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Assessee not entitled to deduction as it was not an industrial undertaking eligible for deduction-Amortization after commencement only to industrial undertaking- Expenditure not allowed as issue of share capital expands the capital base and hence, capital in nature.

ITAT BANGALORE BENCH 'A'

IT Appeal Nos. 668, 669, 708 and 709 (Bang.) of 2010
[ASSESSMENT YEARS 2006-07 & 2007-08]

Syndicate Bank.............................................................................................Appellant.
v.
Deputy Commissioner of Income-tax ...........................................................Respondent

N. BARATHVAJA SANKAR, VICE-PRESIDENT
AND N.V. VASUDEVAN, JUDICIAL MEMBER

Date : JUNE 19, 2013

Appearances

K.P. Kumar and Ms.Tanmayee Rajkumar for the Appellant.
S.K. Ambastha for the Respondent.

Section 35D & 32 of the Income Tax Act, 1961 — Amortization of Certain Preliminary Expenses — Assessee not entitled to deduction as it was not an industrial undertaking eligible for deduction - Amortization after commencement only to industrial undertaking- Expenditure not allowed as issue of share capital expands the capital base and hence, capital in nature.

FACTS

Assessee claimed deduction being 1/5th of the amount incurred towards follow on public offer. Assessee stated that expenditure was incurred by it on public of shares and claim was made u/s 35D. Assessee contended that expenses in connection with issues for public subscription of shares or debentures of company being underwriting commission, brokerage, charges for typing, printing and advertisement of the prospectus were to be allowed as deduction over a period of five years and assessee treated as deferred revenue expenditure and made a claim for one-fifth as admissible deduction u/s 35D. On appeal by assessee CIT (A), allowed the claim of assessee. Being aggrieved, assessee went on appeal before Tribunal.

HELD

That provisions of section 35D allows amortization of certain preliminary expenses and assessee had already commenced its banking business. The expenses are admissible, after commencement, in connection with expansion of industrial undertaking or in connection with setting up of a new industrial unit and assessee was not an industrial unit which was overlooked by CIT(A). therefore assessee's case does not come under the purview of section 35D. Assessee's claim for deduction as revenue expenditure on the basis that issue of share capital was for meeting the working capital requirement also cannot be sustained. Issue of shares increases the capital base and therefore expenses will retain the character of capital expenditure. Action of CIT(A) in deleting the addition made by A.O. was not correct. In the result, appeal was answered in favour of Revenue.

Business loss of banking company — Diminution in the value of stock-in-trade as on the last day of the previous year to be allowed as deduction.

FACTS

While arriving at the business income for the purposes of income tax, assessee deducted profit in sale of investments and added back depreciation on investment and amortization and claimed loss on trading of investments by filing an investment trading account. according to assessee, it has been consistently treating income from investments other than shares as "income from business" and offered it to tax as business income. Assessee pointed out that revenue had accepted the claim of assessee in the past and therefore the stock o investments have to be treated as stock-in-trade and diminution in the value of stock-in-trade as on the last day of previous year has to be allowed as deduction. A.O. did not accepted the claim of the assessee. He was of the view that entire investment portfolio in the case of bank cannot be regarded as stock-in-trade and investments held under the category "available of sale" and "held to maturity" can be considered as stock-in-trade but in the case of "held to maturity" they were purely of the nature of investments and not stock-in-trade. A.O. disallowed the entire claim for deduction of diminution in the value of investments. A.O. also made an addition of profit on sale of investments not offered to tax but brought to tax. On appeal by the assessee, CIT(A) allowed the claim of the assessee. Being aggrieved, Revenue went on appeal before Tribunal.

HELD

That contention put forth on behalf of assessee deserves to be accepted as the Tribunal in assessee' s own case on an identical issue for the A.Y.2005-06 upheld the claim of the assessee which was further upheld by High Court. Claim of deduction was allowed to assessee. In the result, appeal was answered in favour of assessee.

Capital or Revenue Expenditure — Stamp duty expenses incurred in issuing bonds to public allowed as revenue expenditure as raising of funds by issue of bonds akin to borrowing.

FACTS

Assessee claimed stamp duty expenses under the head contingencies. It clarified to A.O. that stamp duty expenses were one time statutory expenses payable at certain percentage of the value of bonds issues to public and the expenditure was meager compared to capital raised by the bank and negligible as compared to total expenditure debited to P&L a/c. A.O. disallowed the expenditure holding it as capital in nature. On appeal by assessee, CIT(A) held that allowed the claim of the assessee. Being aggrieved, assessee went on appeal before Tribunal.

HELD

That the distinction between a capital and a loan was well recognized in law. Raising of funds by issue of bonds will be akin to a borrowing. They are therefore to be considered as revenue expenditure. Accordingly stamp duty expenses claimed under the head contingencies were one time statutory expenses payable at a certain percentage of the value of bonds issued to the public were allowable as revenue expenditure. In the result, appeal was answered in favour of Revenue.

ORDER

The order of the Bench was delivered by

N.V. Vasudevan, Judicial Member - ITA Nos.708 & 668/Bang/2010 ( A.Y. 2006-07).

ITA 708/B/10 is an appeal by the revenue, while ITA 668/B/10 is an appeal by the assessee. Both these appeals are directed against the order dated 25.03.2010 of the CIT(Appeals), Mangaluru, relating to assessment year 2006-07.

ITA Nos.708/Bang/2010 (Revenue's appeal)

2. First, we shall take up for consideration the revenue's appeal. Ground No.1 is general in nature and calls for no adjudication. Grounds No.2 & 3 raised by the revenue are as follows:-

'2. Bad debts of non-rural branches written off under section 36(1)(vii) - Rs.170,62,86,4841

2.a. The learned CIT(A) erred in allowing assessee's claim of write off of bad debts relating to urban branches amounting to Rs. 170,62,86,484/-, without first setting off the bad debts against the credit balance in the Provision for Bad & Doubtful Debts A/c.

2.b. The learned CIT(A) erred in allowing reduction from provision for Bad and Doubtful debts, only of bad debts relating to rural branches, by not properly interpreting proviso to Sec. 36 (1)(vii) of the I T Act which stipulates that "the amount of deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the Provision for Bad and Doubtful Debts A/c."

2.c. The learned CIT(A) erred in not taking cognizance of the fact that the orders of CIT(A) on this issue has not been accepted by the Department in the earlier assessment years and appeal to ITAT has been filed.

3. Provision for Bad & Doubtful Debts claimed to the extent eligible u/s 36(1) (vii a) - Rs.207,83,45,3381-.

3.a. The learned CIT(A) erred in allowing in full the assessee's claim for Provision for Bad & Doubtful Debts amounting to Rs.503,49,00,000/- being 10% of average Rural Advances even though the assessee has debited only Rs.295,55,54,682/- to the P & L A/c.

3.b. The learned CIT(A) erred in not considering the fact that to claim deduction towards Provision for Bad & Doubtful Debts, necessary debit has to be made to the P & L A/c, and is admissible only to the extent provision has been debited.

3.c. The learned CIT(A) erred in not considering the fact that the orders of Hon'ble ITAT in assessee's own case, for the asst. year 1987-88, has not been accepted by the Department and direct appeal to Hon'ble High Court has been filed. The COD has permitted to pursue this issue as per minutes of the meeting held on 30-09-2008 -vide COD/62/2008 dt. 20-10-2008.

3.d. The learned CIT(A) failed to appreciate the fact that the orders of Hon'ble ITAT, in the case of Vijaya Bank - ITA nos. 150 & 151/Bang//2004 dt. 9-6-2006 has not been accepted by the Department and direct appeal to Hon'ble High Court has been filed.

3.e. The learned CIT(A) erred in not considering the decision of Hon'ble High Court of Punjab and Haryana in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 - wherein it is held that "making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction and that proviso to clause (vii) of Sec. 36 (1) also shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under sec. 36 (1)(viia).'

3. The Revenue sought to raise three additional grounds and these are connected to Ground No.3 raised by the Revenue in its original grounds of appeal vide letter dated 11.06.2012. These grounds read as follows:

"The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of the Hon'ble Tribunal:

(i)		Assessee's claim of deduction u/s 36(1)(viia) of Rs. 503.49 crore is not in accordance with the provisions under the Act, read with Rule 6ABA of the IT Rules, 1962, and hence not allowable to that extent?
(ii)		Since (a) non-rural bad and doubtful debts may be written off and allowable u/s 36(i)(vii) independently, and (b) only rural debts written off can be set off/debited against the provisions made u/s 36(1)(viia) in previous years, and/or to be made during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to 10% thereof, subject to available credit balance to this account.
(iii)		Alternatively, and without prejudice to the grounds above, if the computation of the provision has to also include any amount not exceeding 7.5% of the total income, such income should be restricted to the total income of rural branches, or to the amount as prescribed under the RBI prudential norms.

Since the grounds raised are legal grounds, which go to the root of the matter relating to allowance of deduction u/s 36(1)(viia), the same may kindly be admitted. Delay may kindly be condoned, in view of the legal position clarified by the Hon'ble Supreme Court vide their Lordship & order dated 17.02.2012, in case of Catholic Syrian Bank and others (Civil Appeal No. 1143/2011 and others), reported in 2012-TIOL-16-SC-lT-LB."

4. The revenue has sought to raise further additional ground vide letter dated 27.04.2012 and the additional ground is connected to Ground No.3. The ground so sought to be raised reads as follows:

"3.f. The ld. CIT(A) ought to have noted that assessee's claim of 10% of average rural advances u/s 36(1)(viia) is based on categorization of places as made by RBI and not in accordance with Expln.(ia) below section 36(1)(viia). Reliance is placed on the decision of the Hon'ble High Court of Kerala dated 07.10.2010 in ITA No. 234 of 2009 in the case of CIT v. The Lord Krishna Bank Ltd. (195 Taxman 57) wherein it has been held that 'place' referred to in the definition clause for the purpose of identifying the branch as a rural is the revenue village with population in the village as a unit is less than 10,000 and therefore the claim of the assessee bank needs to be restricted to the advances made by such branches."

