Income Tax Appellate Tribunal - Hyderabad
Andhra Bank, Hyderabad vs Assessee on 4 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
S. ITA No. AY Appellant Respondent
No.
1. 95/Hyd/10 2001-02 Andhra Bank, Dy.
Saifabad, Commissioner of
Hyderabad. Income-tax,
Circle 1(1),
(PAN /GIR No. Hyderabad.
AABCA7375C/A-
034
2. 96/Hyd/10 2003-04 -do- -do-
3. 97/Hyd/10 2006-07 -DO- -DO-
4. 218/H/10 2006-07 Dy. Andhra Bank,
Commissioner of Saifabad,
Income-tax, Hyderabad.
Circle 1(1),
Hyderabad. (PAN /GIR No.
AABCA7375C/A-
034
Assessee by : Shri S. Ananthan
Revenue by : Shri M. Dayasagar
Date of Hearing : 04/01/2013
Date of Pronouncement : 04/04/2013
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
Appeals being ITA Nos. 95 to 97/Hyd/10 filed by the assessee and appeal being ITA No. 218/Hyd/10 filed by the revenue are directed against the orders of the CIT(A) for the assessment years 2001-02, 2003-04, and 2006-07. Since common issues are involved in these appeals, they were clubbed and heard 2 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
together and, therefore, a common order is passed for the sake of convenience.
ITA No. 95/H/10 - AY 2OO1 -2OO2 -Assessee's Appeal2. The assessee bank has filed its Return of Income for A.Y. 2001-02 on 30.10.2001 returning income of Rs. 97 ,69,98,502/-. Thereafter, the bank filed a revised return of income on 2l.05.2002 reducing its returned income to Rs.89,74,20,236/- and assessment u/s 143(3) was completed on an income of Rs. 122,59,24,368/- on 16.03.2004 and the same was revised u/s. 263 by Hon'ble CIT, Hyderabad-I vide order dated 03.03.2006 on an income of Rs.187, 12, 13,460/ -". Subsequently, notice u/ s. 148 dated 07.03.2008 was issued with prior approval of Hon 'ble CIT, CIT/Hyd-I/ 147/18/2007-08, dated 29.02.2008 as the income has escaped assessment or has been under assessed within the meaning of IT Act as per provisions of section 147 of IT Act. Notice u/s. 148 was issued for the reasons that during the year relevant to A.Y. 2001-02 assessee company has reversed its unrealised interest on NPAs while recognising the interest income for the A.Y. 2001-02 i.e. It has reduced its current years interest income to that extent and same is not allowable as per provisions of IT Act. Further, during the year, the assessee company has claimed interest expended for purchasing/ sale of securities and such broken period interest claimed by the assessee is not an allowable expenditure as per provisions IT Act. Further, during the year assessee company .h as claimed depreciation on securities held under Available for 3 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
sale/Held for trading category and the same is to be allowable as per the RBI revised guidelines read with CBOT Circular No.665 read with provisions of IT Act as follows.
"HTM category of investments cannot be treated as stock-in-trade. No depreciation is to be provided for on investments classified under the category 'Held to Maturity" and Valuation of investments classified under the categories available for sale and held for trading is required to be done scrip-wise and thereafter depreciation/ appreciation is required to be provided for each classification of category and only net depreciation, if any, is required to be provided for and net appreciation if any is required to be ignored" 148 notice was served on the assessee on 12.03.2008 and for which assessee filed their Return of Income on 10.04.2008. In response to subsequent notices u/s. 143(2) and 142(1) issued assessee bank representatives Shri Prasad Reddy, Senior Manager and Shri Vasudev Murthy, Chief Manager, appeared from time and time and filed their submissions /replies as called for. During the proceedings and hearings, Authorised Representatives of the assessee bank has sought for the reasons recorded an.d same were furnished and brought to the notice of Authorised Representatives vide order sheet notings dated 14.05.2008, 14.06.2008, 24.07.2008 and 08.08.2008 and requested to file their replies/ objections if any along with details of information as called for. Further, assessee was requested to give information as called for vide this office letter dated 14.05.2008 and sufficient time and opportunity was offered as requested from time to time. Further, assessee filed their submissions vide their letter dated 20.10.2008 and information as called for vide their letter dated 06.12.2008 after verifying the submissions made and information submitted/ available assessment is completed as under:
3. The assessee's observations and submissions are 4 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
not acceptable and tenable as per the provisions of IT Act keeping in view the facts of the case on hand for the assessee bank for relevant A.Y. 2001-02 Proceedings u/s. 148 are valid as the revenue has the reason to believe that the income has escaped assessment 811.d S81ne is more so when the S81ne is backed by such issue (s) in the assessments made in subsequent years or current years in scrutiny u/s. 143(3). In the instant case, relevant issues have been considered and disallowances were made in subsequent assessment (s) and as upheld / adjudicated by appellate authorities. For brevity the brief extracts of provisions u/s. 147 of IT Act is reproduced below:
"147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for 811.y assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income 811.d also 811.y other income chargeable to tax which has escaped assessment 811.d which comes to his notice subsequently inthe course of the proceedings under this section, or re compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year]: Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to made a return under section 139 or in response to a notice issued under sub section(l) of section 142 or section 148 or to disclose fully and truly all material facts 5 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
necessary for his assessment, for that assessment year.
Explanation 1- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso."
4. The crux of the powers and discharge of responsibility by revenue u/s. 147 are meant to bring to tax income omitted to be either disclosed in the return or assessed in the original assessment by reason (s) of failure on the part of the assessee to disclose fully and truly all material facts with due diligence. Accordingly, assessee's reliance on various citations and submission to conclude that there is only mere change of opinion is far stretched and devoid of facts of the case and not reasonable and justifiable. In view of this assessee's contentions and objections are not acceptable and proceedings u/s. 148 are squarely valid ill the larger perspective and in the interest of justice as per the provisions of I.'T. Act. Accordingly, all the facts of the case, provisions of IT Act and of re-assessment proceedings are brought to the notice of assessee's Authorised Representatives Shri M.V. Prasad Reddy and others vide order sheet notings dated 20.10.2008 and 28.11.2008 and requested to give full information as called for and as discussed as it is time barring assessment. Accordingly, assessee's Authorised Representative has submitted the details of information as called for vide their letter dated 06.12.2008 and after verifying the information submitted available assessment 6 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
was completed.
5. The AO has held that the relevant issues have been considered and disallowances made in the subsequent assessments and as upheld/ adjudicated by Appellate Authorities. In the circumstances the AO justified the reopening of assessment.
