision pertain to the assessment year 2003 – 04. After the assessment year 2003 – 04 there is an amendment in the law which has been discussed in the decision of the coordinate bench in case of Tecnimont private limited as well as in Essar oil Ltd on account of notification number 91/2008 dated 28/8/2008. b) He submitted that according to the version of the assessee there is no exemption clause for elimination of double taxation avoidance between the respective countries and therefore it is out of question that such income derived by the assessee from foreign branches should be excluded from the computation of total income of the assessee. c) He further stated that assessee is a resident Indian, therefore, its global income is chargeable to tax in India on the basis of residence, if there is any foreign sourced income is required to be taxed, same is required to be looked into by looking at the double taxation avoidance agreement providing method of elimination of double taxation. ` Page | 114 d) It was submitted that mostly India has not entered into any double taxation avoidance agreement with any of the countries providing exemption method. e) Therefore, the assessee is entitled to take credit of foreign taxes paid in accordance with the provisions of double taxation avoidance agreement with those countries but now, assessee cannot claim that such income should not enter into the computation of taxation of income according to the income tax act. 153) We have carefully considered the rival contention and perused the orders of the learned lower authorities. The simple issue involved in this ground of appeal is that the assessee has earned profit from its foreign branches in Belgium, Barry in, Sri Lanka, Bangladesh, Germany, Hong Kong, South Africa, US, Maldives, Omar, Obama’s, Japan, France, Singapore, Australia, UK, China, Israel, Barry in and UAE. The total income earned by the assessee is Rs. 3,330,878,174. Out of the above branches the assessee has incurred losses in Hong Kong, Panama , UK and has paid taxes in Belgium, Sri Lanka, Bangladesh, Germany, South Africa, US, Maldives, Oman, Japan and France. The assessee has sought the income earned from Belgium Bangladesh, Germany, South Africa, Omar and former Japan, France and Singapore amounting to Rs. 3,101,210,083/– cannot be taxed in India. 154) In case of Tecnimont ( P ) Limited [2020] 116 taxmann.com 996 ( Mumbai) the coordinate bench has dealt with identical issue wherein in Indian company with ` Page | 115 branch office in UAE and Qatar on the profit of Rs. 11.91 crores in these branches has asked for the exclusion of the aggregate profits earned by the assessee’s branches from total income of the assessee. The coordinate bench considered the decision of the honourable Supreme Court in case of CIT versus P.V.A.L. Kulandagan Chettiar (2008) 300 ITR 5 and held that with effect from 1 April 2004 a new subsection 3 was inserted in section 90 and in exercise of powers vested in the central government notification number 91 of 2008 dated 28 August 2008 was issued. Notification provided that wherein agreement entered into by the central government with government of any country outside India for granting relief of tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India ‘as may be taxed’ in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the income tax act 1961 and relief shall be granted in accordance with the method for elimination of avoidance of double taxation provided in such agreement. Therefore, it was held that the above decision of the honourable Supreme Court was clearly overruled by the legislative development. On the issue of the date of applicability of such notification it was further held that looking at the decision of the coordinate bench in case of Essar oil Ltd wherein it has been held that this notification was retrospective in effect in as much as it applied with effect from 1 April 2004 i.e., the date on which subsection 3 was introduced in section 90. In the same decision relying on the decision of the honourable Supreme Court in case of fiber boards private ` Page | 116 limited versus CIT (2015) 62 taxmann.com 135, it was held that despite reenactment after 1 October 2009 such notification still prevails. 155) Thus, according to above decision after 1 April 2004 , in case of foreign branches or permanent establishment of an Indian resident, such income are required to be included in the total income of the Indian resident and relief shall be granted in accordance with the method for elimination of avoidance of double taxation as per those Double Taxation Avoidance Agreement. 156) All those decisions relied upon by the assessee before us have been considered in paragraph number 14 of that decision and held that those are no longer valid after 1/4/2004. 