5. The additional grounds sought to be raised by the Revenue are stated to be consequent to the decision rendered by the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT [2012] 343 ITR 270/206 Taxman 182/18 taxmann.com 282 and the decision of the Hon'ble Kerala High Court in the case of CIT v. Lord Krishna Bank Ltd. [2010] 195 Taxman 57/7 taxmann.com 118. These decisions were rendered after the completion of assessments by the AO in the case of the Assessee for both the assessment years 2006-07 and 2007-08.

6. The learned counsel for the Assessee opposed the admission of the additional ground for adjudication. According to him, the additional grounds sought to be raised by the Revenue seeks to enlarge the scope of the original grounds raised by the Revenue as also the very basis on which the AO and CIT(A) proceeded to decide the issue. If the additional grounds are entertained, then the Tribunal will virtually enhance the assessment. According to him, the Tribunal can neither directly nor indirectly enhance assessment. In this regard, reference was made to two decisions of the Hon'ble Supreme Court viz., Pathikond Balasubba Setty v. CIT [1967] 65 ITR 252 (Mys.)and M. Corp Global (P.) Ltd. v. CIT [2009] 309 ITR 434/178 Taxman 347.

7. We will deal with the admissibility of the additional grounds sought to be raised after considering the issue that was originally sought to be raised by the Revenue.

8. Since grounds 2 and 3 and the additional grounds sought to be raised are interlinked, we deem it convenient to deal with these grounds together.

9. The Assessee is a banking company carrying on business of banking. In its return of income the Assessee claimed deduction of a sum of Rs.170,62,86,485 on account of bad debts written off u/s.36(1)(vii) of the Act. The Assessee also claimed deduction of a sum of Rs.503,49,00,000 on account of Provision for Bad and Doubtful Debts in respect of rural advances, u/s.36(1)(viia) of the Act. The claim for deduction u/s.36(1)(vii) of the Act on account of Bad Debts written off was made on the following basis:
Bad Debts Written Off By Non-rural branches

Out of income	Rs. 57,66,26,877
Out of Provision	Rs. 112,96,59,608
	Rs. 170,62,86,485

10. The position with regard to claim for deduction on account of provision for bad and doubtful debts created by the Assessee u/s.36(1)(viia) of the Act was as follows:

A.	Provision u/s.36(1)(viia)
	1.04.2005 Balance B/F.		Rs. 912,57,47,169
	31.03.2006 Provision for NPA's		Rs. 295,55,54,682
	Balance u/s - provision claimed		Rs. 1208,13,01,851
B.	Debts written off u/s.36(1)(vii)
	Bad Debts written off during AY 2006-07
	Out of Income	Rs. 65,53,48,914
	Out of Provision	Rs. 112,96,59,608
	Debited to Gratuity paid A/c.	Rs. 71,80,470
		Rs. 179,21,88,992
	Less: Bad Debts Written Off
	By Non-rural branches
	Out of income	Rs. 57,66,26,877
	Out of Provision	Rs. 112,96,59,608
		Rs. 170,62,86,485
	Less: Bad debts written off pertaining to rural branches		Rs. 8,59,02,507
	Balance under provision carried over as on 31.3.2006		Rs.1199,53,99,344
	Average Advances at Rural Branches for FY 05-06(AY 06-07)		Rs.4656,87,24,770
	Rural Branch Average for 2004-05 - 10%		Rs. 465,68,72,477

11. The claim for deduction on account of Provision for Bad and Doubtful debts u/s.36(1)(viia) of the Act was claimed by the AO at Rs.503,49,00,000 comprising of the following two amounts:

10% Average rural advances 7.5% of gross total income	Rs.465,68,72,477
(7.5% of Rs.504,03,66,972)	Rs. 37,80,27,523
Total	Rs.503,49,00,000

12. In note Nos.6 and 7 filed along with the computation of Income the Assessee has explained its claim for deduction u/s.36(1)(vii) and 36(1)(viia) of the Act as follows:

"6. We have made a provision for Bad and Doubtful debts (NPAs) for Rs.295,55,54,682/- in our books during the F.Y. 2005-06 (AY 2006-07). However, we are claiming deduction u/s.36(1)(viia) to the extent of Rs.465,68,72,477/- being 10% of average rural advances of Rs.4656,87,24,770/- and 7.5% of Gross Total Income before allowing this deduction amounting to Rs.37,80,27,523/- relying on ITAT Bangalore Bench decision dt.23.06.2000 in our own case for the A.Y. 1987-88 (87 ITD 103) (sic 78 ITD and not 87 ITD). Our similar claims for the AY 2003-04 and AY 2004-05 are allowed by CIT(Appeals), Mangalore.

7. The total amount of bad debts written off in our books for the AY 2006-07 is Rs.179,21,88,992/- which includes Rs.66,25,29,384/- out of income and Rs.112,96,59,608/- out of provision being prudential write off. This write off pertains to non-performing advances at both rural and non-rural branches. We are claiming deduction u/s.36(1)(vii) towards Bad debts written off in respect of non-rural branches to the extent of Rs.170,62,86,485/-. Bad debts written off at Rural branches amounting to Rs.8,59,02,507/- is reduced from the Provision for Bad and Doubtful Debts claimed u/s.36(1)(viia)."

13. The AO called upon the Assessee to explain the basis on which the above working of deduction u/s.36(1)(vii) and 36(1)(viia) of the Act was done by the Assessee.

14. With regard to deduction u/s.36(1)(vii) of the Act, it is already seen that the Assessee had claimed a sum of Rs.170,62,86,485 as deduction on account of bad debts written off out of which Rs.112,96,59,608/- was "Prudential write off out of provision". The AO wanted two clarifications:

1.		How prudential write off of Rs.112,96,59,608 can be claimed as a deduction u/s.36(1)(vii) of the Act.
2.		Under proviso to Sec.36(1)(vii) of the Act, bad debts written off has first to be adjusted against provision created. Since this has not been done, the AO proposed to do so. If so adjusted the credit balance in the Provision for Bad and Doubtful Debts account will still be available and therefore deduction u/s.36(1)(vii) of the Act will not be allowed in view of the proviso to Sec.36(1)(vii) of the Act.

15. With regard to the claim for deduction u/s.36(1)(viia) of the Act, the AO wanted two clarifications viz.,

1.		Whether 10% of average rural advances have been calculated on the basis of 2001 census or on 1991 census.
2.		The provision for bad and doubtful debts in respect of rural advances was created by debit to profit and loss account of only a sum of Rs.295,55,54,682 whereas the claim for deduction actually made u/s.36(1)(viia) of the Act was a sum of Rs.503,49,00,000/-. The AO was of the view that as laid down by the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 (P & H), claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The AO therefore proposed to disallow a sum of Rs.207,93,45,318 (Difference between Rs.503,49,00,000 and Rs.295,55,54,682).

16. On the query of the AO with regard to deduction u/s.36(1)(viia) of the Act, the Assessee submitted that the 10% of the Average Aggregate rural advances is worked out on the basis of 2001 census and further clarified that the actual Aggregate Average Rural Advances (AARA) was Rs.3525,25,92,038 and not Rs.4656,87,24,770/- as given earlier and 10% of AARA would be 352,52,59,204. The Assessee also gave a list of rural branches along with its revised computation of AARA. With regard to the proposal of the AO to restrict deduction u/s.36(1)(viia) of the Act to the extent of provision created by debit to profit and loss account of only a sum of Rs.295,55,54,682 based on decision of Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 the Assessee submitted that its claim is based on the decision of the ITAT, Bangalore in Assessee's own case in Syndicate Bank v. Dy. CIT [2001] 78 ITD 103 wherein it was held that irrespective of the debit to the profit and loss account on account of Provision for Bad and Doubtful Debts (PBDD), an Assessee is entitled to 10% of the AARA as deduction u/s.36(1)(viia) of the Act.

17. The AO however held that the decision of the ITAT in Assessee's own case was not accepted by the Revenue and an appeal has been preferred to the Hon'ble Karnataka High Court and therefore he would prefer to follow the decision of the Hon'ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra). Accordingly the AO disallowed a sum of Rs.207,93,45,338/-.
18. Apart from the above, the AO also disallowed the sum of Rs.295,55,54,682 out of Rs.503,49,00,000 claimed as deduction u/s.36(1)(viia) of the Act. The reasons given for disallowing claim for deduction of Rs.295,55,54,682/- u/s.36(1)(viia) of the Act by the AO was that there was already credit balance in the PBDD as on 1.04.2005 Balance B/F was Rs. 912,57,47,169. According to the AO, 10% of AARA can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the PBDD account. 10% of the AARA as admitted by the Assessee as per revised census of 2001 was 352.53 crore. According to the AO, even if Bad debts written off of Rs.179,21,88,992 is reduced, still the balance in the PBDD account was Rs.733,35,58,177/-. Since the balance so available in PBDD account was more than 10% of AARA, the AO held that deduction on the basis of new provision of Rs.295,55,54,682/- cannot be allowed. In this regard, the AO referred to the contention of the Assessee which was to the effect that in each year the Assessee can create 10% of AARA and concluded that the expression "not exceeding ten per cent of the aggregate average advances" used in Sec.36(1)(viia) of the Act cannot mean that provision can be created each year irrespective of the available balance in the PBDD account. The AO also referred to a situation where there is no claim for bad debts in a year, even then the Assessee will be entitled to claim deduction by way of PBDD, which according to the AO, would not be the intention of the legislature. The AO thus refused to allow the claim of the Assessee for deduction of 10% of AARA. The AO however allowed deduction of 7.5% of total income as contemplated by Sec.36(1)(viia) of the Act. Thus out of the claim of the Assessee for deduction on account of provision for bad and Doubtful debts u/s.36(1)(viia) of the Act of Rs.503,49,00,000 comprising of the following two amounts:

10% Average rural advances 7.5% of gross total income	Rs.465,68,72,477
(7.5% of Rs.504,03,66,972)	Rs. 37,80,27,523
Total	Rs.503,49,00,000

a sum of Rs.37,80,37,523 being 7.5% of gross total income alone was allowed as deduction as stated in the body of the assessment order, but no such deduction is actually allowed in the computation of total income as made by the AO in the order of assessment. But there is no dispute raised by the Assessee with regard to deduction of 7.5% of gross total income.

19. With regard to the claim for deduction u/s.36(1)(vii) of the Act, the AO referred to the provisions of sec.36(1)(vii) of the Act which allows deduction in computing the income referred to in Section 28 subject to the provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee during the previous year. The AO referred to the proviso and Explanation below Sec.36(1)(vii) of the Act which reads as under:

"Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

Explanation.—For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee."

20. The AO held that as laid down in the proviso to Sec.36(1)(vii) bad debts written off should first be adjusted towards provision created u/s.36(1)(viia) of the Act and only if the bad debts written off is more than the credit balance in the PBDD account can deduction u/s.36(1)(vii) be allowed to the extent of such excess. He thereafter found that the credit balance in the PBDD as on 1.04.2005 Balance B/F was Rs. 912,57,47,169 and the provision created during the year as on 31.03.2006 Provision for NPA's of Rs. 295,55,54,682 making a total credit balance of Rs.1208,13,01,851. He found that the Assessee had claimed bad debts written off of rural advances of Rs.8,59,02,507 and even if that is adjusted still there would be sufficient credit balance in the PBDD account which would be in excess of the sum of Rs.170,62,86,485 claimed as deduction u/s.36(1)(vii) of the Act by the Assessee. The AO therefore held that the deduction u/s.36(1)(vii) of the Act claimed by the Assessee cannot be allowed.

21. Aggrieved by the order of the AO, the Assessee preferred appeal with regard to disallowance of deduction both u/s.36(1)(vii) and 36(1)(viia) of the Act.

22. With regard to the deduction u/s.36(1)(viia) of the Act, the Assessee contended before CIT(A) that the ITAT in Assessee's own case for AY 87-88 (Syndicate Bank's case (supra) held that irrespective of the quantum of PBDD created in the books of account, an assessee was entitled to claim deduction by way of provision of 10% of the AARA. It was argued that the decision in Assessee's own case has to be followed rather than the decision rendered by a non-jurisdictional High Court in the case of State Bank of Patiala (supra). It was further contended that it was not open to the AO to reduce claim for deduction on account of PBDD u/s.36(1)(viia) by the amount of provision created in an earlier year. On the above submission, the CIT(A) held as follows:

"30. I have carefully considered the facts and the rival submissions. I am inclined to agree with the appellant that the jurisdictional ITAT bench's decision in the appellant's own case is binding on the assessing authority, notwithstanding that the decision has not become final. The Hon'ble Tribunal has, in its order dated 23.06.2000 in [2001 178 ITD 103 (Bang.) in the appellant's own case for assessment year 1987-88, held that, it was a misconception that the deduction under clause (viia) was related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause was that, once a provision for bad and doubtful debts was made by a scheduled rural branches, the assessee was entitled to a deduction which was quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this was a specific deduction given by the statute, irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts. Respectfully following this decision, I hold that the assessing officer was not justified in disallowing the amount claimed under section 36(1)(viia) and delete the disallowance."

23. With regard to deduction u/s.36(1)(vii) of the Act, the Assessee contended that proviso to Sec.36(1)(vii) is applicable only to bad debts written off of rural debts and not to non-rural debts. Since the claim of deduction of Rs.170,62,86,485 made by the Assessee u/s.36(1)(vii) of the Act pertained to bad debts of non-rural debts, the credit balance in the PBDD account should not be looked into at all. The Assessee placed reliance on several decisions for the above proposition viz., South Indian Bank Ltd. v. CIT [2003] 262 ITR 579/130 Taxman 749 (Ker), Dhanalakshmi Bank Ltd. v. CIT [2003] 131 Taxman 774 (Ker), Dy. CIT v. Catholic Syrian Bank Ltd. [2004] 88 ITD 185/(Coch.) (SB)CIT v. City Union Bank Ltd. [2007] 291 ITR 144/163 Taxman 495 (Mad.).
24. On the above submissions of the Assessee, the CIT(A) held as follows:

"31. As regards the disallowance of Rs. 1,70,62,86,485 claimed under section 36(1)(vii), bad debts written off under section 36(1)(vii) and provision for bad and doubtful rural debts under section 36(1)(viia) are two distinct and separate classes of debts. The bad debts referred to in section 36(1)(vii) are urban debts, whereas the bad debts referred to in section 36(1)(viia) are rural debts. Proviso to section 36(1) provides that rural debts cannot be written off in excess of the provision made for such debts and is applicable only if the write off and the provision are in respect of the same class of debts.

32. The view that both the allowances envisaged under section 36(1)(vii) and 36(1)(viia) are admissible deductions in computing the appellant's income and are independent of each other is confirmed by the Central Board of Direct Taxes (CBDT) Circular No. 258, dated 14.06.1979, which is still in force. Provisions made under section 36(1)(viia) are in respect of aggregate advances made by rural branches, whereas the write off under section 36(1)(vii) is in respect of a separate set of urban branches' debts, i.e., other than the rural debts covered by the provision made under section 36(1)(viia). The proviso clearly indicates that the debts for which provision has been made under section 36(1)(viia), if written off under section 36(1)(vii), would not be allowed to the extent of the provision made for such debt. The proviso does not apply to debts that are independent of the provisions under section 36(1)(viia), viz., urban debts. The restriction laid down by the proviso is to prevent double claims for deduction under both sections 36(1)(vii) and 36(1)(viia) in respect of rural debts.

34. The Hon'ble High Court of Karnataka has held in DCIT (Asst.) Special Range, Bangalore, v. The Karnataka Bank Ltd. [2008 175 Taxman 325, that deduction under section 36(1)(vii) is allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to the advances of the rural branches, subject to the limitation that an amount should not be deducted twice under section 36(1) (vii) and 36(1) (via) simultaneously. The facts in that case were that the appellant bank had, in the return for assessment year 1993-94 filed on 30-12-1993, claimed a sum of Rs. 38,28,836 as bad debts actually written off. It had also claimed provision for bad and doubtful debts under section 36(1)(via) in a sum of Rs. 1,10,94,360. The assessing officer did not allow the claim for deduction of debts amounting to Rs. 38,28,836 actually written off. The CIT(A) rejected and upheld the order of Assessing Officer and the ITAT held that deduction under section 36(1)(vii) was allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to advances of rural branches, subject to the imitation that an amount should not be deducted twice under section 36(1)(vii) and 36(1)(viia) simultaneously.

35. The Hon'ble jurisdictional High Court considered the questions of law answered by two judgments of Kerala and Madras High Courts in South Indian Bank Ltd. v. CIT [2003 262 ITR 579, and in CIT v. City Union Bank Ltd. [2007] 291 ITR 144. The ratio of the case of Kerala High Court, after considering the provisions of section 36(1)(vii) and (viia), was that a scheduled bank might be having both urban and rural branches and advances were given from both branches. Having regard to the hazards involved in realising the advances made by rural branches, particularly to agriculturists, certainly the assessee-bank would prefer to make provision for bad debt in respect of advances made in the rural branches. If an assessee made a provision under clause (viia) in respect of bad debts relating to rural advances only, to deny such an assessee the benefit provided under clause (vii) which was available to all other assessees who were engaged in money lending business would result in discrimination without reason.

36. The Legislature could not be presumed to have intended such a result in the case of scheduled banks. The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously was only to see that a double benefit in respect of the same bad debt is not being given to a scheduled bank. It was only for the said purpose that the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. The scope of the proviso to clause (vii) of section 36(1) of the Act was only to deny the deduction to the extent of bad debt written off in the books with respect to which provision was made under clause (viia) of the Act. If the bad debt written off related to debts other than for which the provision was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia).
37. If the bad debt written off related to debts other than those for which provision was made under section 36(1)(viia), such debts would fall squarely under the main part of sub-section (vii) and would be entitled to the deduction. In respect of that part of debt with reference to which a provision was made under clause (viia), the Proviso would operate to limit the deduction to the extent of the difference between that part of the debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia).

43. It is clear from the above analysis of the provisions of sections 36(1) that the assessing officer could not disallow a claim under section 36(1)(vii) in respect of an urban bad debt, either under the Proviso to clause (vii) or under condition (v) of sub-section 36(2). Thus his action in disallowing the claim under section 36(1)(vii), holding that the claim for bad debt was less than the credit balance in the Provision for Bad and Doubtful Debts account, is based on an incorrect interpretation of the legal provisions. The CIT(A) had, in his order dated 25.03.2009 in ITA No. 2/UDP/CIT(A)/07-08 in the appellant's own case for assessment year 2005-06, deleted a similar addition. In these circumstances, I delete the addition of Rs. 1,70,62,86,485 made in this assessment year as well. The assessing officer may allow the appellant's claim under section 36(1)(vii), subject to satisfaction of other applicable conditions."

25. Aggrieved by the order of the CIT(A), the revenue has raised grounds No.2 & 3 and additional grounds referred to in the earlier part of this order.

26. The first aspect that needs to be addressed by us is with regard to the admissibility of the additional grounds for adjudication.

27. As far as the additional ground which is sought to be admitted as Gr.No.3f in the application dated 2.5.2012 of the DCIT Circle-1, Udupi, the same reads thus:

"3.f. The Ld. CIT(A) ought to have noted that assessee's claim of 10% of average rural advances u/s 36(1)(viia) is based on categorization of places as made by RBI and not in accordance with Expln.(ia) below section 36(1)(viia). Reliance is placed on the decision of the Hon'ble High Court of Kerala dated 07.10.2010 in ITA No. 234 of 2009 in the case of CIT v. The Lord Krishna Bank Ltd. (195 Taxman 57) wherein it has been held that 'place' referred to in the definition clause for the purpose of identifying the branch as a rural is the revenue village with population in the village as a unit is less than 10,000 and therefore the claim of the assessee bank needs to be restricted to the advances made by such branches."

Under Section 36(1)(viia) of the Act, in respect of any provision for bad and doubtful debts made by a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, is entitled to deduction (a) of an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and (b) an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. In respect of the deduction referred to in (b) above, "rural branch" has been defined under Expln.-(ia) to Sec.36(1)(viia) of the Act as a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year. It is the stand of the learned CIT DR before us that the assessee bank had never submitted the list of 'rural branches' during the course of assessment proceedings, which have been taken into consideration for the computation of PBDD claimed u/s 36(1)(viia)(a) in the years under appeal. It is only on 24.8.2012, that it has submitted a list of 745 'rural branches' with corresponding population figures. It was his submission that the Assessee has not submitted even after specific request by AO, the Census Year, or any other basis, from where the population figures of 'rural' branches have been quoted. According to him, scrutiny of the names of rural branches reveals that many of the so-called 'rural' branches are not rural in the first place, and also had population above 10000, as per Census 2001 for which population figures were published by the Directorate of Census Operations in the year 2002 itself. It was submitted that many of the 'rural' branches ceased to be 'rural' because of merger/amalgamation of such villages (in which the branch was located) into the municipalities of towns and cities by the respective ministries of Urban Development of the states, through notifications issued before and after 2001, however the assessee has continued to claim such branches as 'rural', and has not changed the classification ever to reduce the number of such branches and their advances.

28. It was further submitted that as per the RBI Circular on the subject, for the purpose of correct classification of a centre (city/town/village) i.e. rural, semi-urban and urban or metropolitan, the bank is required to obtain such classification from BDO, Municipal Offices, District Collector, District Census Authorities or from DISM (RBI), for sending various annual reports to the RBI. According to him no such annual exercise has been undertaken by the assessee bank, and the branches continue to be classified by it as 'rural' branches, based perhaps on Census figure of 1991, even as late as for AY 2005-06, oblivious of the changes over the years in urbanization process, govt. notifications and figures of Census 2001, published in year 2002.

29. The learned DR has in his submissions given an analysis of some of the branches/centres classified as 'rural' by the assessee stated to have been made based on the Census figures and classification of 2001, as indicated in the table below. Verification of other branches could not be made in the absence of their geographical location, and municipal status:-

Sl. No.	Branch Name	Population claimed	Population as per Census 2001	Census Town/2001 Municipalities
15		7108	8604	Census Town
16		5390	15860	MC
20		8798	14913	MC
24		6754	11194	MC
38&39		7446	-	CMC, Bommanahalli
79		4504	6273	Census Town
150		9472	13186	CT
253,592		8708		CMC, BUA
299		9684	17980	TP
302		9659	18983	CT
336		4514		CMC, BUA
663		3935	9090	MC

30. According to him the table given above clearly establishes that the assessee bank has misrepresented facts regarding the classification of 'rural' branches, and hence rural advances. The provisioning (PBDD) has to be made based on the analysis of such correct rural advances as per RBI norms. It was his submission that since this goes to the root of the matter, the additional of the department may kindly be admitted, in the interest of justice and to arrive at the correct amount of provision actually made by the assessee in respect of such actual rural branches.

31. We have considered the submissions of the learned DR. In the course of assessment proceedings before the AO, a query was raised by the AO by his letter dated 12.3.2008 regarding the claim of the Assessee with regard to deduction on account of provision for Bad and Doubtful Debts u/s.36(1)(viia) of the Act as to whether the AARA was worked out on the basis of 2001 Census because the Assessee has in one of its letter dated 19.2.2008 claimed that AARA have been worked out based on 1991 Census. The Assessee in response to the same by its letter dated 20.2.2008 gave a working of AARA as per 2001 census data. The figure as originally given in the books in this regard was revised to 3525,25,92,038. In para III.1.4 of the AO's order, the AO has accepted such working given by the Assessee. The CIT(A) has also not thought it fit to make any enquiries in this regard in exercise of his powers of enhancement. Assuming the order of the AO to be erroneous on this aspect, the same could only be set right in proceedings u/s.263 of the Act. This issue does not arise out of the order of the AO or CIT(A) at all. The issue is no doubt one facet of the claim for deduction u/s.36(1)(viia)(a) of the Act but this aspect has been examined and accepted by the AO in the order of assessment and not interfered with by the CIT(A) either in first appeal or by CIT in exercise of powers u/s.263 of the Act. We are therefore of the view that the additional ground No. 3.f now sought to be raised by the Revenue cannot be admitted for adjudication.

32. With regard to the additional ground sought to be raised by the Revenue in the covering letter dated 11.6.2012, the same reads thus:

"The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of the Hon'ble Tribunal:

(i)		Assessee's claim of deduction u/s 36(1)(viia) of Rs. 503.49 crore is not in accordance with the provisions under the Act, read with Rule 6ABA of the IT Rules, 1962, and hence not allowable to that extent?
(ii)		Since (a) non-rural bad and doubtful debts may be written off and allowable u/s 36(i)(vii) independently, and (b) only rural debts written off can be set off/debited against the provisions made u/s 36(1)(viia) in previous years, and/or to be made during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to 10% thereof, subject to available credit balance to this account.
(iii)		Alternatively, and without prejudice to the grounds above, if the computation of the provision has to also include any amount not exceeding 7.5% of the total income, such income should be restricted to the total income of rural branches, or to the amount as prescribed under the RBI prudential norms."

33. The submission of the Learned DR before us was that ground No.(i) and Ground No.(ii) would arise because of the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) rendered subsequent to the impugned order of the CIT(A) which will have a bearing on original Ground No.3 raised by the Revenue. It is therefore necessary to examine the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra).

34. Section 36(1)(vii) of the Income-tax Act, 1961 (the Act) allows deduction in computing the income referred to in Section 28 subject to the provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee during the previous year.

35. Section 36(1)(viia)(a) of the Act allows deduction in respect of any provision for bad and doubtful debts made by a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non- scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank:—

"An amount not exceeding seven and one-half per cent (7.5%) of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner."

36. A comparison of Sec.36(1)(vii) and Sec.36(1)(viia)(a) would show that Section 36(1)(vii) of the Act provides deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee, while Section 36(1)(viia)(a) provides the deduction merely for making provision for bad and doubtful debts up to the prescribed limit in respect of AAAR of such bank.

37. The facts of the case before the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) was that the Assessee claimed deduction on account of bad debts written off in respect of non-rural branches u/s.36(1)(vii) of the Act. The AO noticed that there was already credit balance in the Provision for Bad and Doubtful Debts Account u/s.36(1)(viia) (a) of the Act, which was in excess of the claim of the assessee for deduction on account of bad debts. The AO after making reference to proviso to Sec.36(1)(vii) of the Act and also Sec.36(2)(v) of the Act was of the view that the Assessee could not be allowed the deduction claimed because (i) the amount claimed as deduction on account of bad debts was not the excess available in the credit of the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act and (ii) that u/s.36(2)(v) of the Act the amount of bad debts written off should first be debited in the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act. The stand of the Assessee was that since the claim of deduction of Bad debts made by the Assessee was u/s.36(1)(vii) of the Act and pertained to bad debts of non-rural debts, the credit balance in the PBDD account should not be looked into at all because it pertains only to Rural Branches. The Hon'ble Supreme Court held:

"(i)		The provisions of Section 36(1)(vii) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other.
(ii)		Clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to sec. 36 demonstrate that the deduction on account of provisions for bad and doubtful debts under sec. 36(1)(viia) is distinct and independent of the provisions of s. 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches.
(iii)		The language of sec. 36(1)(vii) is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to sec. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of sec. 36(1)(vii) on the one hand and that it satisfies the requirements stated in sec. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under sec. 36(1)(viia). The Explanation to sec. 36(1)(vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of sec. 36(1)(vii) simpliciter.
(iv)		As per the proviso to cl. (vii) of sec. 36(1), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances."

The Hon'ble Chief Justice, His Lordship Mr. S.H. Kapadia, in his concurring judgment had summed up the position in the following words:

"The provisions of cl. (viia) of sec. 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of sec. 36(1)(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under sec. 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under s. 36(1)(viia). A reading of the circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of cl. (viia) and also on the basis of actual write off under cl. (vii). This situation is taken care of by the proviso to cl. (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under cl. (viia). CBDT itself has recognized the position that a bank would be entitled to both the deductions, one under cl. (vii) of sec. 36(1) on the basis of actual write off and another, on the basis of cl. (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to cl. (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under cl. (viia). Thus, the proviso to cl. (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of cl. (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which cl. (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to cl. (vii)."

38. The ratio of the Hon'ble Supreme Court can be explained with an example on assumed figures. Let us say in the assessment year 2006-07, an assessee gets deduction on account for provision for Bad and Doubtful Debts of rural branches, under Section 36(1)(viia)(a) of say Rs.100 crore. In the very next year, i.e., assessment year 2007-08, if the Assessee writes off bad debts relating to rural advances amounting to Rs.60 crore, then he has to debit the PBDD A/c., by Rs.60 crores in view of the provisions of Sec.36(2)(v) of the Act. In AY 07-08, the Assessee will not get any deduction on account of write off of bad debts relating to rural branches because, he still has a balance of Rs.40 crore in the PBDD A/c., since the proviso to clause (vii) will be applicable. Hence the balance in the PBDD A/c., at the end of the year will be Rs.40 crore.

39. In assessment year 2008-09, if the Assessee writes off bad debts relating to rural advances amounting to Rs.50 crore, then he can get a deduction of Rs.10 crore on account of bad debts written off relating to rural branches in AY 08-09 because, the deduction allowed as provision for bad and doubtful debts was only Rs.100 crore, and Rs.10 crore is in excess of the amount already allowed as provision.

40. The ratio laid down by the Hon'ble Supreme Court can be summed up as follows:—

(1)		Deduction under Section 36(1)(vii) of the Act is available for deduction on account of Bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actually written off in the books and debited to Profit & Loss Account. Deduction cannot be claimed for creating Provision for Bad and Doubtful Debts of Non-rural branches. It is like any other bad debt written off which is allowed as deduction in the case of Assessees who are not in banking business.
(2)		Deduction u/s.36(1)(viia)(a) is allowed when a Provision for bad and doubtful debts relating to rural advances is made in the books of account subject to the limit laid down therein.
(3)		When a deduction is allowed u/s.36(1)(viia)(a) of the Act by way of provision, there will be no deduction under clause (vii) for actual write off of bad debts relating to rural advances, until or unless there is a balance lying in the provision account made under clause (viia). This so because of the Proviso to Section 36(1)(vii) of the Act which provides that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Thus the proviso ensures that there is no double deduction, i.e., firstly getting a deduction when a provision is created and secondly getting a deduction when bad debts are written off.

41. Rule 6ABA of the Income Tax Rules, 1962 (the Rules) lays down the manner of computation of Aggregate Average Advances for the purpose of clause (a)(viia) of Sec.36(1) and it reads thus:
"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."

42. Now with regard to additional ground No.(i) sought to be raised by the Revenue, there is no dispute by the AO in the order of assessment that the provision of Rs.503.49 crore is not in accordance with Rule 6ABA of the rules. The case of the AO was that (i) deduction u/s.36(1)(viia)(a) will be allowed only to the extent provision is created in the books; (ii) Even when such provision is created in the books, if there is opening balance in the PBDD A/C. that has to be taken into account and it is only where the provision made is in excess of the opening balance of provision available in PBDD A/c., subject to the limits prescribed in Sec.36(1)(viia)(a) of the Act that will be allowed as deduction. Therefore the additional gr. No. (i) sought to be raised by the Revenue does not arise out of the order of the AO or the CIT(A) and the same cannot be therefore admitted for adjudication. Even assuming there was an error on the part of the AO in this regard that could have been set right either in proceedings u/s.263 of the Act or by the CIT(A) in exercise of his powers of enhancement. The revenue cannot seek to raise an issue concluded in the assessment in the form of an additional ground before the Tribunal.

43. As far as additional ground No.(ii) is concerned, the plea of the learned DR was that the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) was rendered on the presumption that banks maintain separate accounts for rural and non-rural debts. According to him prior to the aforesaid decision revenue looked at PBDD A/C. only for Assessee as a whole and did not bifurcate, the PBDD A/C. as pertaining to rural and non-rural branches. His submission was that the Assessee should be directed to give bifurcation of PBDD A/C. as one relating to Rural branches and one relating to Non-rural branches, so that the available credit balance in the bifurcated account can be seen and deduction u/s.36(1)(viia)(a) can be allowed at 10% of the AARA subject to the available credit balance in the bifurcated PBDD A/C. referable to rural branches.

44. We have considered his submission and are of the view that the submissions are made on a total misconception of the manner in which provision for Bad and Doubtful debts relating to rural advances are allowed u/s.36(1)(viia)(a) of the Act. Under Sec.36(1)(viia)(a) deduction is allowed when (a) Provision is made in the books of account at 10% of the AARA ; (b) AARA is computed in accordance with Rule 6ABA of the Rules; (c) 7.5% of the total income. The opening balance in the PBDD A/C. is irrelevant for allowing the said claim. That becomes relevant only when a claim for deduction on account of Bad debts written off in respect of rural advances is made by an Assessee. If such a claim is made then the proviso to Sec.36(1)(vii) of the Act and Sec.36(2)(v) of the Act will come into play. For allowing deduction u/s.36(1)(viia)(a) of the Act, no bifurcation of PBDD A/C. is required. What is relevant is the provision made in the books of account of the Assessee. We will demonstrate this with examples:

Example-1:
Provision made during the year	-	Rs.50 crore
10% of rural advances	-	Rs.35 crore
7.5% of total income before deduction u/s.36(1)(viia)	-	Rs.5 crore
Example-2
Provision made during the year	-	Rs.30 crore
10% of rural advances	-	Rs.35 crore
7.5% of total income before deduction u/s.36(1)(viia)(a)	-	Rs. 5 crore
Deduction u/s.36(1)(viia)(a)
Example:- 1:
Particulars	Amount (Rs. In crore)
10% of AARA	35
7.5% of total income	5
Total eligible amount	40
Provision made in the books during the year	50
Deduction allowable u/s.36(1)(viia)(a)	40
Example: 2
Particulars	Amount (Rs. In crore)
10% of AARA	35
7.5% of total income	5
Total eligible amount	40
Provision made in the books during the year	30
Deduction allowable u/s.36(1)(viia)(a)	30

In the first example, though the Assessee made PBDD of Rs.50 crore in the Books of Account, since 10% of AARA is only Rs.35 crore, deduction to that extent alone will be allowed u/s.36(1)(viia)(a) of the Act.

In the Second example, though the Assessee made PBDD of Rs.35 Crores in the Books of Account, 10% of the AARA is only Rs.30 crore and therefore deduction of only Rs.30 crore will be allowed u/s.36(1)(viia)(a) of the Act.

45. Thus the submission made by the learned DR with regard to opening balance available in PBDD A/C. are all irrelevant and therefore Gr.No.(ii) even if found admissible is without any merit.
46. As far as Gr.No.(iii) is concerned, the provisions of Section 36(1)(viia)(a) of the Act lays down as follows:
"(viia) in respect of any provision for bad and doubtful debts made by —

(a)

a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner;

Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year."

The section clearly lays down that deduction of 7.5% of the total income has to be allowed as deduction. The plea of the learned DR to restrict the allowance to 7.5% of the total income of the rural branches is contrary to the provisions of the Act. The deduction on account of PBDD in respect of Non Performing assets contemplated by the first proviso to Sec.36(1)(viia)(a) is based on classification of Non Performing assets as per the prudential norms of Reserve Bank of India. The AO did not dispute the classification as made by the Assessee in its books of account. The deduction under the first proviso to Sec.36(1)(viia)(a) of the Act is in addition to what is allowed under Sec.36(1)(viia)(a) of the Act and the Assessee is given the option to claim deduction under the proviso. The above being the purport of the provisions, we find no basis for Addition Gr.No.(iii) sought to be raised by the Revenue. Gr.No.(iii) is therefore held to be unsustainable on merits and does not even require an admission for adjudication as it does not arise out of the order of the AO or CIT(A).

47. Now, we will deal with the main grounds 2 & 3 raised by the Revenue. As far as Gr.No.2 of the original grounds raised by the Revenue is concerned, the AO disallowed the claim for deduction on account of Bad Debts written off in respect of non-rural debts. The AO did not allow the claim of the Assessee by applying proviso to Sec.36(1)(vii) which lays down that bad debts written off should first be adjusted towards provision created u/s.36(1)(viia) of the Act and only if the bad debts written off is more than the credit balance in the PBDD account can deduction u/s.36(1)(vii) be allowed to the extent of such excess. He thereafter found that the credit balance in the PBDD as on 1.04.2005 Balance B/F was Rs. 912,57,47,169 and the provision created during the year as on 31.03.2006 Provision for NPA's Rs. 295,55,54,682 making a total credit balance of Rs.1208,13,01,851. He found that the Assessee had claimed bad debts written off of rural advances of Rs.8,59,02,507 and even if that is adjusted still there would be sufficient credit balance in the PBDD account which would be in excess of the sum of Rs.170,62,86,485 claimed as deduction u/s.36(1)(vii) of the Act by the Assessee. The AO therefore held that the deduction u/s.36(1)(vii) of the Act claimed by the Assessee cannot be allowed. The CIT(A) deleted the addition holding that PBDD A/c. is not relevant when Bad debts are written off in respect of non-rural debts. With the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra), we are of the view that the order of the CIT(A) on this issue has to be upheld. The learned DR however sought to put forth a plea with regard to bifurcation of PBDD A/C. into one in relation to Rural branches and the other relating to non-rural branches. We have already dealt with this argument while dealing with the additional grounds raised by the Assessee. The PBDD A/C. is not relevant while allowing deduction u/s.36(1)(vii) of the Act in respect of Bad debts written of non-rural branches. We find no merits in Gr.No.2 raised by the Revenue.

48. As far as Gr.No.3 raised by the Revenue in the original grounds of appeal is concerned, the AO disallowed the entire claim for deduction of Rs.503,49,00,000/- on the following ground.

"(a)		The provision for bad and doubtful debts in respect of rural advances was created by debit to profit and loss account of only a sum of Rs.295,55,54,682 whereas the claim for deduction actually made u/s.36(1)(viia) of the Act was a sum of Rs.503,49,00,000/-. The AO was of the view that as laid down by the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT 272 ITR 53 (P & H), claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The AO therefore proposed to disallow a sum of Rs.207,93,45,318 (Difference between Rs.503,49,00,000 and Rs.295,55,54,682).
(b)		Apart from the above the AO also disallowed the sum of Rs.295,55,54,682 out of Rs.503,49,00,000 claimed as deduction u/s.36(1)(viia) of the Act. The reasons given for disallowing claim for deduction of Rs.295,55,54,682/- u/s.36(1)(viia) of the Act by the AO was that there was already credit balance in the PBDD as on 1.04.2005 Balance B/F was Rs. 912,57,47,169. According to the AO 10% of AARA can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the PBDD account. 10% of the AARA as admitted by the Assessee as per revised census of 2001 was 352.53 crore. According to the AO even if Bad debts written off of Rs.179,21,88,992 is reduced still the balance in the PBDD account was Rs.733,35,58,177/-. Since the balance so available in PBDD account was more than 10% of AARA, the AO held that deduction on the basis of new provision of Rs.295,55,54,682/- cannot be allowed. In this regard the AO referred to the contention of the Assessee which was to the effect that in each year the Assessee can create 10% of AARA and concluded that the expression "not exceeding ten per cent of the aggregate average advances" used in Sec.36(1)(viia) of the Act cannot mean that provision can be created each year irrespective of the available balance in the PBDD account. The AO also referred to a situation where there is no claim for bad debts in a year even then the Assessee will be entitled to claim deduction by way of PBDD which according to the AO would not be the intention of the legislature. The AO thus refused to allow the claim of the Assessee for deduction of 10% of AARA."

49. The CIT(A) deleted the addition made by the AO by following the decision of the ITAT in Assessee's own case in Syndicate Bank (supra) wherein it was held that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an Assessee is entitled to 10% of the AARA as deduction u/s.36(1)(viia) of the Act. The relevant observations of the Tribunal in the aforesaid decision was as follows:

"20. The learned CIT has also acted under the misconception that deduction under cl. (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is entitled to a deduction which is quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this is a specific deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts."

50. In the appeal before the Tribunal, in Ground No.3 of the original grounds of appeal, the Revenue has challenged the order of CIT(A) insofar as it relates to the deletion of a sum of Rs.207,83,45,338 which is the difference between Rs.503,49,00,000 and Rs.295,55,54,682. The learned DR relied on the decision of the ITAT Bangalore Bench in the case of Canara Bank in ITA No.58/Bang/2004 dated 9.6.2006. In the aforesaid decision this Bench considered the decision of the ITAT in the case of Syndicate Bank (supra) and the decision of the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra) and held that the decision rendered by the Hon'ble High Court has to be followed. The above decision is the decision brought to our notice on the issue rendered after the decision in Assessee's own case. Judicial discipline demands that we follow the later decision which has considered both the decisions on the issue. We therefore respectfully following the decision of the Tribunal in the case of Canara Bank (supra), allow Gr.No.3 raised by the Revenue and hold that disallowance to the extent of Rs.207,83,45,338/- be restored. Thus Gr.No.3 raised by the revenue is allowed.

51. Ground No.4 raised by the revenue reads as follows:—

'4. Profit on sale of investments and investment trading loss - Rs.446,82,97,535

4.a. The learned CIT(A) erred in accepting the assessee's claim that the assessee has traded in securities, shown as Investments in the Balance Sheet, and that the assessee has incurred loss of Rs.374,97,43,513/- on account of revaluing the investments, held as on 31-3-2006, at cost or market value whichever is less.

4.b. The learned CIT(A) erred in not considering the fact that during the year the assessee has made profit of Rs.71,85,54,022/-on sale of investments, which is credited to P & L A/c, as against loss of Rs.374,97,43,513/- as claimed.

4.c. The learned CIT(A) failed to consider that as per the guidelines issued by the Reserve Bank of India, the assessee can claim depreciation only in respect of investments held under the category "Held for Trading" and Available for sale', and there was no depreciation admissible to the assessee during this year.

4.d. The learned CIT (A) erred in not considering the orders of his predecessor in the case of Corporation Bank, Mangalore, for the asst. year 2005-06 - ITA No. 66/MNG/CIT(A)/MNG/07-08 dt. 25-4-2008 - wherein the CIT(A) has held that only Investments held under the category 'Held for Trading' can be considered as in the nature of stock-in-trade, and that investments falling under the category 'Available for sale' and 'Held to Maturity 'cannot be considered as stock-in-trade but only as investments.'

52. While arriving at the business income for the purpose of income tax, the assessee deducted profit on sale of investments amounting to Rs.71,85,54,022 and added back depreciation on investment amounting to Rs.10,32,20,170 and amortization amounting to Rs.29,60,93,787. Apart from the above, the assessee also claimed loss on trading of investments amounting to Rs.374,97,43,513 by filing an investment trading account as under:-

Op. stock of Securities	Rs. 19694,87,62,367	By Sales	Rs.91858,05,08,997
Purchases	Rs.88562,07,25,257	Cl.Stock	Rs.16023,92,35,114
		Loss	Rs. 374,97,43,513
	Rs.108256,94,87,624		Rs.108256,94,87,624

53. According to the assessee, it has been consistently treating income from investments other than shares as 'income from business' and offering to tax such income under the head 'income from business'. The assessee pointed out that the revenue has accepted the claim of the assessee in the past. The assessee therefore submitted that the stock of investments have to be treated as stock-in-trade and the diminution in the value of the stock-in-trade as on the last day of the previous year has to be allowed as a deduction. In this regard, the assessee also pointed out that as per the RBI guidelines, the assessee has to classify investments in India into three categories viz., (a) held to maturity, (b) available for sale, and (c) held for trading. The assessee pointed out that investments held under the head 'held to maturity' are valued at cost, except in a case where they were acquired at a premium in which case the premium was amortized over the remaining life of the security. As far as investments under the head 'available for sale' and 'held for trading' is concerned, the assessee pointed out that such investments were valued at cost or market price, whichever is lower. If the value of the investments on the last day of the previous year is less than the cost price, the depreciation in its value is claimed as a deduction. The AO did not accept the claim of the assessee. He was of the view that the entire investment portfolio in the case of a bank cannot be considered as stock-in-trade. He was of the view that investments under the category 'available for sale' and 'held for trading' can be considered as stock-in-trade, but in the case of investments under the category 'held to maturity', they were purely of the nature of investments and not in stock-in-trade, therefore the loss claimed on diminution of value cannot be allowed. These observations of the AO are found in Para IV.8 of his order. He ultimately disallowed the entire claim of the assessee for deduction of diminution in the value of investments of Rs.374,97,43,513 by referring to the reasons given for making such disallowance in assessee's own case for the A.Y. 2005-06.

54. Apart from the above, the assessee had also claimed profit on sale of investments at Rs.71,85,54,022 but did not offer it to tax for the reason that the profit on sale of investment is already reflected in the investment trading account referred to in the earlier paragraph-52 of this order. The AO ignoring the above submission, treated the aforesaid income as also part of the business income. Thus, the AO made an addition of Rs.446,82,97,535 [ 374,98,43,513 diminishing in value of securities claimed as deduction disallowed + 71,85,54,022 profit on sale of investments not offered to tax but brought to tax ].

55. Aggrieved by the addition made by the AO, the assessee preferred appeal before the CIT(Appeals). Before CIT(A) the Assessee contended that it has been consistently and historically treating the entire investments as stock-in-trade in all these years and it was a legally accepted practice in the banking industry. It was also a prudent practice that enabled the banking industry to bring out the real income for taxation purpose and therefore, there was no justification to deny this consistent practice, which had been accepted even by the RBI. The department had also taxed the income from such investments as business income. All investments of the bank were stock-in-trade and hence had to be valued at the 'lower of cost or market value' (LCMV). The RBI Circular referred to by the assessing officer only gave directions for uniform presentation in the published balance sheet and not for the purpose of computation of real income under the Income-Tax Act. Therefore, treatment of the investments in the books of account based on RBI guidelines had no bearing on the bank's income-tax assessment. The assessing officer was not justified in following RBI classification and ignoring the LCMV method as per international banking practice. With regard to the action of the assessing officer in adding the profit on sale of investments it was submitted that the AO had failed to appreciate that the profit credited to P & L account had been reworked by the assessee by preparing a separate investment trading account. The said account took into consideration the actual profit on sale of investments which were offered for income-tax purposes and the loss arising on account of valuing all its investments which were held as stock-in-trade (other than shares) at LCMV, in accordance with the generally accepted accounting practice, which had been upheld in a number of judicial decisions. It was highlighted that the classification made in the books as HTM was purely temporary since banks had a right to reclassify the investments into other categories once in a year with the permission of its Board of Directors. Further, as per the said RBI circulars, there was no prohibition on banks selling securities in HTM category before maturity. It was argued that wherever the intention of the Act was to compute income in accordance with RBI circulars, the same had been provided for. For example, in the case of section 43D read with rule 6EA, the Act clearly provided that interest in relation to such categories of bad and doubtful debts, as may be prescribed having regard to the guidelines issued by RBI, would be charged to tax in the year in which it was credited to the profit and loss account, or when it was recovered, whichever was earlier. Similarly, in section 36(1)(viia), a deduction was allowed in respect of such categories of doubtful and lost assets identified in accordance with the guidelines of RBI. In the absence of any such specific provision in the Act, the assessing officer should not have disallowed the claim by making reference to guidelines of RBI. Reliance was placed on the decision dated 07/01/2005 of the Chennai bench of ITAT in the case of Bharat Overseas Bank Ltd. in ITA No.241/Mds/2001 for the assessment year 1996-97.

56. The CIT(A) on a consideration of the above submissions, held as follows:
"50. I have carefully considered the rival submissions. The view that investments of banks are stock-in-trade is supported by various judicial pronouncements including those in the cases of CIT v. Karur Vysya Bank Ltd. [2005] 273 ITR 510 (Mad), ITO v. J&K Bank Ltd. [2005] 95 ITD 141 (Asr), United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), Lakshmi Vilas Bank Ltd. v. CIT [2006] 284 ITR 93 (Mad), CIT v. Corporation Bank [1998] 174 ITR 616 (Kar), CIT v. South Indian Bank Ltd. [2000] 241 ITR 374 (Ker), CIT v. Bank of Baroda [2003] 262 ITR 334 (Bom.), CIT v. Nedungadi Bank [2003] 264 ITR 545 (Ker.), DCIT v. Nedungadi Bank [2003] 85 ITD 1 (Coch), Ivory Mar v. Union of India [2002] 255 ITR 425 (Del), and the decision of the Hon'ble ITAT in ITA No. 50/Bang/1997, dated 29.07.2003, in the case of Karnataka Bank Ltd.

51. The Hon'ble ITAT has also considered the same issue in its order dated 03.12.2008 in (ITA No. 112/Bang/2008 in the case of Corporation Bank in assessment year 2004-05. It has held that the decision of the Hon'ble Supreme Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 was directly applicable to this issue. In that case, the Hon'ble Supreme Court has held that preparation of the balance sheet in accordance with statutory provisions will not disentitle the assessee from submitting the income-tax return on its real taxable income in accordance with the method of accounting it adopts consistently and regularly. For the purpose of income-tax, what is to be taxed is real income, which is to be deduced on the basis of the accounting system regularly maintained by the assessee. The method by which the assessee bank is valuing securities by treating them as stock-in-trade is in accordance with the accounting principles and the revenue itself is treating the profit on maturity of such securities as business income. Therefore, such securities cannot be treated as capital assets.

52. Following the above decision of the Hon'ble Supreme Court, and in line with its decision dated 24.01.2008 in ITA No. 253/Bang/2007 in the case of ACIT (LTU) v. Vijaya Bank, the Hon'ble ITAT has held that the assessee bank is entitled to value all investments at LCMV by treating such investments as stock-in-trade, and has deleted the disallowance made on loss on valuation. The Hon'ble High Court of Karnataka has, in the case of CIT v. Corporation Bank (1998) 174 ITR 616, also upheld the ITAT's decision. Respectfully following these judicial pronouncements, I delete the disallowance of Rs. 71,85,54,022 on sale of investments and Rs. 374,97,43,513 on trading loss in investments."

57. Aggrieved by the order of the CIT(Appeals), the revenue has raised ground No.4 before the Tribunal.

58. We have heard the submissions of the ld. DR and the ld. counsel for the assessee. The ld. DR relied on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. [2012] 208 Taxman 511/24 taxmann.com 51. In the aforesaid decision, the Hon'ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing income under the Income-tax Act. The Hon'ble Court further took the view that every investment held by a bank cannot be considered as stock-in-trade. The Hon'ble High Court finally concluded that 30% of the investments can be clothed to the character of stock-in-trade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction.

59. The ld. counsel for the assessee, however, submitted that in the assessee's own case for the A.Y. 2005-06, this Tribunal has confirmed the order of the CIT(A), deleting identical addition made by the AO. Our attention was also drawn to the order of the Tribunal in assessee's own case in ITA No.492/Bang/2009 for the A.Y. 2005-06, order dated 13.01.2012, wherein the Tribunal had to deal with identical issue as to whether the CIT(A) was correct in deleting the addition made by the AO on account of profit on sale of investments of Rs.200,77,13,662/- and deleting the action of the AO in disallowing loss claimed on treating investments as stock-in-trade by drawing the investment trading account of Rs.775,96,55,047. The Tribunal held.

'16. We have heard both sides and find that the Supreme Court in the case of UCO Bank in 240 ITR 355 has held as under :

"In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance sheet in the prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case."
The Bangalore Bench of ITAT in Corporation Bank (supra) has also followed the above decision of the Hon'ble Supreme Court as also the ITAT, Mumbai and ITAT, Chennai. Following the above decisions, we are deciding this issue in favour of the assessee. This ground of appeal by the Revenue is dismissed.'

60. Apart from the above, the ld. counsel for the assessee also submitted that the decision rendered by the Hon'ble High Court of Karnataka in the case of ING Vysya Bank Ltd. (supra) is per incuriam the decision of the Hon'ble Supreme Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601. He brought to our notice that the Hon'ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act, following mercantile system of accounting both for book keeping as well for income-tax purposes. The Hon'ble Apex Court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income-tax purposes. The Hon'ble Court took the view that all investments held by a bank are to be regarded as stock-in-trade.

61. The ld. counsel for the assessee further drew our attention to a very recent decision of the Hon'ble High Court of Karnataka rendered on 11.03.2013 in the case of CIT v. Vijaya Bank, ITA No.687/2008.The Hon'ble High Court of Karnataka in the aforesaid case followed its own decision rendered in the case of Karnataka Bank Ltd. v. CIT ITA No.172/2009 rendered on 11.01.2013,wherein the Court took the view that depreciation claimed on investments 'held on maturity' by a bank has to be treated as stock-in-trade in accordance with RBI guidelines and CBDT Circular. It was his submission that the later decision of the Hon'ble Karnataka High Court has to be followed.

62. We have given a careful consideration to the rival submissions and are of the view that the contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in assessee's own case on an identical issue for the A.Y. 2005-06 has upheld the claim of the assessee. The later decision of the Hon'ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the revenue in its appeal is without merit. Consequently, the same is dismissed.

63. Ground No.5 raised by the revenue reads as follows:—
"5. Expenditure on issue of Bonds - Rs.343,80,712
5.a. The learned CIT(A) erred in allowing the assessee's claim for deduction of stamp duty on bonds amounting to Rs.343,80,712.

5.b. The learned CIT(A) failed to consider the fact that the amount incurred for issue of bonds (series 7 &9) as expenditure for earning the income is in fact incurred for expansion of capital and has to be considered as a capital expenditure and not an admissible revenue expenditure."

64. The assessee claimed stamp duty expenses amounting to Rs. 3,43,80,712 under the head contingencies. It clarified to the assessing officer that stamp duty expenses were one time statutory expenses payable at certain percentage of the value of bonds issued to public. The expenditure on stamp duty was meagre compared to Rs. 500 crore of capital raised by the bank and negligible compared to Rs. 4,100 crore of total expenditure debited to profit and loss account. The assessing officer, however, held that the expenditure was capital in nature and disallowed the same.

65. The assessee submitted before the CIT(Appeals) that the expenditure incurred on raising the Tier-Il Bonds was incidental to the bank's business operations and was not a capital expenditure. Cost of raising debt was allowable as revenue expenditure. Reliance was placed on the Apex Court's decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 and the decision of the Hon'ble High Court of Karnataka in the case of CIT v. ITC Hotels Ltd. [2011] 334 ITR 109/[2010] 190 Taxman 430.

66. The CIT(Appeals) after considering the issue agreed with the appellant. He relied on the decision of the Hon'ble jurisdictional High Court in ITC Hotels Ltd.'s case (supra), wherein it was held that the issue is no longer res integra as the Hon'ble Supreme Court had dismissed the Revenue's SLP in CIT v. Secure Meters Ltd. [2010] 321 ITR 611/[2008] 175 taxman 567 where the Hon'ble High Court of Rajasthan had held that such expenses were revenue expenditure. Respectfully following the ratio of these decisions, the CIT(A) deleted the disallowance of Rs.3,44,80,712 being the expenditure incurred by the Bank on raising Tier-II capital.

67. We are of the view that the order of the CIT(A) does not call for any interference. The contention on behalf of the revenue that the sum raised by way of issue of bonds is capital expenditure is erroneous. The distinction between a capital and a loan is well recognized in law. The raising of funds by issue of bonds will be akin to a borrowing. The expenses incurred in issuing bonds will therefore be cost of loan or borrowing. They are therefore to be considered as revenue expenditure. The decisions relied upon by the CIT(A), in our view, clearly indicate that expenses incurred on issue of bonds have to be regarded as revenue expenditure. Consequently, we do not find any merit in this ground of appeal by the revenue and the same is dismissed.

68. Ground No.6 raised by the revenue reads as follows:—
"6. Estimated Expenditure on earning tax free income u/s 14A - Rs.1,84,93,358
6.a The learned CIT(A) erred in deleting the disallowance of Rs.1,84,93,358/- on a/c of estimated expenditure on earning income exempt u/s 10(23G) by placing reliance on the following decisions.

i.		Rajasthan State Warehousing Corp v. CIT [2000] 242 ITR 450
ii.		Wimco Seedings (P) Ltd. v. DCIT [2007] 107 ITD 267 (Hon'ble Delhi Bench of ITAT)
iii.		Maruthi Udyog Ltd. v. DCIT [2005] 92 ITD 119 (Hon'ble Delhi Bench of ITAT)

6.b The learned CIT(A) failed to appreciate the fact that the deptt. has taken a stand of disallowing proportionate expenditure in earning the exempted income for the earlier Asst Year also.

6.c. The learned CIT(A) failed to appreciate the fact that the issue is still in dispute for various AYs before appellate authorities.

6.d The learned CIT(A) failed to appreciate the fact that the assessee banks contention that being a banking company, it does not incur any expenditure on earning exempt income also is not acceptable as the investment made for shares for earning exempt income will always have a notional interest cost attached to it and the same has to be proportionately arrived at and disallowed as no expense incurred on earning exempt income is allowable as per IT Act."

69. It is not in dispute before us that identical issue was considered by this Tribunal in assessee's own case for the A.Y. 2005-06 and this Tribunal remanded the issue for fresh consideration by the AO in the light of the decision of the Hon'ble Bombay High court in the case of Godrej & Boyce Mfg. Co. Ltd., v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203. The following are the relevant observations of the Tribunal :—

'32. We have heard the rival submissions and considered the facts and materials on record. We find that in the assessee's own case for asst. years 2000-01 and 2001-02 in ITA.1283 and 1284/Bang/2007, the Tribunal allowed the claim of the assessee that prior to the insertion of Rule 8D, there was no basis to make disallowance on estimate basis. However, now the Bombay High Court in the case of Godrej Boyce (supra) has held as under :

"…the Assessing Officer is duty-bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record……. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."

33. Respectfully following the Bombay High Court decision, we are inclined to restore this issue back to the file of the Assessing Officer with a direction to decide the issue afresh by following the ratio of the decision of the Bombay High Court in Godrej Boyce Mfg. Co. Ltd., after giving effective opportunity of hearing to the assessee. This issue is allowed for statistical purpose.'

70. Following the aforesaid decision, we remand the issue to the AO for fresh consideration to be decided on the lines indicated by the Tribunal in the order for the A.Y. 2005-06.
71. Ground No.7 raised by the revenue reads as follows:—

"7. Deduction u/s 35D - Rs.2,45,15,858
7.a The learned CIT(A) erred in allowing the assessee's claim for deduction u/s 35D amounting to Rs.2,45,15,858 being 1/5th of Rs.12,25,79,290.
7.b The learned CIT(A) failed to appreciate the fact that the expenses are admissible after commencement of business only in connection with either extension of industrial undertaking or setting up of new industrial unit.
7.c The learned CIT(A) failed to appreciate the fact that the words 'Industrial undertaking" had been substituted with the word "Undertaking" only w.e.f. 01.04.2009 by the Finance Act 2008 deduction u/s 35D is not available to the bank in the current assessment."