6. Aggrieved the Assessee preferred an appeal before the Commissioner of Income tax (Appeals). The CIT(A) upheld the reopening observing as under:
" 4.0 I have considered the facts on record and the submissions of the appellant on this issue. The AO noticed that the appellant had reduced the interest income which has accrued on account of certain advances made by the appellant, which it classified as NPAs. The appellant had not disclosed the fact that the interest it had credited to its P&L a/c on account of such advances, was reduced, resulting in under statement of its total income. The AO has come to know of such derecognizing of interest income by the appellant subsequent to the completion of assessment u/s 143(3) made by him. Similarly the facts relating to claim of interest on securities purchased and classified as Held to Maturity (HTM) category as revenue expenditure has come to the knowledge of the AO later on, on account of the omission of the appellant in disclosing full facts relating to the it."
7. Aggrieved the Assessee is on appeal before us and has raised the following grounds of appeal:
"Ground No. 1 is general in nature.
Ground No. 2.a) to 2.c) is directed against the action of the CIT(A) in confirming the action of the AO in making reassessment u/s 143(3) r.w.s. 147 of the IT Act for the assessment year 2001-02 and determining the assessee's income from business at Rs. 219,83,09,050/-.7
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
Ground No. 3.a) to 3.c) is directed against the order of the CIT(A) in confirming the action of the AO in disallowing unrealized interest of Rs. 4,78,00,000/- on NPAs which was reduced from interest income.
Ground No. 4.a) to 4.c) is directed against the action of the CIT(A) in disallowing broken period interest paid at the time of purchase of HTM securities treating it as capital expenditure relying on the decision of SC in the case of Vijaya Bank Vs. CIT, 187 ITR 541.
8. The assessee in addition to the said grounds of appeal, filed a petition requesting for admission of the following additional grounds of appeal:
"1. Without prejudice to Ground No. 3(b), the learned CIT(A) ought to have allowed the unrealized interest of Rs. 4,78,00,000/- on Non-Performing Assets as deduction u/s 36(1)(vii) of the Act by treating the same as bad debts written off.
2. The appellant submits that it had written off Rs. 74,89,22,470/- as bad debts in respect of its non-rural branches during the assessment year and that the same be allowed as deduction u/s 36(1)(vii) of the IT Act.`"
9. The learned DR filed written submissions wherein he has contended that the plain reading of proviso to section 147 coupled with the explanation clarifies that even if the details were produced before the AO in the course of proceedings u/s 143(3) or 147, even then on the same issue reopening only justified after expiry of four years from the end of the relevant assessment year. The learned DR relied on the decision of Malegaon Electricity Co. (P) Ltd. Vs. CIT, 78 ITR 466 and the Hon'ble Karnataka High Court in the case of CIT Vs. Rinku Chakrobarty, 56 DTR 227. Further, the learned DR relied on the case laws, relied on by the CIT(A), which are as follows:
1. Sundaram and Company, 66 ITR 604 (SC) 8 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
2. Shahbara (Delhi) Saharanpur Light Railway Co. Ltd., 208 ITR 882 (Cal.)
3. Girilal and Co., 300 ITR 432 (Bom.)
10. The learned counsel for the assessee relied on the following case laws in support of assessee's case:
1. Hindustan Lever Ltd., [2004] 137 Taxman 479 (Bom.)
2. Hewelett Packard Digital Global Soft Ltd., [2011 (9) TMI 800 (HC- Karnataka)
3. Titanor Components Ltd., [2011] 243 CTR 520 (Bom.)
4. Smt. Raj Rani Gulati, [2010] 329 ITR 370 (All)
5. ICICI Bank Ltd., [2011] 16 Taxmann.com 250 (Bom.)
6. Lok Housing & Construction Ltd., [2012] 348 ITR 335 (Bom.)
11. We have gone through the orders of the authorities below and find that all these issues are common issues in the assessment of all the Banks. These issues are subject of matter appeals before various forums. Therefore it cannot be said that the Assessing officer would not have applied his mind on these issues.
12. When assessment u/s 143(3) has been completed if the assessing officer chooses to reopen the assessment beyond 4 years from the end of the assessment year, then as per proviso to sec 147(1) the income escaping assessment should be due to failure on the part of the Assessee to disclose fully and truly all particulars for making the assessment. Mere change of opinion on the part of the Assessing officer and his belief that the decision on some issues could be different will not give him the jurisdiction to reopen the assessment. Even if on the basis of 9 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
later judgements, the decision in the regular assessment is found not to be correct will not be sufficient ground to reopen. The AO should have come into possession fresh material, something tangible which has live nexus with the income escaping assessment as held in CIT v Kelvinator of India Ltd., 320 ITR 561 SC.
13. In this case the assessment u/s 143(3) has been completed. Of the three issues, the COD had not granted permission to the revenue to prosecute one of the issues viz., reversal of interest income recognised earlier, in appeal before the ITAT. Eventhough it is now recognised that approval of the COD is not necessary for prosecution of appeal, the basis of the requirement of COD approval, viz., reduction in litigation among Government Departments is still valid. If the COD had applied their mind and refused permission to the revenue to pursue the appeal in respect of certain issues, the revenue is precluded from doing so. It is an inter-se arrangement between the Government departments/ Government owned undertakings. Hence the issue regarding reversal of interest income recognised offered for income no longer survives. Even otherwise all the materials were before the AO and the AO has now sought to disallow the reversed income on the basis of the materials already before him. It is clearly a change of opinion.
14. As regards the second issue viz., broken period interest, this has been a subject matter of litigation and numerous decisions. Whenever securities are purchased, the purchase price is inclusive of interest upto the date of purchase. As interest earned from the securities are assessed as business income, interest for the broken period included in the purchase price of the securities 10 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
are to be allowed as a deduction. (American Express International Banking Corporation vs. CIT (2002) 258 ITR 601 Bom. CIT vs. Nedungadi Bank Ltd. (2003) 264 ITR 545 Ker).That being so, the allowance of broken period interest as a deduction in cases of securities purchased has been allowed by various courts. Therefore in allowing the broken period interest in the original assessment, the AO can not said to have committed any error. The particulars about the broken period interest claimed was before the Assessing officer as he has taken the figure from the original assessment for disallowing. The AO had not come across any fresh material which will lead him to the satisfaction that income has escaped assessment. Therefore the present reopening on this issue is merely a change of opinion on the part of the Assessing officer.
15. The third issue, viz., depreciation on securities, is also subject matter of numerous decisions in the case of banks. Once the investment in securities are made with a view to comply with statutory requirement of liquidity, the securities constitute stock in trade and valuing them at market or cost whichever is lower is an accepted method of accounting. The Apex Court has upheld the same in the case of United Commercial Bank v. CIT 240 ITR 355 (SC). The AO's attempt to classify them at Held to market or ready for sale etc is merely a change of opinion. There has been no fresh facts or evidence collected by the AO on the basis of which he can be said to have come to conclusion that income has escaped assessment.
16. As regards the issue regarding disallowance of unrealised interest, we find that the same are covered by the decisions of CIT Vs. Industrial Financial Corporation India Ltd., 205 ITR 75 11 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
(Del.) and Union Bank of India Vs. ACIT, 16 Taxman.com 304 (Mum.)
17. As regards the issue with respect to deduction u/s 36(1)(vii) in respect of debts written off by the non-rural branches of the asessee's bank, is covered in favour of the assessee by the Cathelic Syrian Bank Vs. CIT [2012] 18 Taxman.com 282 (SC) Thus in the instant case there is nothing new which has come to the notice of the Assessing officer after the original assessment u/s 143(3). The accounts had been furnished by the petitioner when called upon. Thereafter, the assessment was completed under section 143(3) of the Income-tax Act. Now, on a mere relook and review, the officer has come to the conclusion that the income has escaped assessment. The proviso to section 147 of the Income-tax Act requires a failure on the part of the assessee to make a proper return. In the present case, no such case is made out on the record. In the circumstances, from the facts and evidence on record we are of the opinion that the reopening is based on a mere relook of the same set of facts and documents which were already available before the AO at the time of original assessment and it was merely a change of opinion. The Assessing officer also has not pointed out what was the failure on the part of the Assessee to disclose fully and truly the particulars required for making the assessment. It is a well settled principle that reopening after 4 years from end of the relevant Assessment year, when the Assessment under sec 143(3) has been completed and the Assessee had furnished full facts, is not permissible under proviso to sec 147(1). The following among other cases support this view:
CIT Vs M/s Kelvinator of India Limited 320 ITR 561 SC 12 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
Mihir Textiles Ltd. v. JCIT 347 ITR 546 Guj. NYK Line (India) Ltd. v. DCIT (No. 2) 346 ITR 361 Bom.
18. The AO has substantiated reopening stating that that disallowances on the above issues have been made and were adjudicated by Appellate Authorities. It was not as if there was any factual and tangible material regarding these issues which came to light in the subsequent years. It was only a conclusion based on a different interpretation on the same set of facts. Thus the AO had merely changed his conclusion, on the same set of facts available for this year. Legal conclusion arrived at on similar set off facts in the subsequent year cannot be the reason for reopening. It is a settled proposition that reopening is not permitted on the basis of subsequent decision of the High Court or Supreme Court.
Commercial Co-operative Bank Ltd. v. ITO 336 ITR 196 Guj Austin engineering Co Ltd v CIT 312 ITR 70 Guj CIT v. Baer Shoes (India) Pvt. Ltd 331 ITR 435 Mad.
19. Thus a different legal interpretation of a provision in the subsequent year, on the same set of facts cannot be the basis of reopening for an earlier year, particularly when it is beyond 4 years from the end of the Assessment year.
20. In the circumstances we hold that the reopening is without jurisdiction and hence invalid. As we have held that the assessment is without jurisdiction, we are not dealing with other issues on merits.
21. In the result, the Assessee's appeal being ITA No. 95/H/10 is treated as allowed.
13ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
ITA 96/H/10 AY 2003-04
22. This is an appeal against the order giving effect to the order of the CIT u/s 263.
23. In this appeal the assessee has raised the following grounds of appeal:
Ground No. 1 is general in nature. Ground No. 2.a) to 2.b) is directed against the action of the CIT(A) in confirming the action of the AO in considering Rs. 32.68 crores as alleged notional profit on sales of investments in trading book as income of the assessee for the AY 2003-04 when in fact it is only a notional income and was not earned by the assessee on sale of investments.
24. The AO considered Rs. 32.68 crores representing notional profit on sale of investment in HFT category as income of the assessee. The facts recorded by the AO are as follows:
"that the CIT-1, Hyderabad had considered the Issue In detail In his order u/s 263 dated 15-02-08 at Para 14.02 to 14.8 and held that the profit of s.32.68 crores accrued in the process ought to have been brought to tax;
- the appellants representative clarified that it arrived at the average value by clubbing of different securities as computed by the statutory auditors and the appellant's reply that such income was notional and not real was acceptable to him as the appellant made an overall profit of Rs.32.6~ crores on account of "trading book" during the year as per statutory audit report as real income."
25. Before the CIT(A), the assessee submitted as follows:
"that statutory auditors in notes on accounts -14
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
Schedule 17 clause 4(e) in the annual report observed the bank follows the practice accounting the sale of securities in the trading book on the basis of purchases made on the same day in trading book even through the stock is held in available for sale or HTM category. Had the accounting "of these transactions been made in the category in which the existing stocks are held, the profits and investments would have been higher by Rs.32.68 crores;
- that it is relevant to note that securities are understated by Rs. 32. 68 crores. In this connection, it is relevant to note that securities are held by banks in the following three categories:
HTM -Held to Maturity AFS - Available for Sale HFT - Held for trading Bank can sell securities only when such a security is available with it in anyone of the above categories but cannot sell it if no stock of such security is available in any of the above categories. Securities in HFT category are normally traded. However, if a security is available in AFS Category, sale of such security can be made and bought again on the same day. Such purchase and sale are recorded in the HFT category and difference between sale and purchase value is taken as profit. The auditors opined that while computing the profit on sale of securities, the appellant had taken into account the purchase rate of security in the same category on the same day where security is bought after the time of sale ignoring the cost in other category where such security is available before sale.
According to auditors/ since sale of security cannot be made unless stock of such security is there in anyone of the categories (mostly AFS) profit on sale is to be computed taking into account the sale value of security and average of the cost of security as available in other category (AFS) and purchase value of the security on the day of its sale in trading book.
That above two methods of computing profit are 15 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
illustrated hereunder taking the following values:
a. Sale value of security b. Cost of security in AFS before sale c. Purchase value of security on the date of sale as per trading book Method adopted by Bank Method to be followed as Per Auditors Sale Value - Rs.91 Sale Value Rs.91.00 Purchase Value - Rs.90 Average cost in AFS and purchase Value as per trading Book 89.50
----------
Rs. 1 Rs.1.50
===== ======
Thus/ if the method/ as suggested by the auditors/ is followed/ profit of the bank would have been higher by 32.68 crores. Presuming for a moment that the above view may be correct/ though not conceding/ it would not make any difference on the profit for the year as all the securities held both in AFS & HFT categories are to be valued at the end of the year at cost or market value whichever is lower.
Continuing the above illustration/ profit at the end of the year would be as under:
a. Profit on sale of security as considered in the Rs.l.00 accounts by the bank b. Profit on valuation of security at average value of Rs..89.50 as worked out by auditors as against value of Rs.89/- as per books at the time of purchase Rs.0.50 ps Rs. 1.50 Thus, as could be seen from the ebove, profit at the end of the year would be R,s.1.50. Hence, making addition of Rs.32.68 crores to the income returned is not correct and justified in view of what explained above as the profit at the end of the year would be Rs. 1.50 even if such profit is recorded at Rs. 1/-16
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
only in the books on the date of sale of security."
26. After considering the submissions of the assessee, the CIT(A) held as follows:
"In this context, we need to consider the provision u/s 145 viz., the method of accounting by the assessee's in respect of income chargeable under the head profits and gains of business or profession and the CBDT notification no.9949 dated 25/01/1996 notifying the accounting standards for assessee's following the mercantile system of accounting. According to this notification, all assessees' following the mercantile system of accounting should disclose accounting principles and changes in accounting policies and they cannot have hybrid or mixed system of accounting for the purpose of declaring income under the I.T. Act. In the appellant's case, the Central Statutory Auditors have, in accordance with the accepted accounting standards observed that the accounting practice followed by the appellant in arriving at the profits in trading of securities in AFS, HFT & HTM was not in order and that had the accounting of the sale or securities in the trading account considered the stocks available under AFS category or HTM category, the profits and investments would have been higher by Rs.32.68 crores. In other words, the issue is one of method of accounting for the purpose of arriving at the total income as per the provisions of the LT.Act and for this purpose, provision of section 145, the CBDT notification nO.9949 and the observations of the Central Statutory Auditors override the guidelines provided by the RBI in respect of recognization of income on sale of securities. Further, the appellant cannot follow any method other than mercantile system of accounting as per the provisions u/s 145 of the I.T. Act, particularly in regard to the recognization of income on sale of securities. As the appellant, arrived at the profit figures by taking the purchase cost as per the RBI guidelines and not in accordance with the accounting standards, based on which the statutory auditors found that the income computed was short by Rs.32.68 crores. Further, the appellant was not correct in stating that there would be no difference in the overall profit as the securities in AFS & HTM category are valued at cost or market value, whichever is lower. The fact is that the appellant had 17 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
valued the HTM securities at cost and this is at variance with the appellant's statement above. For these reasons, the AO was justified in bringing to tax the profits that have been under-reported by the appellant in its accounts. Accordingly, this ground fails."
27. Aggrieved, the assessee is in appeal before us.
28. Before us, in addition to the original grounds of appeal, the assessee has also filed the additional grounds of appeal as follows:
"1. The addition made by the learned AO and sustained by the CIT(A) is not tenable in law since there was no rejection of accounts by the learned AO.
2. The learned CIT(A) erred in sustaining the addition by the learned AO without appreciating the fact that the AO had not rejected the books of account.
3. The learned CIT(A) erred in not appreciating the fact that the appellant has been consistently following the same accounting policy in the past."
29. We find that notional profit on sale of investment of trading book has been brought to tax by the AO relying on the statutory audit report as real income and following the order u/s 263 of the Act. The CIT(A) held that the AO was justified in bringing to tax the profits that have been unreported by the assessee in its accounts. The learned counsel for the assessee submitted that the issue is covered in favour of the assessee by the decision of CIT Vs. Realest Builders, 170 tax man 218 (SC) and in the case of CIT Vs. Bilahari Investment (P.) Ltd., 168 Taxman 95(SC) where it was held as under:
"Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee 18 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
results in distortion of profits, the Department can insist on substitution of the existing method. Further, in the present cases, we find from the various statements produced before us, that the entire exercise, arising out of change of method from completed contract method to deferred revenue expenditure, is revenue neutral. Therefore we do not wish to interfere with the impugned judgment of the High Court."
30. The department has to prove satisfactory that the accounts books are unreliable and incorrect or incomplete before it can reject the books of accounts and this can be done by showing that important transactions are omitted or if proper particulars and vouchers are not forthcoming or the accounts do not include entries relating to a particular class of business. Hence, assessee's appeal on this issue is allowed.
31. With respect to the additional grounds filed, the assessee has relied upon the following cases:
1. ACIT Vs. Intermedia Cable Communication (P) Ltd. [2012] 19 Taxmann.com 190 (Pune)
2. DCIT Vs. Associated Petroleum Corporation [2011] 44 SOT 45 (Ahd.)
3. Jai Pulse Mills Vs. ITO, [2010] 39 SOT 312 (Ahd.)
32. We find that the issue is dealt with in the case of ACIT Vs. Intermedia cable communication Pvt. Ltd., 19 taxman.com 190 (Pune) wherein it has been held as follows:
"How the AO can resort to estimation of income without rejection of accounts systematically maintained by the assessee for all the years under consideration and also without invoking the provisions of section 145 of the Act after duly complying with the conditions specified in them ? Should we encourage such callous approach of the AO, who did not bother to read the said provisions and conditions specified therein ?. AO's order does not contain a whisper about the provisions of section 145 of the Act, while he 19 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
proceeded to make best judgment of the assessment. This is not done. Therefore, in our considered opinion the AO made a best judgment assessments in this case assuming jurisdiction u/s 145(3) of the Act invalidly. Such assessments are unsustainable."
33. Following the decision of the coordinate bench in the case of Intermedia Cable Communications Pvt. Ltd. (supra), we allow the additional grounds raised by the assessee.
34. In the result, the appeal of the assessee being ITA No. 96/Hyd/10 is allowed.
ITA No97/H/10 AY 2006-07 - assessee's appeal
35. In this appeal, the assessee has raised the following grounds of appeal:
"Ground No. 1 is general in nature.
Ground No. 2.a) to 2.c) are directed against the action of the CIT(A) in confirming Rs. 3,17,01,996/- out of operating expenditure holding that expenditure to that extent was incurred by the appellant for earning tax free income.
Ground NO. 3.a) &b) are directed against the action of the CIT(A) in confirming the action of the CIT(A) in confirming the action of the Assessing Officer in disallowing deduction of Rs. 3,64,08,364/- claimed u/s 35D of the Act on account of expenditure incurred in connection with public issue for raising capital for expansion of appellant's business stating that the appellant is not an industrial undertaking.
Ground No. 4.a) &b) are directed against the of the CIT(A) in confirming the action of the Assessing Officer in disallowing provision of Rs. 38,50,26,716/- made on standard assets and claimed as deduction u/s 36(1)(viia) of the Act.20
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
Ground No. 5.a) to d) are directed against the action of the CIT(A) in confirming the action of the Assessing Officer in disallowing Rs. 175,60,43,567/- being depreciation/fall in value of investments held to maturity (HTM) category on the ground that the investments in HTM category cannot be treated as stock-in-trade, as per RBI guidelines and hence no depreciation is to be provided on these investments.
Ground No. 6.a) to c) are directed against the action of the CIT(A) in disallowing Rs. 5,07,12,515/- broken period interest (Net) at the time of purchase of HTM securities treating it as capital expenditure relying on the decision of Supreme Court in the case of Vijaya Bank Vs. CIT, 187 ITR 541.
Ground No. 7.a) & b) are directed against the action of the CIT(A) in confirming the action of the Assessing Officer in disallowing unrealized interest of Rs. 2,36,00,000/- on NPAs which was reduced from interest income.
Ground No. 8.a) &b) are directed against the action of the CIT(A) in confirming the action of the Assessing Officer in disallowing provision for leave encashment of Rs. 10,57,94,015/- on the ground that it is not an accrued liability but only a contingent liability."
36. In addition to the original grounds of appeal, the assessee filed a petition seeking admission of following additional grounds of appeal:
"1. Without prejudice to Ground No. 7 the learned CIT(A) ought to have allowed the unrealized interest of Rs. 236,00,000/- on Non-Performing Assets as deduction u/s 36(1)(vii) of the Act by treating the same as bad debts written off.
2. The appellant submits that it had written off Rs. 31,93,36,727/- as bad debts in respect of its non-rural branches during the assessment year and that the same be allowed as deduction u/s 36(1)(vii) of the IT Act, 1961."21
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
37. The first issue in Assessee's appeal is against the disallowance under 14A being expenditure attributable to earning of exempt income. The AO disallowed Rs. 33,64,10,125/-, being Rs 30,47,08,129/- interest on borrowed capital utilised in acquiring tax free securities and Rs. 3,17,01,996/- being 5% of the dividend earned of Rs.63,40,39,912/-. On appeal, the CIT(A) held that the AO erred in disallowing portion of interest expenditure of the Assessee amounting to Rs. 30,47,08,129/- as being related to borrowings utilised in acquiring tax exempt securities and confirmed the disallowance of Rs. 3,17,01,996/- being 5% of the dividend earned towards administrative expenses.
38. Aggrieved the Assessee is on appeal before us. The Assessee contended that they have not expended any amount in earning tax exempt income. They also cited case laws in support of their contention. But as the CIT(A) has observed, the Assessee has made investment in exempt investment in 9 branches in 164 tax free securities. This could not have been done without incurring expenditure on services of fund managers, legal advice, portfolio management, administrative cost, expenditure on manpower and other related costs. It cannot therefore be said that the Assessee has not expended any amount for earning tax free income. But as Rule 8D is not applicable to the year in appeal (Godrej and Boyce Mfg Co Ltd 328 ITR 1 Bom) the same has to be estimated. The AO has estimated such expenditure at 5% of the dividends earned. This has been confirmed by the CIT(A).
39. The learned counsel for the assessee relied on the following case laws:
22ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
1. Munjal Sales Corpn. Vs. CIT, Ludhiana [2008] 298 ITR 298 (SC).
2. CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.)
3. State Bank of Hyderabad Vs. DCIT, Hyderabad in ITA Nos.
661,662 & 663/Hyd/2003.
40. We find that the Delhi High Court in the case of CIT Vs. Oriental Structural Engineers Pvt. Ltd., in ITA No. 605 of 2012 dated 15 th January, 2013 has upheld the disallowance of reasonable amount based on the facts of the case. Following the decision of the Delhi High Court we direct the AO to disallow 2% expenditure as relating to earning of the exempted income u/s 14A as we find it reasonable looking into the facts of the case. The appeal of the Assessee is partly allowed.
41. The second ground of appeal is against the disallowance of deduction u/s 35D of Rs. 3,64,08,364/-. We find that this issue is covered against the Assessee by the order of the tribunal Assessee's own case in ITA Nos. 615 to 619/Hyd/2007 and 711/Hyd/2008 dated 22.5.2009 for the Assessment Years 2000- 01 to 2004-05. In that order the tribunal has observed as follows:
"7. We have duly considered the rival contentions and the material on record. The assessee has claimed deduction under S.35D (1) which has been denied to it by the Department. For immediate reference, we reproduce the provision, as it stood at the relevant time, below-
"35D.(1) Where an assessee, being an Indian company, Of a person, (other than a company) who is resident in India, lncurs, after the 31 sat day of March, 1970, any expenditure specified in sub- section (2),-23
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
(i) before (he commencement of his business, or
(ii) after the commencement of his business in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking Is completed or the new industrial unit commences production or operation:
Provided that where an assessee incurs after the 31 st day of March 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effected as if for the words. "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-
fifth of such expenditure for each of the five successive previous years" had been substituted."
The reason given by the Department to deny the deduction is that since the assessee's case falls under clause (u), it applies only to an industrial undertaking whereas the assessee is in the business of providing ban king services. On the other hand, the main argument of the learned counsel is that there is no reason to believe that before commencement of business, any business is eligible for deduction whereas after commencement of business only an industrial undertaking is eligible for deduction. Even if the provision is read as the Department reads it, it is contended that the assessee should be considered to be carrying on banking industry and in that case also, the assessee would be entitled for deduction. To further buttress his argument, the learned counsel has also drawn our attention to the words 'they new industrial unit commences production or operation'. The argument is that the word 'production' is used In connection with an industrial undertaking whereas the word 'operation' is 24 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
used in connection with any business other than industrial undertaking. Let us consider both the arguments.
8. It is said that Parliament never wastes words. If the argument of the learned counsel is to be accepted, there was no need to split the eligibility criteria into two clauses. It could have well said that, ' .... any expenditure specified in sub-section (2) before or after the commencement of his business/ the assessee shall, ... '. The deduction is contemplated in two different time zones. One is in respect of expenditure incurred before the commencement of business and the other is in respect of expenditure incurred after the commencement of business. The two clauses are meant for two different' time zones as mentioned above. The second clause is qualified by providing that after the commencement of business, the deduction would be available only in respect of the extension of the existing industrial undertaking or in respect of setting up of a new industrial unit. We reiterate that if the deduction was to be made available to any kind of business in both the time zones, then the qualification as inserted in clause (ii) would not have been necessary. If clause (ii) is to apply to any business, then it amounts to waste of words by the Parliament, which is expected, nor intended, nor presumed. However, against this the argument of the learned counsel is that the 'industrial undertaking' or 'industrial unit' is to be understood in a broader sense and the restricted meaning as given to it in the 80I group of sections is not to be given. Further, according to him, the,"word 'operation' is used in connection with that broader meaning only. On a very careful consideration of the argument, we are unable to accept the contention. It is true that the expression 'inldustrial undertaking' is not defined in the Act. In that case, tile options available with us is to adopt either the dictionary meaning or- the popular- meaning or the meaning ascribed to it in other statutes or the meaning in which the said expression has beer) Il'~ iJ in the same statute. In our considered view, tile rour appears to he the most reasonable to us. It cannot be forgotten we are interpreting a fiscal statute. In a fiscal statute, like tile Olle with which we are dealing, the nature of activity 25 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
has a bearing on the determination of the tax liability. Moreover, it has also been the endeavor of all the Governments to encourage industrial production or to encourage savings or to encourage certain social objectives, by incorporating appropriate provisions in the Income tax Act. The impugned provision was brought into tile statute book by the Taxation Laws (Amendment) Act, 1970 with effect from 1.4.1971. The need for industrialization was realised circa sixties and every successive year, we have seen amendments in the Income Tax Act, providing incentives for industrialisation. Therefore, there is a definite conscious decision on the part of the legislature to extend the deduction even after the commencement of business in case of industrial undertakings. It may be argued that if it was so, it could well have been a part of Chapter VIA of the Act. Perhaps, the reason for not grouping it along with other deductions in Chapter VIA, in our view, could be that the expenditure contemplated under this provision are as such capital in nature but as a special incentive. the amortization thereof has been allowed in a phased manner. They are not industry specific or activity specific and these expenses have to be claimed as normal revenue expenditure only over the specified period. Therefore, it finds place in Chapter IV pertaining to the computation of business income. The expression 'industrial undertaking' has been used at several places in the Act. Wherever an activity other than industrial is also to be covered for deduction, such other activity has been specified separately. As an illustration, 5.80I provides for deduction in respect of profits and gains from an industrial undertaking. Besides this, the said deduction is also available to profits derived from shipping business or by running a hotel. The activities of shipping and hotel have been separately specified over and above profit and from industrial undertaking. If industrial undertaking was meant to cover shipping and hotel industry, as is sometimes loosely stated, then separate mention of those activities would not have been necessary. Moreover, the expression 'industrial undertaking' is all through out the statute meant to be an undertaking which manufactures or produces an article or thing. Moving further, wherever a deduction is not meant only for 26 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
an undertaking which manufactures or produces an article or thing, the word 'undertaking' is alone used as is the case in 5.80IA. Therefore, the usage of the expression 'industrial undertaking' in 5.35D has a special significance and it has to be understood in the same meaning as it is understood in other provisions of the Act. It has to be an undertaking which manufactures or produces an article or thing.
9. The next contention of the learned counsel is that the industrial' is removed from the provision with effect from 1.4.2009. According to him, this amendment is meant to remove the hardship and clarify the situation, which always was and hence. it was retrospective in operation. We are unable to accept this argument as well, for the reasons that follow. Earlier, we drew attention to the Government's consciousness about industrialization. When the impugned provision was introduced about four decades back, except in a few areas, the service sector had not developed and its importance was also never realised. It is since last few years that the service sector has spread out in various fields and now, its importance has been realised. The telecom sector, the information technology sectors are but a few examples. Having realised the importance of the service sector, the Government thought it proper to extend the deduction to those sectors also and hence tile removal of the word 'industrial'. This intention, we have gathered from the notes on, clauses to Finance Bill, 2008, through which this amendment was brought about. It reads as follows-
"Clause 6 seeks to amend section 35D of the Income-tax Act. Relating to amortisation of certain preliminary expenses.
Under the existing provIsIOns of the said section, deduction for certain specified preliminary expenses in computing business income is allowed. The deduction is allowed at an amount equal to 1/5 th of such expenditure for five successive previous years. The preliminary expenses relate either to the period before the commencement of business or after. However, if preliminary 27 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
expenses relate to a period after the commencement of business, such expenses are only allowed if they are in relation to the extension of an industrial undertaking or the setting up of a new industrial unit.
The proposed amendment seeks to substitute the words "industrial undertaking" with the word "undertaking" and the words "industrial units" with the word "unit", wherever they occur in the said section. This is intended to provide benefit of amortization of specified post commencement preliminary expenses to all sectors for the extension of an undertaking or the setting up of a new unit.
This amendment will take effect from 1st April, will accordingly apply in relation to the year 2009-10 and subsequent assessment years."
The above note makes it clear that prior- to 1.4.2009, post commencement expenditure was not eligible for deduction in any other sector other- than industrial· sector. Thus, the amendment brought about is not to remove any hardship or to remove any ambiguity. So far as the legislature is concerned, it was conscious that post commencement expenditure was to be allowed only in the case of industrial sector. The judgment of the Supreme Court in the Suresh N .Gupta (297 ITR 392) cannot apply here. In that case, there was an ambiguity as to which rate of surcharge would be applicable -whether the rate provided for in the Finance Act of the year in which search was initiated or the year in which the search was concluded, or the year in which the block assessment was initiated on the year in which the block assessment order Was passed. There is no such ambiguity in S.35D. Similarly, in the case of of Ahmedbhai Umarbhai (supra) and Anglo French Textile Mill (supra), the word 'operation' has been explained in the context of the main activity of production in those cases. It is, no doubt true that the word 'operation' has been explained in the context of the main activity of production in those cases. It is, no doubt, true that the word 'operation' has a broad 28 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
meaning and can be used with reference to any activity. However, the meaning of the word depends on the company it keeps and in s. 35D, since it is used with reference to industrial undertaking, it has to be understood to be an operation connected with industrial undertaking only and nothing else. There may be certain activities prior to the commencement of actual production and income may accrue from such activities. It is to describe these activities, the word 'operation' has been in s.35D. Therefore, the two judgments referred to above, also cannot help the assessee.
10. Before parting, it may be mentioned that we have interpreted the provision as per the actual language used in the section, supported with the intention of the legislature gathered from the finance Bill, 2008. It was in the case of Kannailal Sur V/s Paramnidhi Sadhukhan (AIR 1957 SC 907 at p. 910), the Spureme Court said that the first and primary rule of construction is that the intention of the legislature must be found in the words used by the legislature itself. Again, in the case of Kanta Goel (Smt.) Vs. B.D. Pathak (AIR 1977 SC 1599 at p. 1661), the Supreme Court said that the interpretative effort must be illumined by the goal though guided by the word. We have kept these principles in mind while dealing with the issue.
11. In the light of the aforesaid discussion, we uphold the orders of the CIT(A) in confirming the disallowance."
42. Respectfully following the decision of the coordinate Bench, we uphold the order of the lower authorities disallowing the claim of deduction u/s 35D of Rs. 3,64,08,364/-. The Assessee's appeal on this issue is dismissed.
43. The next ground of appeal is regarding disallowance of provisions for Rs.38,50,26,716/- made on standard assets and claimed as a deduction under section 36(1)(viia). The assessee had made provisions for bad and doubtful debts of Rs.40,00,03,838/- and provisions of Rs.38,50,26,716/- in respect of standard assets and claimed the same. The CIT(A) followed the decision of the ITAT in the assessee's own case of the 29 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
assessment years 2000-01 to 2004-05 "A" Bench in ITA Nos.615 to 619/ and 711/ dated 22.05.2009 wherein it was observed as under:-
"It is prescribed by the RBI that the provision for standard assets need not be netted out from the gross advances but should be shown separately as "contingent provisions against standard assets". The heading itself is indicative of the fact that this provision is contingent in nature whereas the provision for non performing asset is to guard against a loss which is looming large on the bank or for the loss which was already taken place. Therefore, the RBI further prescribed that provision on standard assets should not be reckoned for arriving at net NPAs. The Act itself has given an option to the assessee to make provision for its doubtful or loss assets first proviso to Section 36(1)(viia). We do agree that the bank is bound to follow the RBI guidelines. But the deduction available has to be as per the provisions of the Act only. Accordingly, we uphold the order of the CIT(A) disallowing the deduction in respect of provision made for standard assets. Another provision disallowed by the revenue authorities is in respect of border line performing assets. Neither the RBI has given such classification in its guidelines in respect of such assets. The very nomenclature used by the bank suggests that the assets are skill performing, that is, still generating income for the bank through there may be some signs of concern. However, unless such assets are not classified as non performing assets and sub-classified as sub-standard, doubtful or loss assets, no deduction can be permitted. Thus, the disallowance thereof by the revenue authorities is upheld. This issue, as mentioned earlier is in respect of assessment year 2003-04 and 2004-05 only"
44. Aggrieved the assessee is in appeal before us.
45. Before us, the learned counsel for the assessee conceded the issue under consideration is squarely covered by the decision of the ITAT in its own case for AY 2003-04 and 2004-05 in ITA Nos. 618 & 619/Hyd/2007 vide order dated 22/05/2009. Therefore, respectfully following the decision of the ITAT in the 30 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
said order, we uphold the order of the CIT(A) on this issue and dismiss the ground of appeal of the assessee.
49. The next issue on appeal is disallowance of Rs.175,60,43,567/- being depreciation / fall in value of investment held to maturity (HTM) category on the ground that investment in HTM category cannot be treated as stock in trade as per RBI guidelines and hence no depreciation is to be provided on these investment.
50. The CIT(A) after elaborate discussions, held as follows:
"14.1 Considering my above observations and also as per the guidelines provided by the CBDT in Circular No. 665 and also on the basis of the above mentioned undisputed facts, I find that the securities held by the appellant in HTM category constitute investment and not stock-in-trade. Accordingly, the appellant is not entitled to claim depreciation/fall in value of securities under HTM category. This grounds of appeal is dismissed.
51. The learned counsel for the assessee cited the following decisions in support of assessee's case:
a) UCO Bank Ltd Vs CIT reported in 240 ITR 355
b) Andhra Bank Vs DCIT in ITA Nos.880 and 881 and 2075/Hyd/96 dated 29.11.2004
c) State Bank of Hydrabad Vs DCIT - ITA No 1232/Hyd/06 dated 28.11.2008
d) CIT Vs Karur Vysya Bank Ltd - TC(A) No.2139/08 dated 13.07.2009 (Mad) - SLP dismissed by the Supreme Court
e) ACIT Vs Corporation Bank in ITA No. 710/Bang/2010 dated 31.05.2011
f) ACIT Vs Vijaya Bank ITA No.225 & 253/Bang/07 dated 24.01.2008 31 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
50. We are of the opinion that the assessee Bank is holding various Government Securities in order to comply with the statutory liquidated ratio. The bank would have to hold requisite percentage of deposits in the form of cash, gold, government or approved securities. The government securities held for the purpose of comply with the SLR has been held to be stock in trade and therefore value of the same as on 31 st March has to be made and there is any depreciation the same should be allowed as a revenue deduction. However, the RBI has issued Circular wherein they have classified the investment made to comply with SLR requirement as `Held to maturity' (HTM), `Available for sale' (AFS) and `Held for Trade' (HFT). Based on the RBI Circular lower authorities came to the conclusion that investment in Government Securities which are classified under the head HTM cannot be considered as stock in trade and therefore depreciation in value of such securities cannot be allowed as a deduction. The Apex Court in the case of UCO Bank Ltd Vs CIT reported in 240 ITR 355 has held that value of the securities at cost or market value whichever is less should be accepted for income tax even if the banks in their books do not value on that basis. Therefore, it is an accepted proportion that investment made by the bank to comply with the SLR requirement would constitute their stock in trade and depreciation in value of the same is an allowable deduction.
51. Respectfully following the decisions cited by the learned counsel for the assessee, we uphold the claim of the assessee and direct the AO to allow depreciation / fall in value of investment in Government Securities including those classified under HTM category. No doubt the value in opening 32 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
stock in the next year would correspondingly be adjusted. This issue is decided in favour of the assessee.
52. The next ground of appeal is against the disallowance of Rs.5,07,12,515/- representing broken period expenses (net) at the time of purchase of HTM Securities. The assessee bank purchased government securities in order to comply with statutory requirement to maintain the SLR. The purchase price of the government securities would include element of interest for the broken period from the date of last payment of the interest till the date of purchase of the government securities. This portion is segregated and claimed as a deduction by the assessee. The reason for the same is that interest earned on these securities are assessed as business income at the time of receipt of the interest. Therefore that portion of the interest which belongs to the earlier holder till the date of purchase of the securities by the assessee should be deducted as expenses from the total interest earned. The assessee has on the same basis earned broken period interest in respect of securities which it has sold aggregating to Rs.516305643/- whereas broken period interest extended on purchase of securities aggregating to Rs.70,53,59,446/-. The Assessee has offered the broken period interest it has earned as income and claimed the broken period interest it has paid as deduction.
53. However the AO had disallowed the entire amount of broken period interest on the purchase of securities aggregating to Rs.70,53,59,446/- as a deduction but has not disturbed the broken period interest on sale of securities offered as income.
33ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
54. The CIT(A) has allowed broken period interest in respect of securities purchased which are held for trading and available for sale as they are to be treated as stock in trade and therefore broken period interest for these period are to be allowed. However, the CIT(A) held that broken period interest relatable to securities which are classified in `held to maturity' category cannot be allowed as these are not stock in trade.
55. Earlier in the order while considering the allowability of depreciation or reduction in valuation of the government securities held to comply with the SLR ratio, we have held that the entire such investment in order to comply with SLR would constitute stock in trade and classification of these assets by the RBI is not binding on the Income tax authorities. Such classification would not alter the characteristic of the investments to comply with SLR requirement as stock in trade.
56. As held by the Supreme Court in the case of Southern technologies Ltd v JCIT (320 ITR577), directions of the RBI are not binding for deciding the issue under the Income tax Act. Securities which are held for comply with SLR has consistently been held to be stock in trade. That being so there can be no further distinction and no part such holding will cease to be stock in trade merely because RBI has classified the same as `held to maturity'.
57. The Bombay High Court in the case of American Express International Ltd Vs CIT reported in 258 ITR 601 (Bom) and the Madras High Court in the case of Karur Vysya Bank Ltd in TC(A) No 2139 of 2009 dated 13.07.2007 has held that the broken period interest included in the purchase price of Government 34 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
securities held by the banking company to comply with SLR requirement is entitled to deduction.
58. Respectfully following the same, we direct the Assessing officer to allow a sum of Rs.5,07,02,515/- being broken period interest (net) included in the purchase value of HTM securities as revenue deduction. The assessee appeal on this issue is allowed.
59. The next is regarding deduction of Rs.23600000 being unrealised interest on NPA which is reduced from the interest income. The assessee had recognised interest of Rs.23600000/- on certain accounts during the assessment year 2005-06 the same was offered to tax also. These accounts became NPA during the assessment year 2006-07 the assessee therefore reversed interest of Rs.2.36 crores and reduced the same from the interest income for the assessment year 2006-07. The same was disallowed by the AO and confirmed by the CIT(A).