157) The impugned assessment year before us is assessment year 2006 – 07 and 2007 – 08. Therefore, the assessee is not entitled for exclusion of the income of foreign branches from its tax computation but is only entitled to tax credit or exemption in accordance with those agreements. 158) The assessee was specifically asked to give the details of the Double Taxation Avoidance Agreement where assessee is claiming benefit of exemption, in all those agreements as per article 22 or article 23 or article 25 only the credit methods for elimination of Double taxation are provided. Therefore, assessee is entitled to only credit of foreign taxes paid. 159) Reliance on the decision of the coordinate bench by the learned authorized representative in case of bank of India [supra] does not help the case of the assessee as it pertains to assessment year 2003 – 04. The reliance ` Page | 117 placed on the decision of the honourable Bombay High Court in case of CIT versus bank of India (2015) 64 taxmann.com 215 also does not help the case of the assessee as it also pertains to assessment year 2003 – 04. 160) In view of this, ground number 7.1 and 7.2 raised by the assesseefor assessment year 2006 – 07 and ground number 8 for assessment year 2007 – 08are dismissed. 161) An additional ground is raised for claim of right of bad debts under section 36 (1) (vii) of the act as per additional ground number 1 for both the years. The assessee submits that the requisite facts are available on record no new facts are required to be investigated and therefore these grounds should be admitted. It is further stated that in earlier years also this ground is admitted and restored back to the file of the assessing officer for fresh examination and adjudication. It was further stated that the issue is covered by the decision of the honourable Supreme Court in case of Vijaya bank versus CIT [(2010) ( 323 ITR 166)]. 162) The learned departmental representative vehemently objected to the additional ground. It was further the claim of the learned departmental representative that no double deduction shall be allowed. 163) We have carefully considered the rival contention and perused the orders of the learned lower authorities. This is an additional issue raised by the assessee before us. This issue was neither before the assessing officer nor before the learned CIT – A. We are also not aware whether the relevant facts are also available before the lower authorities are not. However as in earlier years in ` Page | 118 assessee's own case with a series of the orders of the coordinate bench this issue is restored back to the file of the assessing Ofc for fresh examination and adjudication, respectfully following the decision of the coordinate benches in assessee's own case we also remand this ground back to the file of the learned assessing officer with a direction to the assessee to substantiate the facts before the learned assessing officer, which may be verified by the learned assessing officer with a view that no double deduction shall be allowed and thereafter may be decided on the merits of the case. Accordingly Additional ground number 1 raised as additional ground for assessment year 2006 – 07 and 2007 – 08 are admitted and allowed with above direction. 164) An additional ground number 2 for assessment year 2006 – 07 and 2007 – 08 is raised by the assessee for the purpose of claiming deduction of education cess; same are not pressed , hence dismissed. 165) This leaves us with ground number 3 of the appeal of the assessee for assessment year 2007-08, claim of the assessee is that the deduction claimed by the assessee without prejudice that deduction under section 36 (1) (viii) is required to be computed on the taxable business income of the assessee excluding the income other than treasury operations, has not been adjudicated by the learned CIT – A. It was further stated that this ground is interconnected with ground number 7 of the appeal of the learned assessing officer. We have already restored ground no 7 of the appeal of the ld. AO where the identity of the assessee itself is challenged as not eligible for deduction, therefore, as this is connected with that ` Page | 119 ground of appeal of ld. AO, we also restore this ground of appeal of assessee also to the ld. AO for fresh examination. Hence, allowed with above direction. 166) in the result appeal filed by the assessee for assessment year 2006 – 07 and 2007 – 08 is partly allowed. Order pronounced in the open court on 11/10/2024. Sd/- Sd/- Sd/S- Sd/- (KAVITHA RAJAGOPAL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 11.10.2024 Dragon Copy of the Order forwarded to : The Appellant, The Respondent, The CIT, The DR ITAT & Guard File BY ORDER, Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai "