No.- I.T.A. Nos. 979, 1035/Bang/2013, 1493, 1440/Bang/2014 and 931, 903/Bang/2016

Vijay Pal Rao (Judicial Member) And Inturi Rama Rao (Accountant Member)

For the Assessee : G. Sarangan, Senior advocate, and S. Ananthan, Chartered Accountant
For the Department : G. R. Reddy, Commissioner of Income-Tax-Departmental Representative

ORDER

The order of the Bench was delivered by

1. These are cross-appeals filed by the assessee as well as the Revenue directed against different orders of the Commissioner of Income-tax (Appeals) (CIT(A)) for the assessment years 2009-10 to 2011-12. Since common issues are involved in all these appeals, we proceed to dispose of the same by this common order.

2. We shall now take up the assessee's appeal in I. T. A. No. 979/Bang/ 2013 for the assessment year 2009-10.

The assessee is a Government of India undertaking engaged in the business of banking. The return of income for the assessment year 2009-10 was filed on September 30, 2009 declaring a total income of Rs. 1691,78,60,322. The assessment against the said return of income was completed by the Additional Commissioner of Income-tax, LTU, (hereinafter referred to as the Assessing Officer (AO)) vide order dated November 11, 2011 passed under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") of the Income-tax Act, 1961 (hereinafter referred to as "the Act") after making the following disallowances :

3. Being aggrieved by the above assessment order, an appeal was preferred before the Commissioner of Income-tax (Appeals), LTU, Bengaluru, who, vide order dated March 29, 2013 allowed the appeal partly. While doing so, the Commissioner of Income-tax (Appeals) has confirmed the addition on account of bad debts of Rs. 543,00,00,000 holding that corresponding amount has not been reduced by write off of non performing asset.

4. Being aggrieved by the order of the Commissioner of Income-tax (Appeals) which is against the assessee is in appeal in I. T. A. No. 979/ Bang/2013 and the Revenue is in appeal in I. T. A. No. 1035/Bang/2013.

5. Now, we shall take up the assessee's appeal in I. T. A. No. 979/Bang/ 2013. The assessee raised the following grounds of appeal :

"1. The orders of the learned Commissioner of Income-tax- (Appeals), Bangalore, LTU, dated March 29, 2013 is bad in law and against the facts of the case.

2. The learned Commissioner of Income-tax (Appeals) erred in not allowing the bad debts claim of the appellant amounting to Rs. 543,00,00,000 under section 36(1)(vii) of the Income-tax Act, 1961.

2.1. The learned Commissioner of Income-tax (Appeals) erred in holding that the appellant-bank had not written off the bad debts.

2.2. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the amount was debited to the profit and loss account of the appellant-bank.

2.3. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the learned Assessing Officer had accepted the fact that the appellant-bank had written off the debts.
2.4. Without prejudice to the above, the learned Commissioner of Income-tax (Appeals) erred in deciding the issue on a ground totally different from that of the ground raised in the appeal memo without giving an opportunity to the appellant-bank.

3. The learned Commissioner of Income-tax (Appeals) erred in not allowing the claim of Rs. 259,81,00,000 made by the bank under section 36(1)(viii).

3.1. The order of the learned Commissioner of Income-tax (Appeals) is based on surmises and conjunctures.

3.2. The learned Commissioner of Income-tax (Appeals) erred in not accepting the method of computation of the appellant-bank without pointing any defect in the same.

3.3. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the appellant-bank had adopted a reasonable method for arriving at the profit from the eligible business.
4. The learned Commissioner of Income-tax (Appeals) erred in not allowing the amortisation amount of Rs. 115,88,22,975 being the premium paid on investments classified as held to maturity category.

4.1. The learned Commissioner of Income-tax (Appeals) erred in sustaining the addition on surmises and conjuncture.

4.2. The learned Commissioner of Income-tax (Appeals) failed to appreciate the fact that the appellant-bank had not agreed to the said disallowance.

For the above referred grounds or any other grounds that may be prayed at the time of hearing, the appellant prays that the order of the learned Commissioner of Income-tax (Appeals) be set aside and the disallowance and the additions made by the learned Assessing Officer be deleted."

6. Ground of Appeal No. 1 is general in nature and does not require adjudication.

7. Ground of Appeal No. 2 challenges the addition of Rs. 543,00,00,000 by disallowing the claim for bad debts written off. The Assessing Officer (AO) disallowed the claim by holding that credit balance available in the provision of for bad and doubtful debts in the assessee's case is much more than the amount of bad debts actually written off and claimed under section 36(1)(vii) of the Act. The Assessing Officer also placed reliance on the Full Bench judgment of the hon'ble Kerala High Court in the case of CIT v. South Indian Bank Ltd. [2010] 326 ITR 174 (Ker) [FB].

7.1 In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) confirmed the addition by holding that it is only a provision made for non performing asset account in the books of account. He further held that the assessee-bank had not complied with the conditions stipulated by the hon'ble apex court in the case of Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577 (SC).

7.2 We heard the rival submissions and perused material on record. The conditions which are required to be complied with for allowance of bad debt are that the amount of bad debt should have formed part of income in earlier years and it should have been written off in the books of account. The contention of the Commissioner of Income-tax (Appeals) is that the provision for bad debts was not actually written off and squared off from the debtor's account in the books of account. What constitutes write off has been settled by the hon'ble apex court in the case of Vijaya Bank v. CIT [2010] 323 ITR 166 (SC). In the said case, the hon'ble apex court held that reducing provision for bad debts from the debtor's account in the balance-sheet and debiting the provision for bad debts to the profit and loss account constitutes write off. The co-ordinate Bench of the Tribunal in the case of Joint CIT v. Vijaya Bank (I. T. A. Nos. 318 and 331/Bang/2014 dated July 22, 2016) to which both of us are parties after referring to the decision of the hon'ble apex court in the case of T. R. F. Ltd. v. CIT [2010] 323 ITR 397 (SC) and Vijaya Bank (supra) held as follows :

"9.2 We heard the rival submissions and perused the material on record. The only ground on which the Commissioner of Income-tax (Appeals) confirmed the addition made on account of bad debts is that debts have not been written off in the books of account. Similar issue had come up before the hon'ble Supreme Court in the case of Vijaya Bank (supra) wherein the hon'ble Supreme Court held that debiting the profit and loss account by provision for bad debts and reducing the same from the sundry debtors in the balance-sheet amounts to write off. The relevant part of the judgment is extracted below (page 171 of 323 ITR) :

'7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, the learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala v. CIT [1981] 130 ITR 95 (Guj) was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from April 1, 1989 hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in section 36(1)(vii) with effect from April 1, 1989 a mere debit of the impugned amount of bad debt to the profit and loss account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the profit and loss account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to the Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the profit and loss account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the asses see-bank had correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance- sheet and, consequently, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet was shown as net of the provision 'for impugned bad debt'. In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala (supra), a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, after the Explanation, the assessee (s) is now required not only to debit the profit and loss account but simultaneously also reduce loans and advances or the debtors from the assets side of the balance-sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for the impugned bad debt. This aspect is lost sight of by the High Court in its impugned judgment. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of the 1961 Act as there was an actual write off by the assessee in its books, as indicated above.

8. Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of the 1961 Act applies both to banking and non-banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the yearend in the balance- sheet is shown as net of the provisions for the impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee-bank to close each and every individual account of loans and advances or debtors as a pre-condition for claiming deduction under section 36(1)(vii) of the 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction under section 36(1)(vii) of the 1961 Act, twice over. (See order of the Commissioner of Income-tax (Appeals) at pages 66, 67 and 72 of the paper book), which refers to the apprehensions of the Assessing Officer). In this context, it may be noted that there is no finding of the Assessing Officer that the asses see had unauthorisedly claimed the benefit of deduction under section 36(1)(vii), twice over. The order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in the assessee claiming deduction twice over. In this case, we are concerned with the interpretation of section 36(1)(vii) of the 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that the assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. The assessee has instituted recovery suits in courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed.'

The assessee-bank had not produced any evidence that similar treatment was given in its books of account. Therefore, in the interests of justice, we remit this issue back to the file of the Assessing Officer to allow the same as deduction after satisfying himself that the provision for bad debts is debited to the profit and loss account and reduced the same from the sundry debtor's account in the balance- sheet."

7.3 The provisions of section 36(1)(vii) and 36(1)(viii) operate in different fields. Both are independent provisions as held by the hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270 (SC). Therefore, reliance placed by the Assessing Officer on the decision in the case of the Full Bench decision of the hon'ble Kerala High Court in the case of South Indian Bank Ltd. (supra) which is reversed by the hon'ble apex court in the case of Catholic Syrian Bank Ltd. (supra) therefore, is misplaced and had no relevance to the facts of the case. Therefore, this issue requires remand to the Assessing Officer for examining whether the provision for bad debts is actually reduced from sundry debtors account in the balance-sheet and the provision for bad debts is debited to the profit and loss account. If these conditions are satisfied, we direct the Assessing Officer to allow the same as deduction.

7.4 In the result, ground of Appeal No. 2 is partly allowed for statistical purposes.

8. Ground of Appeal No. 3 relates to the disallowance of the claim made under section 36(1)(viii) of the Act. The assessee-bank claimed deduction of Rs. 400 crores under section 36(1)(viii) of the Act in respect of profits derived from the eligible activity viz., (i) industrial or agricultural development, (ii) development of infrastructure facility in India ; and (iii) development of housing in India. The computation made by the assessee-bank in respect of the said activities is as under :

"Calculation of profits earned from long-term finance under section 36(1)(viii)

The Assessing Officer was of the opinion that the ratio of expenditure to the income is 89.33 per cent. at the entity level. Therefore the Assessing Officer held that the deduction claimed under section 36(1)(viii) is excessive and unreasonable and therefore, restricted the deduction to a sum of Rs. 111,19,00,000 thus making addition of Rs. 288,18,00,000.

8.1 On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) confirmed the addition. Being aggrieved, the assessee is in appeal before us.

8.2 We heard the rival submissions and perused the material on record. This issue had come up for consideration before the co-ordinate Bench of the Tribunal in the case of Joint CIT v. Vijaya Bank for the assessment year 2008-09 in I. T. A. Nos. 578 and 653/Bang/2012 dated February 27, 2015 wherein it was held as follows :

"46. We have considered the rival submissions. A plain reading of the provisions of section 36(1)(viii) of the Act clearly shows that what is relevant is profits derived from eligible business computed under the head 'Profits and gains of business or profession' and not the profits derived by the entity as a whole as has been done by the Assessing Officer and the Commissioner of Income-tax (Appeals). We therefore hold that the method of computation of deduction as done by the Assessing Officer and the Commissioner of Income-tax (Appeals) is incorrect. The profits derived from eligible business computed under the head 'Profits and gains of business or profession' as done by the assessee has been accepted by the Assessing Officer and the Commissioner of Income-tax (Appeals). There should be no difficulty in accepting the claim made by the assessee for deduction under section 36(1)(viii) of the Act. The assessee has also filed before us an alternate method of computation of deduction under section 36(1)(viii) of the Act to demonstrate that such alternate method will result in claim for deduction being made at Rs. 37,14,84,183. The said computation is given as annexure 2 to this order. We deem it appropriate to direct the Assessing Officer to examine the computation given as annexure 2 to satisfy himself that the claim as made originally was correct. The Assessing Officer is thereafter directed to consider the claim of the assessee for the correct amount of eligible deduction under section 36(1)(viii) of the Act. The relevant grounds are thus treated as allowed."

There is no dispute about the eligibility of the assessee-bank for deduction under section 36(1)(viii) of the Act. The only dispute is with regard to method of computation of deduction. The provisions of section 36(1)(viii) read as under :

"36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-. . .

(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent. of the profits derived from eligible business computed under the head 'Prof its and gains of business or profession' (before making any deduction under this clause) carried to such reserve account :

Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess."

There is no dispute as to the satisfaction of the conditions prescribed in the said provision. The dispute is only with regard to the method of computation of profits of the eligible business. The Assessing Officer was of the opinion that the eligible profits should be in the same ratio as it bears to the total profits of the bank to the total cost. Neither the provisions of the Act nor the rules prescribe the method of computation of eligible business. Therefore, the computation of income should be done by one of generally accepted methods. It is the contention of the assessee-bank that the expenses which are directly attributed to the assessee's business have been allocated to the eligible business and common expenses and general overheads are allocated or apportioned among the eligible business and non-eligible business in proportion to the turnover of the respective businesses. The methodology adopted by the assessee-bank is in conformity with the well-accepted method. However, we remit this issue to the file of the Assessing Officer to verify the methodology adopted by the assessee is in accordance with the stated method or not. If so, to accept the same.
8.3 This ground of appeal is therefore partly allowed for statistical purposes.

9. Ground of Appeal No. 4 relates to the disallowance of premium paid which is amortised on HTM securities. The factual background of the addition, as set out by the Assessing Officer vide paragraph 7 of the assessment order, reads as under :

"Disallowance of amortisation loss related to HTM securities
It is seen from schedule XI to the statement of income that the miscellaneous of Rs. 785,35,45,489 consists of the following :

The assessee was requested to explain the loss claimed of Rs. 115,88,22,975.07 on amortisation of investments. The assessee has replied by letter dated November 4, 2011. The assessee has stated as under :

'While valuing the HTM category of securities at the year end, the same will not be marked to market price but difference between the book value and face value will be apportioned over the remaining period of maturity. The difference between the book value and the face value will be the premium/broken period interest paid at the time of purchase of the particular security. Every year, at the year end, 1/9th of the amount (difference between the book value and the face value = premium/interest amount, V is the remaining number of years to maturity) will be debited to amortisation account and investment account will be credited.

Amortisation amount will be debited to the profit and loss account. As we treat all categories of securities as stock-in-trade, the amortisation accounted in the books of account is not added to the income in the return of income. The amount of 'loss on revaluation of securities/amortisation of premium' amounting to Rs. 115.88 crores. This amount is inclusive of premium/interest paid for the securities purchased in the earlier years. If the Assessing Officer is intending to consider the amount of the interest component included at the time of purchase is Rs. 90,54,75,365. In the assessment any amount to be considered to be added, either one of the above amount can only be considered.

The assessee's submission is considered. Since the securities in the held to maturity (HTM) category are in the nature of investments, the broken period interest paid at the time of purchase cannot be allowed as revenue expenditure. The difference between the book value and the face value which is actually the broken period interest/premium paid at the time of purchase has been amortised over a period by the assessee and such amortisation loss has been claimed in the books. The assessee has not added back to the amount in the computation of income.

The assessee has now consented to the disallowance and the addition of this amount to the total income. As consented by the assessee and as also on principle, the amortisation of loss of Rs. 115,88,22,975 is disallowed and added back to the assessee's income. (addition Rs. 115,88,22,975)"

9.1 On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) disallowed the same vide para graph 9.2 to 9.4 as under :

"9.2 I have gone through the facts and the submissions. The relevant portion from the Central Board of Direct Taxes Instruction No. 17 of 2008 is reproduced below :

'As per the RBI guidelines dated October 16, 2000 the investment portfolio of the banks is required to be classified under three categories viz held to maturity (HTM), held for trading (HFT) and available for sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity in the case of HFT and AFS securities forming stock-in-trade of the bank, the depreciation/appreciation is to be aggregated scrip-wise and only net depreciation, if any, is required to be provided for in the accounts.'

9.3 I find from the Assessing Officer's order that the appellant had itself categorised the amount as 'premium/broken period interest' being the difference between the book value and the face value of the securities and which is paid at the time of purchase of the particular security. Contrary to the practice followed by the appellant-bank from the financial year 2008-09 of treating HTM category as investment and HFT and AFS as stock-in-trade, the appellant submitted before the Assessing Officer vide letter dated November 4, 2011 as follows 'As we treat all categories of securities as stock-in-trade, the amortisation accounted in the books of account is not added to the income in the return of income. The amount of loss on revaluation of securities/amortisation of premium' amounting to Rs. 115.88 crores. This amount is inclusive of premium/interest paid for the securities purchased in the earlier years. If the Assessing Officer is intending to consider the amount of interest component included at the time of purchase is Rs. 90,54,75,365. In the assessment any amount to be considered to be added, either one of the above amounts can only be considered." (emphasis added).

Before me in appeal it was submitted that 'the premium paid does not include any broken period interest and no broken period interest is amortised'. It was also submitted that the quoted explanation given before the Assessing Officer was not correct as per the description of the HTM category investments in the books of the appellant.

9.4 The contrary claims made before the Assessing Officer and in appeal are found to be irreconcilable from the accounts of the appellant. It is also found that the appellant had agreed to the said disallowance. In view of this discussion I am not inclined to interfere with stand taken by the Assessing Officer. These grounds, therefore, fail."

9.2 We heard the rival submissions and perused material on record. Securities of HTM category form part of stock-in-trade. It is settled proposition of law that stock-in-trade should be valued at cost or market price whichever is less. Where the assessee had paid premium at the time of acquisition of securities which are held as stock-in-trade, the same should be allowed as deduction while computing income. This issue was considered by the co-ordinate Bench in the case of Ing Vysya Bank Ltd. v. Asst. CIT in I. T. A. No. 443/Bang/2012 dated August 14, 2013 wherein it has been held as follows :

"10. We have heard the rival submissions. The issue raised by the assessee in ground No. 2 is no longer res integra and has been decided by this Tribunal in the case of Sir M. Visweswaraya Co-operative Bank Ltd. v. Joint CIT (I. T. A. No. 1122/Bang/2010) for the assessment year 2007-08 order dated May 11, 2012. The following were the relevant observations of the Tribunal :

'03. Let us first take up the issue relating to amortisation of premium on investment in Government securities. Relevant grounds read as under :

"(i) The learned Commissioner (Appeals) ought to have appreciated that the appellant has to invest surplus fund in Government securities as per the RBI guidelines and the premium paid while investing in Government securities that are bought in the open market would have to be amortised till the maturity date of the security and thus the premium was written off was liable to be allowed as depreciation of value of securities ;

(ii) The learned Commissioner (Appeals) ought to have appreciated that the classification of securities for the RBI purposes would not take away the benefit which the appellant was entitled to and he ought to have appreciated that the case law referred to were distinguishable and accordingly he ought to have allowed the deduction as claimed in full."

04. The brief facts pertaining to this issue are that while framing the assessment under section 143(3) of the Income-tax Act, for the assessment year 2007-08, the Assessing Officer noticed that the assessee has claimed a sum of Rs. 26,40,237 under amortisation of premium on investments and the assessee had no explanation for the claim. Hence, he disallowed the same. While disallowing the same, the Assessing Officer followed the decision of the Madras High Court in the case of T. N. Power Finance and Infrastructure Development Corporation Ltd. v. Joint CIT [2006] 280 ITR 491 (Mad). Aggrieved, the assessee moved the matter in appeal before the first appellate authority.

05. The learned Commissioner of Income-tax (Appeals) after considering the submissions made before him and following the decision of the Madras High Court cited supra, came to the conclusion that the hon'ble Madras High Court has that merely because the RBI had directed the assessee to provide for non-performing assets, that direction cannot override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate for deduction not exceeding 5 per cent. of the total income only in respect of the provision for bad and doubtful debts which are predominantly revenue in nature or trade related and not for provision for non-per forming assets which are of predominantly capital nature. Thus, he was of the view that the assessee was not entitled to deduction of amortisation of premium on investments under section 36(1)(vii). Aggrieved, the assessee is in second appeal before us with this issue.

06. The learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) had failed to see the reason that a issue similar to that of the present one had been allowed by various Benches of the hon'ble Tribunals, namely :

• Catholic Syrian Bank Ltd. v. Asst. CIT [2010] 38 SOT 553 (Cochin) ;
• Khanapur Coop. Bank Ltd. v. ITO (I. T. A. No. 141/PNJ/ 2011(Panaji)) ;
• Corporation Bank v. Asst. CIT (I. T. A. No. 112/Bang/2008 (Bang)).

The learned counsel also placed reliance on the Board's Instructions No. 17 of 2008 and pleaded that the claim of the assessee be allowed as the assessee had the powers to debit in its profit and loss account a sum of Rs. 29.02 lakhs of amortisation of premium.

07. Per contra, the learned Departmental representative was unable to controvert to the submissions of the learned counsel for the assessee.

08. We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various Benches of the Tribunal, as under :
(i) Catholic Syrian Bank Ltd. v. Asst. CIT [2010] 38 SOT 553 (Cochin) :

An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analysing the issue in depth, the Bench has observed that with regard to amortisation of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee-bank is following the consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortisation of premium on Government securities. United Commercial Bank v. CIT [1999] 240 ITR 355 (SC) ; [1999] 156 CTR SC 380 and South Indian Bank Ltd. (I. T. A. No. 126/Coch/2004, dated September 19, 2005 followed."
(ii) Khanapur Co-op Bank Ltd. v. ITO (I. T. A. No. 141/PNJ/2011, dated September 8, 2011) :

The hon'ble Bench of the Panaji Tribunal had recorded its findings that '6. Likewise, the premium amortised at Rs. 1,78,098 is claimed to be in respect of securities held under the category "held to maturity". The Assessing Officer has taken them as long-term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the Central Board of Direct Taxes Instruction No. 17 of 2008 dated November 26, 2008 as reproduced hereinabove, the premium paid on such Government securities is required to be amortised over the period remaining to maturity. . .'

(iii) In the case of Corporation Bank v. Asst. CIT (I. T. A. No. 112/ Bang/2008 (Bang)) for the assessment year 2004-05, the earlier Bench had also held a similar view.

In the light of the above discussion and the case law discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.

11. We are of the view that in the light of the decision on the issue considered by the Tribunal, the claim made by the assessee has to be allowed. Accordingly, the Assessing Officer is directed to allow the claim of the assessee for deduction."

The fact that the assessee had agreed for disallowance before the Assessing Officer is of no consequence as it is settled principle of law that there is no estoppel against law. Therefore, respectfully following the decision of the co-ordinate Bench cited supra, we direct the Assessing Officer to allow the same as deduction.

9.3 In the result, the appeal bearing I. T. A. No. 979/Bang/2013 filed by the assessee is partly allowed for statistical purposes.

I. T. A. No. 1035/Bang/2013 (assessment year : 2009-10)
10. The Revenue raised the following grounds of appeal :
"1. The learned Commissioner of Income-tax (Appeals) erred on law and fact.
2. The learned Commissioner of Income-tax (Appeals) erred in restricting the disallowance under section 14A to 2 per cent. of the exempt income which is against the scope of the provisions of the Act.

3. The learned Commissioner of Income-tax (Appeals) erred in allowing depreciation on leased assets.

4. The learned Commissioner of Income-tax (Appeals) erred in allowing write off of miscellaneous items which were in the nature of debts receivable and should have been adjusted against the provision for bad and doubtful debts.

5. The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim that section 115JB is not applicable to a banking company, which is against the provisions of the Income-tax Act.

6. Any other ground that may be urged at the time of hearing of the appeal."

10.1 Ground of Appeal Nos. 1 and 6 are general in nature and do not require adjudication.

10.2 Ground of Appeal No. 2 challenges the direction of the Commissioner of Income-tax (Appeals) restricting the disallowance under section 14A to 2 per cent. of the exempt income. The factual background leading to the addition under section 14A as set out by the Assessing Officer vide paragraphs 3 to 3.8 is as follows :

"3. Disallowance under section 14A

3.1 The assessee has claimed the following incomes as exempt from Income-tax.

3.2 As per the provisions of section 14A of the Income-tax Act, no deduction is required to be allowed in respect of expenses incurred by the assessee in relation to the income which does not form part of the total income under the Income-tax Act. The assessee was requested to explain why the expenses should not be disallowed relating to the incomes claimed exempt. The assessee has replied by letter dated June 27, 2011 as under :

3.3 'The bank has claimed interest on PSU bonds (exempt under section 10(15)(iv)(h) amounting to Rs. 7.94 crores and dividend income (under section 10(34) and 10(35) amounting to Rs. 37.90 crores as exempt under section 10 and no specific expenditure was incurred for earning the income. The administrative expenditure is incurred to carry out various business activities, the income from, which is subjected to tax. There is no additional expenditure involved in earning the tax-free income. The exempted income is very small portion of the total income. Even in the absence of the said exempt income, the bank would have incurred the same expenditure.

3.4 The Assessing Officers in the past have estimated and had disallowed under section 14A notional expenditure approximating to 3 to 6 per cent. of the exempted income. We have established that as no direct expenses are incurred in earning such tax-free income as such no expenditure is attributed for disallowance. However, the Commissioner of Income-tax (Appeals) has for the assessment year 1998-99 and other years estimated that 2 per cent. of the exempted income can be attributed as expenses under section 14A and accordingly directed the Assessing Officer to disallow 2 per cent. of the tax- free income.

However, the Income-tax Appellate Tribunal in our own case for the assessment years 2000-01, 2002-03 and 2003-04 have upheld the bank's contention that when there is no specific expenditure, no expenditure can be attributed under section 14A, based on the decision of the hon'ble High Court of Karnataka in the case of Maharashtra Apex Corporation Ltd. v. CIT [2006] 286 ITR 585 (Karn). Following the Income-tax Appellate Tribunal orders in our case, for the assessment years 2005-06 and 2006-07 the Commissioner of Income-tax (Appeals) has held that estimating the expenditure for the purpose of disallowance under section 14A of the Income-tax Act 1961 is bad in law and confirmed that the Assessing Officer cannot add any expenditure under this head.

However, we have offered a sum of Rs. 91,69,320 as expenditure which is disallowable under section 14A at 2 per cent. on the following amounts.

3.5 As computed in the previous assessment year 2008-09 our computation under rule 8D is as under :

In the past the Assessing Officers were estimating the income for disallowance on the ratio of the 'head office other expenditure' to that of 'head office income' as under :

Proportion of the head office other expenditure to the exempted income Rs. 43,22,952.

If the Assessing Officer is not agreeing with the method of calculation made by the assessee, in terms of the provisions of section 14A and rule 8D the expenditure that is required to be disallowed is the expenditure incurred by an assessee in relation to income which does not form part of the total income has to be worked.

3.6 On a perusal of the assessee's submission, it is seen that the assessee has not appreciated the provision of section 14A properly. Sub-section (2) of section 14A stipulates that 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. The mechanism of determination of the amount of expenditure relatable to exempt income is prescribed in rule 8D of the Income-tax Rules, 1962 which were inserted by the fifth amendment with effect from March 24, 2008. A perusal of rule 8D will indicate that there are three sub components of such expenditure which is relatable to exempt income. The provisions of rule 8D are extracted hereunder :

'I. Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with -

(a) the correctness of the claim of expenditure made by the assessee ; or

(b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

II. The expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts, namely :

(i) the amount of expenditure directly relating to income which does not form part of total income ;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely

A × B
 C

 Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;

B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ;

C = the average of total assets as appearing in the balance- sheet of the assessee, on the first day and the last day of the previous year ;

(iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.

III. For the purposes of this rule, the "total assets" shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.'

3.7 The assessee has offered for disallowance of an amount of Rs. 91,69,320 in the computation of income which is 2 per cent. of the exempt income. The disallowance offered by the assessee is not accepted considering that there would be direct and indirect expenses for earning the exempt income which cannot be quantified by any other method than the application of rule 8D of the Income-tax Rules, 1962, in consonance with section 14A of the Income-tax Act, 1961. Therefore, I proceed to disallow the expenses under rule 8D of the Income-tax Rules. Here, it is further pointed out that the hon'ble Special Bench of the Income-tax Appellate Tribunal Mumbai has held in the case of ITO v. Daga Capital Management Pvt Ltd. [2009] 312 ITR (AT) 1 (Mumbai) that application of rule 8D read with section 14A with retrospective effect and also that the rule 8D applies wherever there is a claim of exempt income.

3.8 The disallowance under rule 8D is computed as under :
(i) The amount of expenditure directly relating to income which does not form part of Rs. 91,69,320.

(The assessee has stated in submission dated June 27, 2011 in paragraph 12 that 'we have not incurred any direct expenditure that can be disallowed, however, as offered in the return of income a sum of Rs. 0.92 crore can be attributed under this clause.')

(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula nil

(The assessee has stated in the submission dated June 27, 2011 in paragraph 12 that 'We have not incurred any interest expenditure for earning the exempted income. For this assessment year our total funds in the form of capital and reserves amounts to Rs. 12207.77 crores and the investment made for earning the interest Rs. 85 crores, dividend is Rs. 1418.10 crores (average investments). Since we have not borrowed any amount for making such investments the amount disallowable under this clause is 'nil.'

(iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.

Value of investments in respect of shares and exempted bonds :

The assessee has disallowed Rs. 91,69,320 while filing the return. A further disallowance of Rs. 7,09,00,000 is made under section 14A read with rule 8D. (disallowance Rs. 7,09,00,000)."

10.3 On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) accepted that the disallowance under section 14A should be restricted to suo motu allowance made by the assessee at Rs. 91,69,320. This issue has come up for consideration before the co-ordinate Bench (same hon'ble members) for the earlier assessment year wherein it was held as follows :

"14.5 We heard the rival submissions and perused material on record. It is undisputed fact that the assessee earned tax exempt income from the following sources :

It is the contention of the assessee-bank that no expenditure was incurred for earning the above exempt income which does not form part of the total income. The provisions of section14A of the Act state that no deduction shall be allowed in respect of an expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Under the provisions of sub- section (2) of section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with methods prescribed i.e., rule 8D of the Income-tax Rules. Therefore, at the first instance, himself examine the claim of the assessee that no expenditure was incurred to earn exempt income and it is only thereafter, and only if the Assessing Officer is not satisfied on this account, and after making reference to accounts, he is entitled to adopt the method prescribed under rule 8D of the Income- tax Rules. Rule 8D of the Income-tax Rules read as under :

'8D. Method for determining amount of expenditure in relation to income not includible in total income.-(1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with-

(a) the correctness of the claim of expenditure made by the assessee ; or
(b) the claim made by the assessee that no expenditure has been incurred,

in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :

(i) the amount of expenditure directly relating to income which does not form part of total income ;

(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely . . . ."

14.6 Sub-rule (1) of rule 8D extracted above states that, the Assessing Officer having regard to accounts of the assessee and not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income can go on to determine disallowance under sub-rule (2) to rule 8D of the Income- tax Rules. Sub-rule (2) does not come into operation until and unless specific condition in sub-rule (1) is satisfied. This position is reiterated by the hon'ble High Court of Karnataka in the case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi), and the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom). The Assessing Officer had not given any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn exempt income was incorrect. In the absence of such finding, resort cannot be had to the provisions of sub-rule (2) of rule 8D as held by the hon'ble High Court in the cases cited supra. Furthermore, it is undisputed fact that exempt income is earned from securities which are held as a part of stock-in-trade. The hon'ble Bombay High Court in the case of CIT v. India Advantage Securities Ltd. [2016] 380 ITR 471 (Bom) held that the provisions of section 14A have no application in case assets are held as stock-in-trade. Therefore, the provisions of section 14A cannot be applied in the present case. Furthermore, in the assessee's own case, the hon'ble High Court of Karnataka held that no notional expenditure can be attributed to exempt income in the case cited supra. Accordingly, we hold that no disallowance can be made under section 14A of the Act. The ground of appeal of the Revenue is dismissed."

10.4 As extracted above, no disallowance under section 14A can be made in the absence of finding as to the correctness or otherwise of the computation made by the assessee. In the present year, the assessee-bank itself has offered to tax a sum of Rs. 91,69,320 which was upheld by the Commissioner of Income-tax (Appeals). Since the assessee is not in appeal, we uphold the disallowance. Accordingly, the finding of the Commissioner of Income-tax (Appeals) does not call for an interference. The ground of appeal is dismissed.

11. Ground of Appeal No. 3 relates to depreciation on the leased assets to the Kedia group of companies. This issue is only consequential in nature, as in the earlier years viz., 2008-09 and 2007-08, we allowed the claim vide order dated July 13, 2016 in Miscellaneous Petition Nos. 42 and 43/Bang/ 2016 in I. T. A. Nos. 684/Bang/2012 and 813/Bang/2011. This ground of appeal is dismissed.

12. Ground of Appeal No. 4 relates to write off of miscellaneous items disallowed by the Assessing Officer. The factual background leading to the above addition, as set out by the Assessing Officer vide paragraph 6 of the assessment order as under :

"6. Write off of miscellaneous items

6.1 The assessee has written off the expenditure of Rs. 37,60,346 during the year under the narration 'miscellaneous items written off'. On this issue, the assessee has submitted in letter June 27, 2011 as under :

'The debit items under certain heads where the bank could not recover/adjust for long are written off and credit entries are written back. The amount outstanding under balancing/clearing differences, unreconciled entries under bankers account, long pending entries under sundry assets on account of fraud and misappropriation, short age of cash, mutilated notes and branch adjustment account etc., are written off/written back after exhausting all possible efforts to adjust the same. Subsequent recoveries from such written off amounts and similarly credit items written back are accounted under commission account and offered to tax.'

It is seen from the assessee's submission that the amount debited to the profit and loss account is in the nature of write off of petty debts receivable from the customers or other banks etc. The amount should have been adjusted against the provision of bad and doubtful debts available in the assessee's books. The issue has been discussed in detailed in paragraph 1 of the order.

Accordingly, the amount of Rs. 37,60,346 is disallowed and added back to the income of the assessee under the Income-tax Act. (addition Rs. 37,60,346)."

12.1 On appeal before the Commissioner of Income-tax (Appeals), the same was allowed vide paragraph 8.3 of the order as follows :

"8.3 I have gone through the Assessing Officer's reason for disallowance as well the submissions of the appellant and I am unable to agree with the stand taken by the Assessing Officer. It is clear from the nature of entries included under 'miscellaneous items written off' that they are extremely diverse and cover a huge gamut from frauds, misappropriations, shortage of cash and stamps to various sundry amounts remaining unadjusted or unrecovered for long and the items cannot be related to advances as has been done by the Assessing Officer, I find that he has not identified any item of advances in the debited items which he could relate to the provision created for rural advances of the bank under section 36(1)(viia). On the contrary, they are clearly relatable to practices and systems arising out of the carrying on of the business of banking and are incidental to it. Hence, in terms of the judicial decisions cited above they are part of the accepted commercial practices in the line of banking. The disallowance is, therefore, directed to be deleted. These grounds, accordingly, succeed."

12.2 We heard the rival submissions and perused material on record. This issue has come up for consideration before the co-ordinate Bench in I. T. A. No. 318/2014 wherein it was held as under :
"Ground No. 4 relates to the direction of the Commissioner of Income-tax (Appeals) deleting the addition on account of sundry assets written off. The Assessing Officer disallowed the same treating it as bad debt written off.

14.1 The learned Departmental representative relied on the order of the Assessing Officer. On the other hand, the learned authorised representative of the assessee submitted that sundry debts written off represent penalties imposed in respect of accounts which are in operative for not maintaining of minimum required balance etc. The system automatically debits the customer's account with such charges wherever required. However, in some cases such charges were not recovered at all as the customers chose not to revive their accounts. Such outstanding balances/sundry assets were written off. It is submitted that whenever there was recovery the same were offered to tax. Sundry assets do not mean bad debts as bad debts pre-suppose existence of a debtor. There was no debtor and creditor relationship in these cases, as no money was lent to them. It is nothing but non- recovery of services charges.

14.2 We heard the rival submissions and perused the material on record. In the present case, amounts written off represent services charges. It is undisputed fact that in the year of recovery the same were offered to tax. Therefore, we do not find any fault with the reasoning adopted by the Commissioner of Income-tax (Appeals) in allowing the same as the conditions prescribed under section 36(1)(vii) are not applicable to the present case. Therefore, this ground of appeal is also dismissed."

Respectfully following the decision of the co-ordinate Bench in the case cited supra, dismiss this ground of appeal.

13. Ground of Appeal No. 5 is on the applicability of the provisions of section 115JB of the Act. This issue had come up before the co-ordinate Bench in the case of the assessee for the assessment year 2005-06 in I. T. A. No. 305/Bang/2011 dated June 18, 2012 wherein it was held as follows :
"7. We have heard the rival submissions and considered the facts and material on record. There is no dispute about the fact that the assessee is a bank and in this the assessee's case, the provisions of section 115JB have been invoked. There are at least two decisions of this Tribunal in the case of banking companies itself as listed below :

(i) Union Bank of India v. Asst. CIT (I. T. A. Nos. 4702 and 4706/ Mumbai/2010 dated June 30, 2011)
(ii) Indian Bank v. Addl. CIT (I. T. A. No. 469/Mds/2010 dated August 3, 2011).

In both these decisions, the respective Benches have followed the decision of the Mumbai Bench in the case of Krung Thai Bank PCL (supra) and held that section 115JB is not applicable to banking company. The decision relied on by the learned Departmental representative in the case of HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409 (SC) is not applicable. In that case, the assessee is not a banking company and hence, in our considered view that decision will not help the Revenue. Since there are more than one decision in favour of the assessee, following the same, we are inclined to hold that the provisions of section 115JB are not applicable to the assessee being a banking company. Hence, we are of the view that invoking of section 263 is not correct and accordingly quash the action under section 263 of the Act."

13.1 Respectfully following the decision of the co-ordinate Bench we hold that the assessee-bank is not liable for tax under section 115JB for the year under consideration. Therefore, we do not find any infirmity in the order of the Commissioner of Income-tax (Appeals). This ground of appeal is dismissed.

13.2 In the result, the appeal filed by the Revenue is dismissed.

Assessee's appeal in I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11 :
14. The assessee raised the following grounds of appeal :

"1. The order of the learned Commissioner of Income-tax (Appeals), LTU, Bangalore dated August 28, 2014 is against law and facts of the case.

2. The learned Commissioner of Income tax (Appeals), erred in law in confirming the disallowance of the bad debts claim under section 36(1)(vii) amounting to Rs. 438,00,00,000.

2.1. The learned Commissioner of Income tax (Appeals) erred in holding that the appellant bank did not write off the debts of Rs. 438,00,00,000.

2.2. The learned Commissioner of Income tax (Appeals) erred in holding that the amount of Rs. 438,00,00,000 is a provision and not a write off.

2.3. The learned Commissioner of Income tax (Appeals) erred in holding that the debts are to be written off at the branch level.

2.4. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the appellant-bank had submitted the individual bad debts details of the write off.

2.5. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that in order to claim deduction under section 36(1)(vii), it is not necessary to prove that such debt has become bad.

2.6. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the amount of Rs. 438,00,00,000 debited to.

Profit and loss account and reduced from loans and advances which amounts to write off.

2.7. The learned Commissioner of Income tax (Appeals) erred in relying on the concept of write off norms as defined/explained in the Reserve Bank of India guidelines.

2.8. The learned Commissioner of Income tax (Appeals) failed to appreciate that fact that the appellant has offered to tax the write back on account of recovery/upgradation of such kind of bad debts written off in the earlier years under section 41 of the Income-tax Act, 1961.

2.9. The learned Commissioner of Income tax (Appeals) erred in making the addition on surmises and conjunctures.

2.10. The learned Commissioner of Income tax (Appeals) erred in relying on the facts of some other assessee.

2.11. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that on the same set of facts the jurisdictional Appellate Tribunal and the hon'ble High Court have allowed the deductions to various banks.

3. The learned Commissioner of Income tax (Appeals) erred in law in confirming the disallowance of the provision for bad debts claimed under section 36(1)(viia) amounting to Rs. 575,05,63,090.

3.1. The learned Commissioner of Income tax (Appeals) erred in law in holding that rule 6ABA prescribes only fresh/incremental advances are to be considered for arriving at the aggregate average advances.

3.2. The learned Commissioner of Income tax (Appeals) erred in interpreting that as per rule 6ABA 'advances made' to be read as 'made during the month'.

3.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that section 36(1)(viia) being an incentive provision should be interpreted liberally.

3.4. The learned Commissioner of Income tax (Appeals) failed to recompute the 'total income under section 36(1)(viia) after making the additions made in the assessment' for the purpose of allowing the deduction under section 36(1)(viia).

3.5. The learned Commissioner of Income tax (Appeals) erred in holding that the appellant-bank did not made any provisions for the entire amount of bad and doubtful debts of Rs. 900,00,00,000 and wrongly concluding that the judgment of the hon'ble Punjab and Haryana High Court decision is applicable to the appellant-bank's case.

3.6. The learned Commissioner of Income tax (Appeals) erred in confirming the addition on surmises and conjunctures.

3.7. The confirmation made by the learned Commissioner of Income tax (Appeals) of the computation made by the Assessing Officer is based on prejudices and against the facts and the records of the case.

4. The learned Commissioner of Income tax (Appeals) erred in law and on facts in confirming the disallowance of the depreciation amounting to Rs. 1008,20,09,971 on investments which are stock-in- trade of the bank.

4.1. The learned Commissioner of Income tax (Appeals) erred in law in disallowing the depreciation on investments considering that the entire depreciation claimed by the appellant holding that the entire depreciation pertains to securities classified under HTM cate gory only which was capital asset.

4.2. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the investments of the appellant-bank are stock-in-trade and the appellant-bank is eligible to claim the loss arising out of the valuation of the stock at cost or market value whichever is lower.

4.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that once an income is taxed under the head business/profession, then the stock on hand should be considered as stock-in-trade and the valuation loss arising by valuing the same at lower of cost or market value is an allowable deduction.

4.4. The learned Commissioner of Income tax (Appeals) wrongly concluded that the RBI guidelines prohibit the trading of HTM category investments and hence it cannot be treated as stock-in-trade and then ignored the decisions of the jurisdictional High Court.

4.5. The learned Commissioner of Income tax (Appeals) erred in relying on the decision in the caseof Ing Vysya Bank Ltd. which is distinguishable on facts.

4.6. The learned Commissioner of Income tax (Appeals) erred in law in redirecting the matter to the Assessing Officer to re-examine the issue of allowing the depreciation on investments amounting to Rs. 55,01,13,332 in respect of securities held outside India, in overseas branches.

4.7. The learned Commissioner of Income tax (Appeals) erred in coming to the conclusion that the appellant-bank had offered all the income and expenditure of the overseas branches and only claimed relief for the taxes paid under section 90 of the Income-tax Act as per the Double Taxation Avoidance Agreement.

5. Without prejudice to ground No. 4 relating to depreciation on investments, the learned Commissioner of Income tax (Appeals) erred in not taxing the profit arising on sale of HTM investments under the head 'Capital gains', whereas the same is treated as business income.

5.1. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that once an asset is treated as capital asset, then the income from the transfer of the same has to be taxed only under the head 'Capital gains'.

6. The learned Commissioner of Income tax (Appeals) erred in law and on facts in confirming the disallowance of the claim of Rs. 542,37,31,200 in respect of profit from long-term finance under section 36(1)(viii) for the special reserve created.

6.1. The learned Commissioner of Income tax (Appeals) erred in law in not appreciating the fact that the appellant-bank computed the income from long-term finance consistently in the similar manner in all the years of its claim as provided in that section.

6.2. The learned Commissioner of Income tax (Appeals) erred in law in confirming the Assessing Officer's contention of disallowing the deduction on the basis that the profit from long-term finance should be arrived by preparing separate profit and loss account in respect of the deduction under section 36(1)(viii).

6.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that there is no requirement in law to maintain separate books of account or the preparation of separate profit and loss account for the purpose of claiming deduction under section 36(1)(viii).

6.4. The learned Commissioner of Income tax (Appeals) failed to conclude that the appellant-bank computation is not reliable and comprehensive without giving an alternate reliable method of computation for claiming deduction under section 36(1)(viii).

6.5. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that section 36(1)(viii) being an incentive provision should be interpreted liberally.

7. The learned Commissioner of Income tax (Appeals) erred in law and on facts in sustaining the addition of the commission and locker rent received in advance amounting to Rs. 112,83,79,281 as income.

7.1. The learned Commissioner of Income tax (Appeals) erred in sustaining this addition without rejecting the books of account of the appellant-bank.

7.2. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the income to that extent did not accrue to the bank.

7.3. The learned Commissioner of Income tax (Appeals) ignored the consistent method adopted by the appellant-bank in not offering the commission and locker rent received in advance but offered in the year it is accrued.

7.4. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that on the same set of facts, in the earlier years, the advance amounts received by the appellant-bank was not taxed as income.

7.5. The learned Commissioner of Income tax (Appeals) failed to distinguish the facts of the judicial decision referred by the Assessing Officer to that of the appellants-bank case and drawing conclusions without verifying the facts of the case.

7.6. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years.

7.7. In the alternative, the learned Commissioner of Income tax (Appeals) failed to direct the Assessing Officer to exclude the above referred added amount from the income of the appellant-bank in the subsequent years since the same has been offered to tax.

8. The learned Commissioner of Income tax (Appeals) erred in law in sustaining the disallowance the unrealised gains on revaluation of forward contracts in foreign exchange amounting to Rs. 36,28,87,643.

8.1. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the unrealised gains cannot be taxed and only real income can be taxed.

8.2. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the unrealised gains did not accrue to the appellant-bank.

8.3. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that the entries in the books alone cannot be the basis for taxing a receipt.

8.4. The learned Commissioner of Income tax (Appeals) ignored the consistent method adopted by the appellant-bank in offering the unrealised gains to tax over the years.

8.5. The learned Commissioner of Income tax (Appeals) failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years as the appellant-bank had offered to tax on the date of actual realisation. The fact finding authorities failed to find that the appellant-bank had offered to tax the deduction claimed in the previous assessment year.

For the above mentioned grounds or any other grounds that may be pressed at the time of hearing, the appellant prays that its appeal be allowed."

15. Ground of Appeal No. 1 is general in nature and do not require adjudication.

16. The assessee challenges the disallowance on account of bad debts vide ground of Appeal No. 2. For the assessment year 2009-10, in the assessee's appeal in I. T. A. No. 979/Bang/2013, this issue was remanded back to the file of the Assessing Officer for the purpose of verification whether bad debt was reduced from sundry debtor's in the balance-sheet and debited to the profit and loss account. Similarly for this assessment year also, the issue is remanded back for the limited purpose of verifying the same and to allow it as deduction.

17. Ground of Appeal No. 3 challenges the methodology of computation of deduction in respect of profits of rural branches as provided under section 36(1)(viia) of the Act. The assessee-bank made a claim of Rs. 900 crores towards deduction in respect of rural branches under the provisions of section 36(1)(viia) of the Act. The working furnished by the Assessing Officer is as under :

Deduction at 10 per cent. of aggregate average of rural branches :

17.1 According to the Assessing Officer, the assessee-bank computed wrong computation of average aggregate advances (AAA) for the following reasons :

"1. Population of many of the rural branches had already exceeded 10,000.

2. Further in several cases it was not rural branch and rather it was situated urban agglomeration.

3. Apart from this while the computing the average aggregate advances the assessee-bank has taken into account the running balance of the advances made in the previous year as the opening balance of the subsequent year and computed the outstanding balance at the end of last day of each month comprised in the previous year. While computing the average aggregate advances the assessee-bank should have considered the fresh amount of advances made by each rural branch as outstanding at the end of each month comprised in the previous year rather the running balance. In this process, substantial amount of deduction has been claimed over and above the eligible amount."
Show-cause notice dated September 26, 2012 was issued to the asses see-bank. In response to the same, the assessee furnished reply vide its letter dated December 18, 2012 as under :

"The details of rural branch advances are already submitted as required under rule 6ABA. The population figures considered for the purpose are of census 2001. We enclose the census certificates of rural branches collected by us/downloaded by Census Department website in support of our claim."

Finally, the Assessing Officer computed deduction of Rs. 324,94,36,110 working of which is as under :

From above working, it is clear that while calculating the average aggregate advances of rural branches, the Assessing Officer has considered only incremental advances alone whereas the assessee-bank calculated the average aggregate advances on the outstanding advances. Thus, variation between amount of claim made by the assessee-bank and allowed by the Assessing Officer i.e., on account of two accounts (i) branches which are urban and rural branches having population of more than 10,000 and branches for which no information was furnished by the assessee and on account of methodology of computation to arrive at the average aggregate advances of rural branches.

17.2 On appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) held as follows :

"9.6 I have considered the appellant's submissions as above along with the Assessing Officer's interpretation of 'advances made' to be read as 'made during the month'. On a simple and plain reading of the rule I am inclined to agree with the Assessing Officer since the words 'made by' in clause (a) of rule 6ABA (supra) and the reference to 'last day of each month' therein suggests a connection through the linkage of 'made during the month'. The word 'made' as used in clause (a) suggests an activity with immediacy, relevant to the current period instead of a historicity relevant to an action taken over multiple years in the past. If the assessee's interpretation is correct including taking the opening balance at the beginning of the year into account) the appropriate language to have been used in the rule would be 'amount of advance of each rural branch outstanding' the use of the word 'made by' implies an activity to be correlated to a time/period that may be overtly mentioned or passively understood as in the present context. This interpretation is closer to the Assessing Officer's understanding that the reference is to advances made during the month and which are outstanding at the end of each month. I have also noted with concern the fact that the assessee-bank failed to furnish the details of fresh advances made by each such rural branch in every month comprised in the previous year to compute the average aggregate advances, in spite of numerous opportunities provided by the Assessing Officer.

9.7 The Assessing Officer has noted that by claiming 10 per cent. of average aggregate advances year after year on the running advance instead of advances made by each rural branch during the year which was outstanding at the end of the month the assessee had claimed benefit beyond the scope of section 36(1)(viia) over the years. This would explain why the provision of non-performing asset as per the annual report (Rs, 788.60 crores) does not match with the credit balance of the provision computed as per the Income-tax Act (Rs.3898 crores). In this regard reliance is placed upon the judgment of the hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 (P&H) where it was held that making of provision for bad and doubtful debts equal to the amount mentioned in section 36(1)(viia) was a condition precedent for allowing deduction under the said section. This order was followed by the hon'ble Income-tax Appellate Tribunal Bangalore in the case of Syndicate Bank v. Deputy CIT (I. T. A. Nos. 668 and 669/ Bang/2010) [2013] 26 ITR (Trib) 501 (Bang) in order dated June 19, 2013. The hon'ble Bench had directed that the deduction under section 36(1)(viia) was to be limited to the amount of the provision claimed and could not exceed it. The appellant's matter is, therefore to be concluded in the light of this judgment. In view of the discussion as above, I find it reasonable to affirm the computation of 10 per cent. of the average aggregate advances in the five steps outlined in pages 50 and 51 of the Assessing Officer's order. The appellant's ground raised in this regard is, accordingly, dismissed."

18. Being aggrieved, the assessee is before us vide ground of Appeal Nos. 2 and 3. The learned counsel for the assessee vehemently contended that the methodology of computation of the average aggregate advances for the purpose of deduction under section 36(1)(viia) is settled by the decision of the co-ordinate Bench in the case of (i) Nizamabad District Co-operative Central Bank Ltd. v. ITO I.T.A. No. 1161/Hyd/2011 reported in 12 TMI 562 (ii) Deputy CIT v. Madurai District Central Co-operative Bank Ltd. [2014] 51 taxmann.com 194 (Chennai), (iii) City Union Bank Ltd. (I. T. A. No. 1485/Mds/2007) and (iv) Deputy CIT v. Indian Bank (I. T. A. No.1485 and 1507/Mds/2007) ; [2016] (7) TMI 28. The learned counsel for the assessee submitted that for the purpose of computing average aggregate advances of amount of advance outstanding alone is to be considered not fresh advances made during the previous year.

18.1 On the other hand, the learned Commissioner of Income-tax, Departmental representative placed reliance on the orders of the authorities below.

18.2 We heard the rival submissions and perused the material on record. The Finance Act, 1979 inserted a new clause (viia) in sub-section (1) of section 36 to provide for deduction in computation of taxable profits of scheduled bank in respect of provision made for bad and doubtful debts relating to advances made by the rural branches computed in the manner prescribed under the Income-tax Rules, 1962. For this purpose, "rural branches" has been defined to mean "branch of scheduled bank situated at place with a population not exceeding 10,000 according to the last census". Rule 6BA of the Income-tax Rules provides the procedure for computing average aggregate advances for the purpose of the provisions of section 36(1)(viia) which reads as under :

"6ABA. Computation of aggregate average advances for the purposes of clause (viia) of sub-section (1) of section 36.-For the purposes of clause (viia) of sub-section (1) of section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely :-

(a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately ;

(b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a) ;

(c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank.

Explanation : In this rule, 'rural branch' and 'scheduled bank' shall have the meanings assigned to them in the Explanation to clause (viia) of sub-section (1) of section 36."

From a bare reading of the above rule it is crystal clear that the said rules prescribe three steps for computing the average aggregate advances in the following manner :

"Step one-in respect of each rural branch, note down the amounts of advances outstanding at the end of the last day of each month comprised in the previous year and aggregate the amounts so noted.

Step two-divide the aggregate amount arrived at in step one by the number of months for which the outstanding amounts have been taken into account for the purpose of step one.

Step three-aggregate the amounts arrived at under step two in respect of all the rural branches."

Thus, it is clear that the said Rules do not provide for only fresh advances made by each rural branch during each month alone is to be considered. It only prescribes that the amount of advances made by rural branch and is outstanding at the end of the last day of each month shall be aggregated. Having regard to the plain provisions of the Income-tax Rules, it cannot be construed that only fresh loans made by rural branches out standing at the end of each month should be considered for the purpose of calculating the average aggregate advances. It is trite law that the condition not imposed by the statute cannot be imported while construing a particular provision of the Rules or statutes. Thus, the reasoning adopted by the Assessing Officer as well as the Commissioner of Income-tax (Appeals) does not stand the test of law. Furthermore, a co-ordinate Bench of the Hyderabad Tribunal in the case of Nizamabad District Co-operative Central Bank Ltd. (supra) held as follows :

"8. We have considered the submissions of the parties and perused the orders of the Revenue authorities as well as other materials on record. Before going into the issue, it is necessary to look into the relevant statutory provisions. Section 36(1)(vii) provides for deduction on account of bad debts actually written off in the books of account. However, the proviso to section 36(1)(vii) makes an exception by providing that in case of an assessee to which clause (viia) applies the claim of bad debt shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made under clause (viia). Clause (viia) permits a co-operative bank to claim deduction of provision made for bad and doubtful debts as per the prescribed conditions. As has been correctly observed by the learned Commissioner of Income-tax (Appeals), the only dispute between the assessee and the Department is in respect of working out 10 per cent. of the aggregate average rural advances. While the assessee has made such working by considering the entire outstanding advances at the end of each month, the Assessing Officer has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances. However, a perusal of the provision contained under section 36(1)(viia) and rule 6ABA, would make it clear that the 10 per cent. of the aggregate average advances has to be worked out on the entire outstanding advances and not the advances of that month alone. That being the case, we agree with the view held by the learned Commissioner of Income-tax (Appeals).

9. Now coming to the quantum of deduction claimed under section 36(1)(vii) and 36(1)(viia), law is well settled that an assessee can claim deduction under both the clauses subject to the condition imposed under the proviso to section 36(1)(vii). As can be seen from the working submitted by the learned authorised representative, the provision created during the year under section 36(1)(viia) read with rule 6ABA, amounts to Rs. 16,35,55,829.00 whereas the assessee has claimed deduction of Rs. 5,16,46,976, which is well within the provision permissible under section 36(1)(viia). Therefore, there cannot be any doubt with regard to the allowability of deduction claimed by the assessee under section 36(1)(viia). Accordingly, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 3,88,25,673. However, as far as deduction of Rs. 18,79,704 is concerned, the same cannot be allowed under section 36(1)(vii) considering the fact such amount has not exceeded the provision for bad and doubtful debts under section 36(1)(viia). At the same time, the alternative claim of the assessee that it is to be allowed under section 37(1), in our view, is acceptable. On a perusal of the assessment order and the facts and materials available on record, it is quite evident that the amount was waived at the direction of the State Government Department has not controverted this fact. Therefore, in our view, the waiver of interest at the instance of the State Government has to be allowed as business expenditure under section 37(1). Accordingly, we uphold the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 18,79,704 though, for a different reason. The grounds raised by the Department are dismissed."

18.3 In the light of the above, we hold that the methodology adopted by the Assessing Officer for the purpose of computing the average aggregate advances is against the plain provisions of rules and also against the ratio of the decision of the co-ordinate Bench in the cases cited supra. However, we remit this issue back to the file of the Assessing Officer to identify the rural branches less than 10,000 population as per the last census and the average aggregate advances of such rural branches alone should be considered for the purpose of this deduction. Thus, these grounds of appeal are allowed for statistical purposes.

19. Ground of Appeal No. 4 challenges the disallowance on account of depreciation in the value of investments of Rs. 1008,20,09,971. The factual background leading to the above addition as set out by the Assessing Officer is as under :

"3 Disallowance of depreciation claimed on HTM category securities

In the computation of income the assessee-bank has been claiming depreciation of investments on the HTM category securities in all the assessment year. The HTM category securities are not eligible for any depreciation as per the RBI guidelines. The RBI has permitted the banks to claim depreciation on remaining two categories of securities namely, held for trade (HFT) and available for sale (AFS) whereas the banks are not entitled to claim depreciation on the HTM category securities, the profit and loss account by the company has been prepared in accordance with the RBI guidelines by not charging any such depreciation on the HTM securities. Accordingly the net profit for the year reported by the bank to the customers was Rs. 3021,43,04,000. However, the assessee-bank has made several adjustments in the computation of income and disclosed only a sum of Rs. 2319,96,40,606 as total income in the return of income.

Some of the adjustments are discussed in the earlier paragraphs and in the subsequent paragraph also. One such major deduction claimed only in the computation income was depreciation on investments in India of Rs. 953,18,96,332 and depreciation on investments outside India of Rs. 55,01,13,647. It is pertinent to mention here that the other two categories viz. held for trade (HFT) and available for sale (AFS) has appreciated during the year and it is noticed the same in the annual report and the profit and loss account.

3.1 Show cause issued and reply

In this connection the assessee-bank has furnished the reply in response to the notice dated June 19, 2012 vide their letter dated August 17, 2012 that 'details will be furnished shortly with explanation'. Further the practice adopted by the bank was explained in point No. 3 of the reply and it is reproduced below :

'In the books of the bank, as per the Reserve Bank of India guidelines, the investments are classified into three categories viz., 'held to maturity' (HTM), available for sale (AFS) and held for trading (HFT).

However, for the purpose of computation of income for the assessment year 2005-06 and onwards we had considered the entire investment portfolio including the HTM category as 'stock-in-trade'. Accordingly the closing stock of investments is valued and claimed depreciation/offered appreciation on the entire investment portfolio.

In the earlier years i.e., for the assessment year 2005-06 onwards, the Assessing Officers have not considered the change in the method of accounting made by the bank and the depreciation on the HTM category was not allowed. The Commissioner of Income-tax (Appeals) has also confirmed the additions made by the successive Assessing Officers. As against the orders of the Appellate Commissioner we have preferred an appeal before the Income-tax Appellate Tribunal and the appeal is pending for the assessment year 2005-06 and onwards in respect of our claim of depreciation on the HTM category.

Pending the decision of our claim before the Income-tax Appel late Tribunal in respect of depreciation on HTM we have not offered the appreciation on HTM in the assessment year 2009-10 as the depreciation in the earlier year was rot allowed. However, we have disclosed the same in our notes to the return undertakes to offer the same for tax in the event of our claim on depreciation is allowed in all the earlier years regarding the HTM securities.

For the current assessment year 2010-11, the depreciation on the available for sale, held for trading and held to maturity categories is reckoned for the purpose of computation of taxable income after adjusting the previous year appreciation on the HTM securities. Accordingly, we have prepared an investment trading account and claimed depreciation and offered appreciation and profit on sale of investments. As in the part assessments, as required, we are furnishing the details which are subject during the course of the assessment we will resubmit any changes that will happen'.

It is noticed from the above reply that the assessee-bank has been following their own method of computation of income against the statutory provisions of the Income-tax Act and the RBI guidelines. Year after year certain deviations are noticed and it was neither prescribed by the RBI nor in the Income-tax Act and in any Accounting Standards. Out of three different securities available for sale and held for trading can be marked to market and the depreciation is allowable as per the RBI and the profit and loss account was prepared in accordance with it. However the securities of the HTM category are not entitled for any depreciation and as it was held to mature. The main intention and purpose is to safeguard the interest of public money and the investors. The HTM securities are redeemed once it matures and the bank cannot trade on those securities.

The assessee-bank cannot adopt their own method of accounting and policy overriding the Income-tax provisions as well as the RBI guidelines. In all the years the additions/disallowance was made by the Assessing Officer where the depreciation of the HTM category securities claimed only in computation of income. The addition/ disallowance made by the Assessing Officer in all the earlier assessments was confirmed by the Commissioner of Income-tax (Appeals) and the assessee-bank is in appeal before the hon'ble Income-tax Appellate Tribunal.

3.2 Relevant case law in support of the Revenue

Recently, the hon'ble High Court of Karnataka in the case of CIT v. Ing Vysya Bank Ltd. [2013] 356 ITR 532 (Karn) ; [2012] 208 Taxmann 511 has upheld the Revenue's stand on a similar issue. The hon'ble High Court of Karnataka has analysed the entire issue in detail and passed a speaking order. The salient findings of the High Court are reproduced as under (page 345) :

'While any investment in security can definitely become part of the stock-in-trade of a banking institution, no relevant question in the context of the present examination will be as to the nature of the security and for what purpose and in what manner the security was held by the assessee-bank. Even though Sri Parthasarathy, the learned counsel for the assessee, has contended that the bank has all along been treating the entire investment in security as stock-in-trade and even otherwise the RBI itself not only had notified the 30 per cent. of the securities required to be held by a banking institution for complying with the RBI guidelines/regulations can be in current investment, the fact that the bank had treated all its investments in securities as stock-in-trade and further fact that the RBI had accorded permission to the bank to value such investment should be taken as a relevant and clinching circumstance to accept the stand of the asses see that the securities were stock-in-trade, we are unable to accept this submission, only for the reason that any and every asset held by an assessee does not necessarily become stock-in-trade, it is only such merchandise of a businessman which is ready for sale, and is held for sale, that acquires the characteristic of stock-in-trade.

A merchandise or goods or in the present situation, security does not get the character of stock-in-trade merely because it is so designated but a security can acquire the character of stock-in-trade if it is so held as part of trading stock and the assessee acts as such. In respect of securities which are held by way of permanent investment in securities by the assessee-bank as part of the requirement of the law, then such securities is not and cannot be either be construed or accepted as an investment in the form of security ready for sale. Stipulation on the bank is that it should be held as an investment and as an investment in some Government securities or other securities. It is, therefore, held that all holdings of a banking institution in the form of investment in securities does not automatically acquire the characteristic of stock-in-trade. As to whether a particular investment in any security is in the nature of stock-in-trade or otherwise is a question which has to be examined in each casehaving regard to the nature of transactions, manner of holding and if it is curtailed or regulated by any other external or outside compulsions other than the volition of the assessee. In the instant case we are of the view that on the findings recorded by the Assessing Officer and as confirmed by the Appellate Commissioner, the Tribunal could not and should not have upset such a finding by drawing a comparison to a situation prevailing in respect of some other bank and the view of the Tribunal in that case was based on the Board circular which had held the field at the relevant point of time. Even otherwise, we find in the facts and circumstances, this is a clear case of investment in the securities, which cannot be characterised as stock-in-trade at all, as even as per the admission of the assessee and as per the relaxation, assuming it has any relevance, given by the RBI, it can only be 30 per cent. of the investment which can be clothed with the character of stock-in-trade, as the assessee-bank had some freedom in exchanging such securities or any other form of security, it can be said that to this extent securities are available for sale but the condition is that it again should be invested in any other security, so that the requirement of investment in securities as per the RBI guidelines/instructions is maintained by the bank. It is for this reason, we also reject the request of Sri Parthasarathy that the matter warrants remand to the Tribunal for re-examination on this aspect of the matter. Accordingly, questions Nos. 1 and 2 are answered in the negative and in favour of the Revenue.'

Accordingly, the claim of depreciation on the HTM securities is not allowable. The hon'ble High Court has given a fruitful meaning to the whole issue.

3.3 The request of the assessee to treat the profit as capital gain and rejection of the claim.

The assessee-bank has made a request vide their letter dated October 19, 2012 that if the Assessing Officer decides to follow the previous order and wants to disallow the depreciation on the HTM category the profit to be considered as capital gains and to be taxed at Rs. 119,14,63,845 and the profit of Rs. 169,88,51,800 needs to be deleted from the computation of business income. The claim of the assessee-bank cannot be considered on the fact that income has to be computed under five different heads prescribed in the Income-tax Act. In order to compute the capital gain there must be a transfer of capital asset. In the present case neither there was existence of a capital asset nor transfer of the capital asset within the meaning of section 2(47) of the Income-tax Act. The assessee-bank has invested some funds in the securities that are held to mature (HTM) and redeemed those securities at the date of maturity. As per the break-up of profit on sale of investment in schedule 14 was Rs. 872,42,65,224. It includes the profit on sale of investment of held to maturity, available for sale and held for trading category securities. The business of the assessee is banking and the profit/gain was computed under the head income from business or profession.

The RBI has not allowed the assessee-bank to claim any depreciation on those securities. The assessee-bank has followed the instruction of the RBI and prepared the profit and loss account whereas in the computation of income they have deviated from the RBI guide lines and claim the depreciation on the HTM securities. This does not mean that they can claim capital gain on redemption on securities. Hence the claim made by the assessee-bank in their letter dated October 19, 2012 is not acceptable and rejected.

3.4 Summary and conclusion

As per the detailed discussion made above the assessee-bank is not entitled the claim depreciation on the HTM securities. They cannot pick and choose the law as per their choice. Further, as per the decision of the hon'ble High Court of Karnataka in the case of CIT v. Ing Vysya Bank the claim of depreciation on the HTM securities in India of Rs. 953,18,96,332 and investments of securities outside India of Rs. 55,01,13,332 totalling into Rs. 1008,20,09,979 is disallowed and added back.
A separate penalty proceeding under section 271(1)(c) of the Income-tax Act was issued for furnishing inaccurate particulars and concealment of income."

20. On appeal before the Commissioner of Income-tax (Appeals), the same was confirmed.

21. Being aggrieved, the assessee is before us vide ground of Appeal Nos. 4 and 5. The learned counsel for the assessee contended that the securities held by the bank are stock-in-trade. Therefore, in view of the salutary principles governing valuation of stock-in-trade that it should be valued at cost or market price whichever is less, the fall in the value investment should be allowed as deduction. The learned counsel for the assessee placed reliance on the decision of the co-ordinate Bench of the Tribunal in the case of the same assessee for the earlier assessment year in I. T. A. No. 530/Bang/2010 to which both of us are parties and also on the decision of the hon'ble apex court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 (SC) and the decision of the hon'ble jurisdictional High Court in the case of Karnataka Bank Ltd. v. Asst. CIT [2013] 356 ITR 549 (Karn) (I. T. A. No. 172 of 2009 dated March 11, 2013).

On the other hand, the learned Commissioner of Income-tax Departmental representative placed reliance on the orders of the lower authorities.

21.2 We heard the rival submissions and perused the material on record. This issue was decided by the co-ordinate Bench in the case of the assessee to which both of us are parties wherein after referring to Circular Nos. 18 of 2015 dated November 2, 2015* and the decision of the hon'ble jurisdictional High Court in the case of Karnataka Bank Ltd. v. CIT [2013] 356 ITR 549 (Karn) and the decision of the hon'ble apex court in the case of Southern Technologies Ltd. v. Joint CIT [2010] 320 ITR 577 (SC) and UCO Bank v. CIT [1999] 237 ITR 889 (SC) it has been held as under :

"9.5 We heard the rival submissions and perused the material on record. The short issue in this ground of appeal is whether fall in value of investments made pursuant to SLR requirements of the RBI can be allowed as a deduction while computing business income of a banking company. Notwithstanding the treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of the RBI governing SLR requirement. Even otherwise, the hon'ble jurisdictional High Court in the case of Karnataka Bank Ltd. v. CIT [2013] 356 ITR 549 (Karn) held that circular issued by the RBI for treatment in the books of account is not relevant for classifying the investments whether stock-in-trade or not. In the present case, undisputedly, the assessee-bank has changed its method of accounting by classifying the investments from investments to stock-in-trade. In such a situation, the provisions of section 45(2) of the Act are attracted. The said provisions of the Act read as under :

'45.(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in- trade of a business carried on by him shall be chargeable to income- tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.'

But here the question is, in the earlier years though investments are shown as investments in the books of account for Income-tax purposes, the same was shown as stock-in-trade. Therefore, the assessee-bank changed its method of accounting during the previous year relevant to the assessment year under consideration is not a material fact in deciding the issue in the present appeal. In the earlier years, the same was claimed as stock-in-trade and the resultant loss or gain on account of following the principle cost or market price whichever is less, is recognised for Income-tax purpose. In this context, it is apt to reproduce Circular No. 18 of 2015 :

'Circular No. 18 of 2015, dated November 2, 2015.

Subject : Interest from non-SLR securities of banks-Reg.

It has been brought to the notice of the Board that in the case of banks, field officers are taking a view that, "expenses relatable to investment in non-SLR securities need to be disallowed under section 57(i) of the Act as interest on non-SLR securities is income from other sources".

2. Clause (id) of sub-section (1) of section 56 of the Act provides that income by way of interest on securities shall be chargeable to Income-tax under the head "Income from other sources", if, the income is not chargeable to Income-tax under the head "Profits and gains of business and profession".

3. The matter has been examined in the light of the judicial decisions on this issue. In the case of CIT v. Nawanshahar Central Co- operative Bank Ltd. [2007] 289 ITR 6 (SC) ; [2007] 160 Taxman 48 (SC), the apex court held that the investments made by a banking concern are part of the business of banking. Therefore, the income arising from such investments is attributable to the business of banking falling under the head "Profits and gains of business and profession".

3.2 Even though the abovementioned decision was in the context of co-operative societies/banks claiming deduction under section 80P(2)(a)(i) of the Act, the principle is equally applicable to all banks/commercial banks, to which the Banking Regulation Act, 1949 applies.

4. In the light of the Supreme Court's decision in the matter, the issue is well settled. Accordingly, the Board has decided that no appeals may henceforth be filed on this ground by the officers of the Department and the appeals already filed, if any, on this ground before courts/tribunals may be withdrawn/not pressed upon. This may be brought to the notice of all concerned.

(Sd.)
D. S. Chaudhry,
CIT (A&J), CBDT, New Delhi.'

From the reading of the above circular, it is clear that investments held by the banking concern are treated as a part of business of the banking company and therefore, the income arising from such investments is treated as part of business income falling under the head 'Profits and gains of business'. Though the circular was issued in the provisions of section 80P of the Act, the said principle was equally made applicable to other banks and commercial banks to which the Banking Regulation Act, 1949 applies. Therefore, by virtue of the abovesaid circular, investments made by the banking company should be treated as a business asset of the banking company or stock-in-trade. It is well settled in law that the Central Board of Direct Taxes circulars are binding upon the officers who are entrusted with the responsibility of executing the provisions of the Act.

9.6 The jurisdictional High Court, in the case of Karnataka Bank (supra), after referring to the judgment of the apex court in the case of Southern Technologies [2010] 320 ITR 577 (SC) and UCO Bank [1999] 237 ITR 889 (SC) held that the directions of the RBI are only disclosed norms and they have nothing to do with computation of taxable income. The jurisdictional High Court further upheld the claim of the assessee-bank following the principle of consistency. Even the hon'ble apex court in the case of UCO Bank (supra) only laid down the principle that where the investments are forming part of stock-in-trade, loss arising on account of fall in value of the securities should be recognised and allowed as a deduction. But the above case cited supra does not come to the rescue of the assessee-bank for the reason that the assessee-bank, even in the books of account, has treated the investments as stock-in-trade from the assessment year 2005-06 onwards. Therefore, the question boils down to the one issue whether the change of method of accounting is bona fide or not. It is not the case of the Revenue that the assessee-bank changed for a casual period to suit its own purpose. Therefore, the bona fide of the asses see-bank in changing the method of accounting cannot be doubted. Now, it is well settled that the assessee is entitled to change the regular method of accounting irrespective of the fact, it results in loss to the Revenue. Therefore, having regard to the spirit of the circular cited supra and the fact that investments are shown as stock-in-trade in the books of account, loss/depreciation on account of fall in value of securities held by the assessee-bank should be allowed as deduction. Therefore, income arising therefrom should also be treated as business income. The provisions of section 45(2) cannot be applied to the facts of the present case, as in the earlier years, for the purpose of Income-tax proceedings, the investments were treated as stock-in- trade. Thus, grounds of Appeal Nos. 4, 5 and 6 are disposed of."

The reliance placed by the Assessing Officer on the decision of the hon'ble jurisdictional High Court in the case of CIT v. Ing Vysya Bank Ltd. [2013] 356 ITR 532 (Karn) ; [2012] 208 Taxman 511 is misplaced for the reason that hon'ble jurisdictional High Court in the case of Karnataka Bank (supra) held that the decision in Ing Vysya Bank (supra) runs counter to law lay down by the hon'ble apex court in the case of UCO Bank (supra). In the light of the above position in law, we direct the Assessing Officer to allow fall in value of investments as a revenue loss.

21.3 Thus, grounds of Appeal Nos. 4 and 5 filed by the assessee are allowed.

22. Ground of Appeal No. 6 challenges the disallowance of the claim made under section 36(1)(viii) of the Act. For the reasons given by us in the appeal by the assessee for the assessment year 2009-10 in I. T. A. No. 979/ Bang/2013 in ground of Appeal No. 3, we remit this issue to the file of the Assessing Officer to recompute profits of eligible business in the manner as prescribed by us therein.

23. Ground of Appeal No. 7 challenges the addition made on account of commission on locker rent received in advance of Rs. 112,83,79,281. It is stated that in terms of the accounting policy, revenue in the form of commission and guarantees, locker rent are accounted on receipt basis. However, in the computation of income, revenue pertaining to future period that is falling beyond the accounting year was claimed as deduction. The same was disallowed by the Assessing Officer holding that once income is credited to the profit and loss account, as per the policy of a company, same should be offered to tax. On appeal before the Commissioner of Income-tax (Appeals), the same came to be confirmed.

24. Being aggrieved, the assessee is before us vide ground No. 7. The learned counsel for the assessee vehemently contended that treatment in the books of account has no relevance for deciding the taxability or otherwise of an item of income. The fact of receipt was accounted as income in the books of account has no bearing on the taxability or otherwise of the income under the provisions of the Act. The learned counsel for the assessee further submitted that this practice is being continuously followed by the assessee-bank and having regard to the rule of consistency, no addition should be made. Reliance in this regard was placed on the decision of the hon'ble apex court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC) and also on the decision of the hon'ble Calcutta High Court in the case of CIT v. Bank of Tokyo Ltd. [1993] 71 Taxman 85 (Cal) and the decision of the co-ordinate Bench of the Tribunal in the case of BNP Paribas SA v. Deputy DIT (International Taxation) (I. T. A. Nos. 2022 and 2048/Mum/2008 dated June 20, 2012).

On the other hand, the learned Commissioner of Income-tax (Departmental representative) placed reliance on the orders of the lower authorities.

25. We heard the rival submissions and perused the material on record. The only issue raised in this appeal relates to the assessability of income from commission on letter of credit and locker rent. The assessee-bank is following the accounting income on account of these two heads on receipt basis whereas in computation of total income, income from this was spread over the period to which commission related and locker related, which means income was offered to tax proportionate to the period covered under the accounting year under consideration. It is not the case of the Assessing Officer that income escaped assessment forever. The income is only spread over. It is settled principle of law that the treatment given in the books of account of a particular item of income or expenditure has no relevance to decide taxability or otherwise of it under the provisions of the Act. Therefore, though the amount was shown as receipt and credited to the profit and loss account, the assessee was entitled to offer income by following different method of recognition of income. No doubt, the assessee was only following the mercantile system of accounting. The only issue to be decided is whether income accrued to the assessee. The hon'ble Calcutta High Court in the case of Bank of Tokyo Ltd. (supra) held that even though the assessee-bank received the entire commission for the guarantee commission no debt is actually created in favour of the assessee- bank for the entire amount. A right always remains vested in the customers to recall payment in the unexpired period in the case of earlier redemption of guarantee. Similarly even in respect of the locker rent also, the same reasoning can be applied. Therefore, having regard to the decision cited supra and also the principle of consistency, we hold that no addition is warranted in respect of the guarantee commission on letter of credit or locker rent received in advance. Thus, ground of Appeal No. 7 is allowed.

26. Ground No. 8 challenges the addition on account of unrealised gains on revaluation of forward contracts. The facts leading to this addition as stated by the Assessing Officer in paragraph 8 as under :

"Unrealised gains on revaluation of forward contracts (Rs. 36,28.87.643)

In the computation of income a sum of Rs. 36,28,87,643 was claimed as deduction on account of unrealised gains on revaluation of forward contracts. The assessee-bank was asked to substantiate their claim vide notice under section 142(1) dated June 19, 2012. In response to the notice the assessee-bank has furnished the following reply in their written submissions dated August 17, 2012. The reply is scanned and reproduced below :

(16) Unrealised gains on revaluation of forward contracts

Forward contract is a mechanism by which foreign currency is bought/sold from/to customer for delivery at a future date at an agreed rate of exchange (contracted rate). Conversion of currencies takes place at a future date (known as delivery date) at the contacted rate. In terms of the uniform accounting procedure for evaluation of forward exchange contracts drawn up by FEDAI and approved by the Reserve Bank of India, valuation is to be done at the end of each month and on balance-sheet date. During the year end, the unsettled forward exchange contract in foreign currencies will be valued in Indian rupees at rates specified by FEDAI. There will be profit/loss on valuation of such contracts. The profit/loss accounted in the books is only on estimation basis. As this is merely an estimated anticipated income, the same is reversed on the next day in the books and hence the profit arising on valuation of unsettled forward exchange contracts is offered to tax on maturity of such contracts. This is supported by the decision of the Madras High Court in the case of Indian Overseas Bank v. CIT [1990] 183 ITR 200 (Mad).

Under the Income-tax Act 1961, income chargeable to tax is the income received or due to be received in India in the previous year, or income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. No doubt the Income-tax Act, 1961 takes into account two points of time at which the liability to tax is attracted viz., the accrual of income or its receipt ; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though the book keeping entry is made about hypothetical income which does not materialise. As per the decision of the Madras High Court, the gain arising on conversion of unsettled forward exchange contracts are not taxable as they are merely estimated anticipated income. As decided in the abovesaid case and as only real income is to be brought to tax as decided in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) income to the extent of Rs. 36.29 crores representing unrealised income on evaluation of forward exchange contracts has been claimed as deduction in the computation of income. However, since we have claimed deduction in this respect to the extent of Rs. 28.57 crores in the previous year, the same has been offered to tax this year.

The hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) and in the case of Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC), reiterated that Income-tax is not leviable on hypothetical income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted viz., the accrual of income or its receipts but the substance of the matter is income. If the income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a 'hypothetical income' which did not materialise.

In view of the above, in a situation where there is uncertainty regarding recognition of income in the books, the recognition of income as taxable on that account should be postponed and that there could be no levy of tax on any hypothetical or illusory income."

The above submission of the assessee-bank has been rejected by the Assessing Officer by holding that the assessee-bank recognised income in the profit and loss account made as on March 31, 2010 and therefore the same cannot be claimed as deduction while computing the total income.

27. On appeal before the Commissioner of Income-tax (Appeals), the same was confirmed by the Commissioner of Income-tax (Appeals).

28. We heard the rival submissions and perused the material on record. There is no dispute that the assessee-bank has recognised as income in the profit and loss account on account of unrealised forward exchange contracts. However, the same was claimed as deduction in the computation of income. It is also undisputed fact that income is recognised only on hypothetical basis which has not accrued to the company. In the light of these facts, the issue is whether this income is liable to tax as accrued income within the meaning of section 5 of the Act. It is salutary principle that Income-tax is not leviable on hypothetical income. No income can be taxed unless otherwise accrued and realised. Reliance in this regard can be placed on the decision of the hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) and Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC). This issue was settled by the hon'ble Madras High Court in the case of Indian Overseas Bank v. CIT [1990] 183 ITR 200 (Mad). In the light of these judgments, we hold that no income can be taxed on notional basis unless and otherwise income accrued to the assessee.

29. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

30. The Revenue raised the following grounds of appeal for the assessment year 2010-11 :

The order of the learned Commissioner of Income-tax (Appeals) is opposed to law and fact of the case.

"1. The Commissioner of Income-tax (Appeals) has erred in allowing the depreciation claimed on the leased assets i.e. finance lease giver to M/s. Rajinder Steels Ltd. and M/s. Kedia Castle Dellon Ltd. and Kedia Distilleries Ltd. based on the earlier assets.

2. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the disallowance made under section 14A stating that the mandatory requirement of section 14A(2) has not been satisfied and consequential application of rule 8D(2) to compute the disallowance was not in order.

3. The Commissioner of Income-tax (Appeals) has erred in relying on the decision of the hon'ble Income-tax Appellate Tribunal in the assessee's own case for the assessment year 2005-06 in the applicability of the provisions of section 115JB of Income-tax Act for rate purpose contending that the provisions as section 115JB is not applicable to banks."

31. Ground of Appeal No. 1 relates to depreciation claimed on leased assets given to M/s. Rajinder Steels Ltd., M/s. Kedia Castle Delton Ltd. and Kedia Distilleries. This issue is only consequential in nature for the year under consideration. We held in the Revenue's appeal bearing I. T. A. No. 1035/ Bang/2013 for the assessment year 2009-10 vide paragraph 11 that depreciation cannot be disallowed on the leased assets given to M/s. Rajinder Steels Ltd., M/s. Kedia Castle Delton Ltd. and Kedia Distilleries. For parity of reason, we hold that depreciation cannot be disallowed on the leased assets given to M/s. Rajinder Steels Ltd., M/s. Kedia Castle Delton Ltd. and Kedia Distilleries. This ground of appeal filed by the Revenue is dismissed.

32. Ground of Appeal No. 2 challenges the deletion of the addition made under section 14A by the Commissioner of Income-tax (Appeals). In the immediate preceding assessment year 2009-10 in I. T. A. No. 1035/Bang/ 2013, following the co-ordinate Bench decision in the case of the very same assessee for the earlier assessment years, we held that the provisions of section 14A cannot be applied without giving any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn exempt income, was incorrect. Respectfully following the ratio laid down in the earlier years, this ground of appeal is also dismissed.

33. Ground of Appeal No. 3 challenges the direction of the Commissioner of Income-tax (Appeals) that the provisions of section 115JB are not applicable to the assessee-bank. This issue was also decided by us against the Revenue in the appeal for the assessment year 2009-10 in I. T. A. No. 1035/ Bang/2013. For the same reasoning, this ground of appeal is also dismissed.

The assessee's appeal viz., I. T. A. No. 931/Bang/2016 for the assessment year 2011-12

34. The assessee-bank raised the following grounds of appeal :

"1. The order of the learned Commissioner of Income-tax (Appeals)-14, LTU Bangalore dated March 11, 2016 is against law and facts of the case.

2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in confirming the disallowance of the bad debts claim under section 36(1)(vii) amounting to Rs. 372,70,00,000.

2.1. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the appellant-bank did not write off the debts of Rs. 372,70,00,000.

2.2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the amount of Rs. 372,70,00,000 is a mere provision and not a write off.

2.3. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in holding that the debts are to be written off at the branch level where advances are made.

2.4. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the appellant-bank had submitted the individual bad debts details of the write off.

2.5. The learned Commissioner of Income tax (Appeals)-14, LTU failed to appreciate the fact that in order to claim deduction under section 36(1)(vii), it is not necessary to prove that such debt has become bad.

2.6. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the amount of Rs. 372,70,00,000 debit to the profit and loss account and reduced from 'loans and advances' in the balance-sheet amounts to write off.

2.7. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in understanding the concept of write off norms as defined/ explained in the Reserve Bank of India guidelines.

2.8. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate that fact that the appellant has offered to tax the 'write back' on account of recovery/upgradation of such kind of bad debts written off in the earlier years under section 41 of the Income- tax Act, 1961.

2.9. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in making the addition on surmises and conjunctures.
2.10. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that on the same set of facts the juris dictional Appellate Tribunal and the hon'ble High Court have allowed the deductions to various banks.

3. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in confirming the disallowance of the provision for bad debts claimed under section 36(1)(viii) Rs. 266,28,98,973.

3.1. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in holding that rule 6ABA prescribes only 'fresh/incremental advances' are to be considered for arriving at the aggregate average advances.

3.2. The learned Commissioner of Income-tax (Appeals)-14 erred in interpreting that as per rule 6ABA 'advances made' to be read as 'made during the month'.

3.3. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that section 36(1)(viii) being an incentive provision should be interpreted liberally.

3.4. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in confirming the addition on surmises and conjunctures.

3.5. The confirmation made by the learned Commissioner of Income-tax (Appeals) of the computation made by the Assessing Officer is based on prejudices and against the facts and the records of the case.

4. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law and on facts in confirming the disallowance of depreciation amounting to Rs. 1154,59,00,000 on investments which are stock-in-trade of the bank.

4.1. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in confirming that the assessee had not made a provision for depreciation on investments and hence disallowed Rs. 1154.59 crores out of Rs. 1197.21 crores (allowed Rs. 42.61 crores being the amount debited to the profit and loss account).

4.2. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in relying on the decision in the case of Ing Vysya Bank Ltd., which is distinguishable on facts. The learned Commissioner thus ignored the decisions of the jurisdictional High Court decisions.

4.3. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the investments of the appellant- bank are stock-in-trade and the appellant-bank is eligible to claim the loss arising out of the valuation of the stock at cost or market value whichever is lower.

4.4. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that once an income is taxed under the head 'Business or profession', then the stock on hand should be considered as stock-in-trade and the valuation loss arising by valuing the same at lower of cost or market value is an allowable deduction.

4.5. The learned Commissioner of Income tax (Appeals)-14, LTU erred in concluding that since the Department has not accepted the method of accounting followed by the bank in the earlier assessment years and no final conclusion can be drawn on the consistent method followed by the assessee-bank.

I. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law and on facts in sustaining the addition of the commission and locker rent received in advance amounting to Rs. 110,26,13,670 as income.

5.1 The learned Commissioner of Income-tax (Appeals)-14, LTU erred in sustaining this addition without rejecting the books of account of the appellant-bank.

5.2. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the income to that extent did not accrue to the bank.

5.3. The learned Commissioner of Income-tax (Appeals)-14, LTU ignored the consistent method adopted by the appellant-bank in not offering the commission and locker rent received in advance but offered in the year it is accrued in the subsequent years.

5.4. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that on the same set of facts, in the earlier assessment years, the advance amounts received by the appellant- bank was not taxed as income.

5.5. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to distinguish the facts of the judicial decision referred to by the Assessing Officer to that of the appellant-bank case and drawing conclusions without verifying the facts of the case.

5.6. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years.

5.7. In the alternative, the learned Commissioner of Income-tax (Appeals)-14, LTU failed to direct the Assessing Officer to exclude the above referred added amount from the income of the appellant-bank in the subsequent years since the same has been offered to tax voluntarily.

6. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law in sustaining the disallowance the unrealised gains on revaluation of forward contracts in foreign exchange amounting to Rs. 107,20,87,678.

6.1 The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the unrealised gains cannot be taxed and only real income can be taxed.

6.2. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the unrealised gains did not accrue to the appellant-bank.

6.3. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that the entries in the books alone cannot be the basis for taxing a receipt.

6.4. The learned Commissioner of Income-tax (Appeals)-14, LTU ignored the consistent method adopted by the appellant-bank in offering the unrealised gains to tax over the years.

6.5. The learned Commissioner of Income-tax (Appeals)-14, LTU failed to appreciate the fact that it is only a revenue neutral exercise and there is no loss to the Revenue over the years as the appellant- bank had offered to tax on the date of actual realisation.

7. The learned Commissioner of Income-tax (Appeals)-14, LTU erred in law and on facts in sustaining the disallowance of expenditure under section 40(a)(ia) of Rs. 7,30,78,117.

For the abovementioned grounds or any other grounds that may be pressed at the time of hearing, the appellant prays that its appeal be allowed."

35. Ground of Appeal No. 1 is general in nature and do not require any adjudication. Ground of Appeal No. 2 challenges the confirmation of disallowance of claim for bad debts under section 36(1)(vii) of the Act. In the earlier assessment year viz. 2009-10 in I. T. A. No. 979/Bang/2013 and in the assessment year 2010-11 in I. T. A. No. 1493/Bang/2014, we remitted this issue to the file of the Assessing Officer for a limited purpose of verifying whether the provision for bad debts is reduced from the sundry debtors accounts in the balance-sheet and debited to the profit and loss account. If it is found so on due verification, the Assessing Officer was directed to delete the addition. Following the same reasoning, we remit this issue to the file of the Assessing Officer for the purpose of verifying the above facts. Thus this ground of appeal is partly allowed for statistical purposes.

36. Ground of Appeal No. 3 challenges the confirmation of disallowance on account of provision for bad and doubtful debts claimed under section 36(1)(viia) of the Act. In the assessee's appeal for the assessment year 2010-11 in I. T. A. No. 1493/Bang/2014, we held that for the purpose of calculating the average aggregate advances (AAA), only loan outstanding should alone be considered, not fresh advances made during the period. However, this issue was remitted back to the file of the Assessing Officer to verify and identity rural branches less than 10,000 population as per the latest census and the average aggregate advances of such rural branches alone be considered. Accordingly, even during this year also, we remit this issue back to the file of the Assessing Officer to allow the claim on the lines indicated in paragraph 18.3 in I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11. This ground of appeal is partly allowed for statistical purposes.

37. Ground of Appeal No. 4 challenges the confirmation of disallowance on account of fall in the value of investments which are held as stock-in-trade. For the detailed reasons stated in paragraph 21.2, in the assessee's appeal viz. I. T. A. No. 1493/Bang/2014, for the assessment year 2010-11, we hold that the same should be allowed as revenue loss. This ground of appeal is allowed.

38. Ground of Appeal No. 5 challenges the confirmation of the addition of commission and locker rent received in advance of Rs. 110,26,13,670. In the assessee's appeal viz., I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11 in paragraph 25, we held that advance commission received on account of letters of credit and bank guarantee and locker rent has not become due or accrued to the assessee in terms of contract entered into by the bank with its customers. Accordingly, we hold that this amount cannot be brought to tax. Respectfully following the ratio laid down in the assessment year 2010-11, we allow this ground of appeal.

39. Ground of Appeal No. 6 challenges the confirmation of addition made on account of unrealised gains on revaluation of forward contracts in foreign exchange amounting to Rs. 107,20,87,678. In the assessee's appeal viz., I. T. A. No. 1493/Bang/2014 for the assessment year 2010-11 in paragraph 28, we held that unrealised gains on revaluation of forward contracts cannot be brought to tax. Accordingly for the detailed reasons given therein, this ground of appeal is allowed.

40. Ground of Appeal No. 7 challenges the confirmation of disallowance of Rs. 7,30,768,117 under section 40(a)(ia) of the Act. It is the claim of the assessee-bank that a sum of Rs. 7,30,768,117 claimed as deduction which was disallowed in the earlier years but claimed on payment basis under section 40(a)(ia) of the Act but the Assessing Officer denied the claim holding that the assessee-bank had failed to provide evidence in support of the claim.

40.1 On appeal before the Commissioner of Income-tax (Appeals), it was contended that the tax audit report of all the branches have been furnished before the Assessing Officer and if there is any non-compliance with the TDS provisions ought to have disclosed the same in the tax audit report. However, the Commissioner of Income-tax (Appeals) has not accepted this contention. Hence, the assessee-bank is before us in the present ground of appeal.

40.2 We heard the rival submissions and perused the material on record. No doubt, the assessee-bank is entitled for deduction of the amount which was disallowed in the earlier assessment proceedings for non-deduction of tax at source in the year of deducting tax at source. The onus always lies on the assessee to prove that the TDS provisions have been complied with during the year in which the claim was made. Therefore, we remit this issue to the file of the Assessing Officer with a direction that the assessee- bank shall furnish evidence in respect of compliance with the TDS provisions.

40.3 This ground of appeal is partly allowed for statistical purposes.

The Revenue's appeal (I. T. A. No. 903/Bang/2016) for the assessment year 2011-12
41. The Revenue raised the following grounds of appeal :

"1. The order of the Commissioner of Income-tax (Appeals) is opposed to the facts and law in so far as the below issues decided against the Revenue.

2. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the addition made on account of payment to gratuity and pension fund even though the said expenditures were not debited to the profit and loss account.

3. The Commissioner of Income-tax (Appeals) has erred in holding that the provisions of section 115JB are not applicable to banking companies.

4. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the addition made towards expenses attributable to exempted income under section 14A.

5. The Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to delete the addition made on account of depreciation on the leased assets."

42. Ground of Appeal No. 1 is general I nature and do not require any adjudication.

43. Ground of Appeal No. 2 challenges the deletion of the addition made on account of payment of gratuity and pension fund. Brief facts surrounding this addition are as under :

43.1 The assessee-bank is required to contribute towards gratuity fund of the employees of the bank every year on the basis of actuarial valuation as per Accounting Standard 15 issued by the Institute of Chartered Accountants of India. During the financial year relevant to the assessment year under consideration, liability towards gratuity fund as per the actuarial valuation worked out to Rs. 1428 crores which includes additional liability on account of enhancement in the gratuity limit. However, the fund available is only Rs. 747.75 crores. Therefore, the assessee-bank was required to make a further contribution to the extent of Rs. 681.15 crores towards the fund as on March 31, 2011. The Reserve Bank of India had permitted banks to amortise additional liability on account of enhancement of gratuity limit over a period of 5 years. Accordingly, a sum of Rs. 13,753 crores was debited to the profit and loss account. The balance was carried forward for future amortisation. However, in the computation of total income, the entire additional liability has been claimed as deduction. As regards the contribution of pension fund, additional liability on account of reopening of pension option to the employees as a consequence of which the assessee- bank was required to make further contribution of Rs. 2373.12 crores as on March 31, 2011 and this additional liability was permitted to be amortised over a period of 5 years by the Reserve Bank of India. Accordingly, in the books of account, 1/5th of the additional liability i.e., Rs. 370.5 crores was debited to the profit and loss account for the year March 31, 2011 and the balance amount was carried forward for amortisation. However, in the computation of total income, the entire liability was claimed as deduction. The Assessing Officer has restricted the deduction to the extent of the amount debited to the profit and loss account only and the balance was disallowed. The facts as set out by the Assessing Officer are as under :

"6.3 . Summary

'The detailed discussion made above has revealed fact that the assessee-bank has debited only a sum of' Rs. 137,52,84,090 as provision for gratuity fund and Rs. 890,26,63,390 towards provision for pension fund. As against this a sum of Rs. 679,52,53,142 and Rs. 2369,18,89,449 was claimed as a deduction as the payment made to the gratuity fund and the payment made to the pension fund. When the bank themselves has drawn its minutes stating that the entire liability cannot be absorbed against the current year profit. It cannot be claimed as the current year expenditure in computation of income.

It is pertinent to mention here that one-fifth of the gratuity fund of Rs. 679,52,53,142 is worked out into Rs. 135,90,50,628 whereas the assessee-bank has debited Rs. 137,52,84,090. They were not able to explain the difference. Similarly, Rs. 2369.19 crores of pension fund includes Rs. 1853.60 crores for the existing employees and Rs. 515.59 crores for retired employees. Out of Rs. 1853.60 crores one-fifth of the expenditure is computed into Rs. 370.72 crores and hence the total amount of Rs. 886.31 crores alone (Rs. 515.59 + Rs. 370.72 crores) is allowable. However, the assessee-bank has debited a sum of Rs. 890.26 crores for which no explanation was given.

Every assessment year is a self-contained unit and the profits and gains of an assessee have to be computed in accordance with law discussed above. Hence, the following amounts are disallowed :

As per the detailed discussion made above a sum of Rs. 2020,49,91,960 is disallowed. For filing inaccurate particulars and concealment income a separate penalty proceedings under section 271(1)(c) of the Income-tax Act is initiated."

43.2 Being aggrieved, an appeal was preferred before the Commissioner of Income-tax (Appeals), who, vide the impugned order allowed the claim taking into consideration that payment to this fund were made before due date for filing of return of income and also placing reliance on the decision of the co-ordinate Bench of Hyderabad in the case of Deputy CIT v. Andhra Bank (I. T. A. Nos. 167 to 169/Hyd/2014 and 244 to 246/Bang/2014 dated July 18, 2014) allowed the claim.

43.3 Being aggrieved, the Revenue is in appeal before us in the present ground of appeal.

43.4 The learned Commissioner of Income-tax (Departmental represent ative) vehemently argued that the additional liability was not debited to the profit and loss account and therefore, the same was not eligible for deduction.

43.5 On the other hand, the learned counsel for the assessee contended that the treatment in the books of account has no relevance for allowability of an item of expenditure. The learned counsel for the assessee further contended that even otherwise the contribution to the gratuity fund as well as the pension fund can be allowed on payment basis in terms of the provisions of section 43B of the Act. He placed reliance on (i) the decision of the co-ordinate Bench of Hyderabad in the case of Andhra Bank (supra); (ii) the decision of the hon'ble Karnataka High Court in the case of CIT v. Amco Batteries [2006] 287 ITR 80 (Karn) ; [2006] 155 Taxman 167 (Karn) and (iii) the decision of the hon'ble Supreme Court in the case of Taparia Tools Ltd. v. Joint CIT [2015] 372 ITR 605 (SC).

43.6. We heard the rival submissions and perused the material on record. The only issue in this ground of appeal relates to whether the additional liability arising on account of gratuity on account of enhancement of gratuity limit and the contribution to the pension fund on account of employees reopening of the option for pension, can be allowed as a deduction though only 1/5th additional liability was debited to the profit and loss account. There is no dispute as regards the crystallisation of liability during the year under consideration. The only reason cited by the Assessing Officer for disallowance is that the assessee has not debited to the profit and loss account, the entire amount of the additional liability. Now, it is settled law that the absence of entries in the books of account or treatment in the books of account has no bearing on the allowability of actual expenditure, once it is established that the liability had crystallised and which is in the revenue in nature. Reliance in this regard can be placed on the decision of the hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). This proposition of law has been reiterated in a plethora of decisions subsequently by various High Courts as well as the hon'ble apex court. Therefore, the reasoning of the Assessing Officer does not hold water. Even otherwise, these payments were subject to the provisions of section 43B. Section 43B permits deduction only in the year of payment. Therefore, we do not find any fallacy in the reasoning of the Commissioner of Income-tax (Appeals).

43.7 This ground of appeal is dismissed.

44. Ground of Appeal No. 3 of the appeal relates to the applicability of the provisions of section 115JB to a banking company. This issue is covered in favour of the assessee and against the Revenue for the reason stated by us in the Revenue's appeal I. T. A. No. 1035/Bang/2013 for the assessment year 2009-10 and I. T. A. No. 1440/Bang/2014 for the assessment year 2010-11. For the same reasoning, we dismiss this ground of appeal.

45. Ground of Appeal No. 4 challenges the deletion of the addition made under section 14A of the Act. For the detailed reasons given by us in paragraph 10.4, in the Revenue's appeal in I. T. A. No. 1035/Bang/2013 for the assessment year 2009-10 this ground is dismissed.

46. Ground of Appeal No. 5 challenges the direction of the Commissioner of Income-tax (Appeals) to delete the addition made on account of depreciation of leased assets. This issue is also covered in favour of the assessee- bank and against the Revenue and for the reasons given by us in paragraph 31 in the Revenue's appeal (I. T. A. No. 1440/Bang/2014) for the assessment year 2010-11 this ground of appeal is also dismissed.

In the result, the appeal filed by the Revenue is dismissed.

47. In the result, I. T. A. Nos. 979/Bang/2013, 1493/Bang/2014 and 931/ Bang/2016 are partly allowed for statistical purposes and I. T. A. Nos. 1035/ Bang/2013, 1440/Bang/2014 and 903/Bang/2016 are dismissed.

The order pronounced in the open court on this 15th September, 2017.