60. The assessee submits that these issue is covered by the decision of the Delhi High Court in the case of CIT Vs Industrial Finance Corporation reported in 201 Taxmann 75. In that case also the assessee reversed the income offered to it for tax in the earlier years on the ground that accounts are become NPAs.
The assessee has also raised additional ground, which is as follows:
"1. Without prejudice to Ground No. 7 the learned CIT(A) ought to have allowed the unrealized interest of Rs. 236,00,000/- on Non-Performing Assets as deduction u/s 36(1)(vii) of the Act by treating the same as bad debts written off.35
ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
61. The Delhi High Court held that income which was earlier recognised is not to be allowed in the subsequent year in case it is permissible for the assessee to write off such income in concerned assessment year when it was found that it was not recoverable. In this connection they have also referred to the decision of the Apex Court in the case of Vijaya bank reported in 323 ITR 166 and TRF Ltd reported in 323 ITR 397. The Delhi High Court upheld the claim of the assessee for deduction of interest reversed.
62. Respectfully following the above we direct the AO to allow deduction of Rs.2.36 crores being unrealised interest offered for tax in the earlier year now reversed by the assessee.
63. The next ground of appeal is against disallowance of provision for leave encashment. The assessee has provided leave encashment and claimed it as deduction. However, amount claimed for Rs.105691015/- , the same was disallowed in view of the amendment to Section 43B by the introduction of Sub Section
(f) which provides for allowing deduction on leave encashment only on the actual payment. There is nothing on record to show that the assessee has parted with the amount for making payment for the leave encashment. This was merely a provisions made by the assessee. No doubt, the Calcutta High Court in the case of Exide Industries Ltd Vs Union of India (292 ITR 470) held that they have struck down the Section 43B in a writ petition filed. But that decision which is applicable to parties to the writ petition and the same will not be applicable to the assessee in the appellate proceedings. The ITAT which is creature of the Income tax Act is bound by the provisions of the Act and therefore in view of the specific provisions of sub-clause (f) to Section 43B 36 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
the claim of the assessee for deduction of Rs.1056911015/- towards provisions for leave encashment cannot be allowed.
64. The appeal of the assessee on this issue is dismissed.
65. The assessee filed an additional ground before the Tribunal regarding deduction under Section 36(1)(viia) in respect of bad debts written off by the rural branch of the assessee bank. As this is a legal issue and the facts are available with the lower authorities, we admit the additional grounds.
66. We find that this issue is covered by the decision of the Apex court Catholic Syrian Bank Ltd reported in 343 ITR 270. We set aside the issue to the file of the assessing officer for dealing with the same in line with the decision of the Apex Court in the case of Catholic Syrian bank Ltd, supra.
67. In the result appeal of the assessee being ITA No. 97/Hyd/10 is partly allowed.
Andhra bank- ITA No 218/H/10- AY 2006-07 Departmental Appeal
68. The only issue in the revenue's appeal is against the disallowance u/s 14A being restricted to 0.5% of the investments and deletion of interest payments which the AO held to be relatable to investment in Tax free securities. AO disallowed interest payable by the Assessee to the extent of Rs. 30,47,08,129/- and of Rs. 3,17,01,996/- towards administrative expenses calculated at 5% of the tax free income of Rs. 63,40,39,912/- . On appeal the CIT(A) deleted the disallowance 37 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
of interest as he found that the Assessee had huge surplus of non interest bearing which was sufficient to make investments in interest free bonds. The Assessee bank had approximately Rs. 5800 Crores as capital and reserves amounting to Rs. 2803.94 crores and current deposits of Rs. 2906 Crores which carry no interest burden. Against this the Assessee Bank had made an investment of Rs. 1145.13 Crores in Bonds and advances, income from which is exempt from tax. The Assessee has given a table of Interest free funds available and the investment in tax free securities from 31.3.2002 onwards and we find that for all the years, interest free funds were more than the investments in tax free securities.
As on 31st March:
2006 2005 2004 2003 2002 Free funds 5800.62 4369.72 3671.52 2720.81 2279.08 Investment 1145.12 795.31 1021.73 649.84 594.08 69. It is the contention of the Assessee that the entire
investment of tax free securities were made out of interest free funds. They relied on the decisions of Munjal sales Corporation v CIT (298 ITR 298 SC): CIT v Reliance Utilities &Power Ltd ( 313 ITR 340 BOM). It has been held in these decisions that when the Assessee has sufficient interest free funds, the investments should be considered to have been made out of those funds and not interest bearing borrowals. It is only with the introduction of Rule 8D, interest expenditure was apportioned on the basis of investment, even though there was no direct nexus between the borrowals and the investments. Rule 8D is not applicable to the AY under appeal ( Godrej & Boyce Mfg Co Ltd (328 ITR 81 Bom). However it was held by the Bombay High Court a reasonable amount should be disallowed under 14A. In view of the above, we 38 ITA Nos. 95 to 97 & 218/Hyd/10 Andhra Bank Ltd.
uphold the order of the CIT(A) deleting the disallowance of interest disallowance of Rs.30,47,08,129/- u/s 14A.
70. As regards disallowance of administrative expenses, the CIT(A) upheld the disallowance of Rs. 3,17,01,996/- at 5% of the tax exempt income. We have held in the appeal by the Assessee that their contention that no expenses were incurred cannot be accepted. The expenditure to be disallowed is to be necessarily to be made on an estimate basis. We find that the Delhi High Court in the case of CIT Vs. Oriental Structural Engineers Pvt. Ltd., in ITA No. 605 of 2012 dated 15 th January, 2013 has upheld the disallowance of reasonable amount based on the facts of the case. We follow the said decision of the Delhi High Court and reduce the disallowance to 2% expenditure as relating to earning of the exempted income u/s 14A, which has been already decided in the Assessee's appeal in ITA 97/H/10 supra. In view of this decision the appeal by the revenue for a higher disallowance u/s 14A is partly allowed.
71. In the result, appeal being ITA No. 218/Hyd/10 is partly allowed.
72. To sum up, appeals being ITA Nos. 95 & 96/Hyd/10 are allowed, and appeals being ITA No. 97/Hyd/10 & ITA No. 218/Hyd/10 are partly allowed.
Pronounced in the open court on 04/04/2013.
Sd/- Sd/-
(CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 4 th April, 2013.
39
ITA Nos. 95 to 97 & 218/Hyd/10
Andhra Bank Ltd.
kv
Copy to:-
1) M/s Andhra Bank Ltd., Head Office, Dr. Pattabhi
Bhavan, Saifabad, Hyderabad.
2) DCIT, Circle 1(1), Hyderabad.
3) The CIT (A)-II, Hyderabad
4) The CIT-I, Hyderabad
5) The Departmental Representative, I.T.A.T., yderabad.