72. The assessee claimed deduction of Rs.2,45,15,858/- being 1/5th of Rs.12,25,79,290/- incurred towards follow on Public Offer. The expenses as furnished in Annex. 5 to assessee's letter dt. 19-2-2008 to the AO was as under:

S.No.	Details of IPO Expenses	Amount (Rs.)
1.	Lead Managers Fees/Underwriting Commission	38436332.70
2.	Advertisement & Marketing Expenses	31493859.00
3.	Printing Charges (inclusive of Courier)	44220629.00
4.	Registrar's Fees	5279828.00
5.	Legal Fees	8820686.46
6.	Listing Fees	3616500.00
7.	Miscellaneous	426844.87
		132294680.03
	Less: Advertisement Expenses	9631723.00
		122662957.03
	Less: Excess provision made towards expenses	83666.70
	Follow on Issue Expenses eligible u/s 35D	122579290.33
	Less: 1/5th claimed during the ÀY 2006-07	24515858.00
	Balance	98063432.33

73. In its letter dated 19-02-2008 in para 5 - page 3 - the assessee has stated that they have incurred this expenditure on public issue of shares of Rs.50 crores made during the financial year 2005-06 and the claim is made u/s. 35D of the Act. The contention of the Assessee was that under Sec. 35D(2)(c)(iv) claim for deduction of expenses in connection with issues for public subscription of shares or debentures of the company, being underwriting commission, brokerage, charges for typing, printing and advertisement of the Prospectus are to be allowed as deduction over a period of 5 years. The assessee had treated the expenditure of Rs. 12,25,79,290/- as "Deferred Revenue Expenditure" and made a claim for 1/5th of this expenditure, as admissible deduction under sec. 35D during the year.

74. The AO was of the view that Sec. 35D of the Act allows Amortization of certain preliminary expenses. The deduction is admissible only if the following conditions are fulfilled.

(i)		An Indian Company incurs after 31.03.1970.
(ii)		Any expenditure specified under sub-section 2.
(iii)		Before commencement of its business.
(iv)		After commencement of business in connection with extension of industrial undertaking or in connection with setting up a new industrial unit.

75. The AO was of the view that the expenses incurred in connection with issue of shares being incurred for expansion of capital base is a capital expenditure and the same was considered as "Deferred Revenue Expenditure" to be amortised under sec. 35D subject to the above-mentioned conditions. The AO held that the assessee has already commenced its banking business. The assessee is a banking company and cannot be considered as an industrial undertaking. The expenses are admissible, after commencement of business, only in connection with either extension of industrial undertaking or setting up of new industrial unit. Therefore, the assessee's case does not come within the purview of sec. 35D of the Act. According to the AO, this position is made amply clear in the amendment proposed to section 35D in the Finance Act, 2008, wherein the word "industrial undertaking" has been substituted with the word "undertaking". This proposed amendment was with effect from 01.04.2009 and is, therefore, not applicable to this assessment year. The AO relying on the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26, wherein the Hon'ble Supreme Court held that expenditure incurred by the assessee-company in issuing shares with a view to increase its share capital, directly related to the expansion of the capital base of the company, and the same was held to be capital expenditure, even though such expenditure may incidentally help in the business of the company and in ifs profit-making, the AO rejected the assessees claim for deduction u/s 35D amounting to Rs. Rs.2,45,15,858/-being 1/5th of Rs.12,25,79,290.

76. On appeal by the assessee, the CIT(A) directed the AO to allow the claim for deduction holding as follows:-

"72. I have examined the issue carefully. As the assessing officer has held that the expenditure was not covered under section 35D because the bank had already commenced its business and it was not an industrial undertaking, it is apparent that he treated the expenditure as capital in nature. However, it is the appellant's case that the expenditure was revenue in nature because it was the cost of raising working capital. Though there is merit in the argument that this was not a purely capital expenditure, the nature of expenses involved is not comparable to interest on borrowed capital, but is a one-time expenditure incurred to facilitate issue of shares. As capital was raised to meet the bank's working capital needs in keeping with RBI's capital adequacy norms, the expenditure was incurred in the course of business and was incidental to the appellant's regular banking business. Under these circumstances, the expenditure is allowable under section 37(1). However, since the appellant has chosen to amortise the expenditure over five years in terms of its own accounting policy which is consistently followed, I direct that the expenditure debited in the current year may be allowed as a general deduction under section 37(1)."

77. Aggrieved by the order of the CIT(A), the revenue has raised ground No.7 before the Tribunal.
78. We have considered the rival submissions. In our view, the order of the CIT(Appeals) cannot be sustained. Firstly, the provisions of section 35D of the Act were applicable only when the expenses are incurred after commencement of business in connection with expansion of industrial undertaking or in connection with setting up of a new industrial unit. Admittedly, the assessee was not an industrial undertaking. This aspect has been overlooked by the CIT(A). Even assuming that the claim is not one made u/s. 35D of the Act, the assessee's claim for deduction as a revenue expenditure on the basis that the issue of share capital was for meeting the working capital requirement cannot also be sustained. The fact that the capital raised by issue of shares is for meeting the working capital requirement or otherwise, will not be a relevant consideration. This aspect has been made clear by the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. (supra), wherein at page No.801 in the concluding part of the judgment, the Hon'ble Supreme Court observed that by issue of shares there is increase in capital and therefore there is a expansion of capital base of the company and therefore the expenses will retain the character of capital expenditure. In view of the above, we are of the view that the action of the CIT(Appeals) in deleting the addition made by the AO cannot be sustained. Accordingly ground No.7 raised by the revenue is allowed.

79. In the result, the appeal by the revenue is partly allowed.
ITA Nos.668/Bang/2010 (Assessee's appeal)
80. Ground Nos.1 & 2 raised by the assessee reads as follows:—

"1.		That the learned CIT-A erred in law and on facts in confirming the disallowance of Rs.38,72,634/- being the provision made for credit card reward points.
2.		That the CIT-A ought to have appreciated that the Appellant had actually incurred the liability by way of credit card reward points with the cardholders availing the credit being a certainty."

81. The assessing officer disallowed Rs. 38,72,634 towards a provision made in respect of the bank's liability to reimburse credit cardholders in respect of reward points accumulated by them. Customers were awarded one reward point on every Rs. 100 spent using the 'Syndbank Visa Card' issued by the bank. Cardholders were eligible to encash the reward points after accumulating a minimum of 500 reward points, provided they made subsequent credit purchases. The assessing officer held that encashment of reward points by cardholders depended on many conditions and was therefore only a contingent liability. The accumulated reward points were 38,72,634 valued at Rs. 38,72,634, but this could be claimed as deduction only in the year all the reward points were actually encashed.

82. Before the CIT(Appeals), the assessee stated that the reward points had actually accrued and the bank was liable to incur the expenditure when cardholders exercised their option to redeem their reward points. As the assessee followed mercantile system of accounting, it had provided for the accrued points which the customers could redeem. The assessing officer had failed to appreciate that, as per the prescribed rules, the accumulated points could be utilised by customers at any point of time and, therefore, there was a contractual and legal liability on the part of the bank to redeem the points. Therefore, the provision was not a contingent liability and should have been allowed as a deduction. Without prejudice to this contention, it was submitted that at least the amount of Rs. 2,97,026 actually paid during the year in respect of the accumulated points ought to have been allowed as deduction.

83. The CIT(Appeals) after considering the submissions on the issue and perusing the terms and conditions prescribed by the bank for redemption of reward points found that customers could encash reward points in multiples of 500 points at Rs. 0.50 per point, by making a written request to the bank's Credit Card Centre. Unlike other banks, the assessee bank allows cash reimbursement, rather than making offers for providing goods and services 'in kind', in exchange for the reward points. Viewed in this perspective, the bank's liability to cardholders against accumulated reward points is certain, ascertained, and quantifiable, and is therefore not a contingent liability. However, he observed that since all cardholders do not necessarily encash reward points at the same time, or even during the same year, the bank does not incur actual expenditure in a particular in respect of all reward points earned by cardholders during that year. While the liability to pay is definite, actual payment is not. In these circumstances, it does not matter that the bank follows mercantile system of accounting and accounts for the reward points on accrual basis. What accrues is reward points, and not expenditure. The only guide to accrued expenditure is the actual expenditure incurred. For this reason, the CIT(A) allowed the assessee's alternate plea of allowing Rs.2,97,026 being the amount actually paid during the year in respect of accumulated reward points and sustained the disallowance of the remaining sum of Rs.35,75,608.

84. Aggrieved by the order of the CIT(A), the assessee has raised grounds No.1 & 2 before the Tribunal.

85. We have heard the submissions of the ld. counsel for the assessee, who submitted that the CIT(Appeals) having accepted that the liability of the assessee has accrued, fell into error in holding that the expenditure can be allowed only when the credit cardholders encash the reward points. It was his submissions that under the mercantile system of accounting followed by the assessee, accrual of liability takes place when the accumulated credit points can be encashed by a credit cardholder. In other words, on the eligibility of the credit cardholder to encash the reward points, liability of the assessee accrues irrespective of whether the card holder actually encashes the reward points or not.

86. The ld. DR relied on the order of the CIT(A).

87. We have considered the rival submissions. We are of the view that the CIT(A) has fallen into error in rejecting the claim of the assessee for deduction. As laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT [2003] 245 ITR 428/112 Taxman 61, the criteria for allowing deduction on account of a provision is that the liability to incur the expenditure which is claimed by way of a provision should be certain and secondly the quantification of such liability should be scientific/reasonable. In the present case, as per the terms of issue of credit cards, on accumulation of minimum points, the customers were free to encash those points. The assessee was legally bound to provide equivalent of reward points in cash or kind. In the case of the assessee, the reward points are given in the form of cash reimbursement. The fact that the customers did not make claim for such reimbursement will not stop the accrual of liability. In our view, the liability of the assessee insofar as accumulated reward points are concerned is certain and the revenue has not disputed the basis of quantification of such liability. In such circumstances, we are of the view that in the light of the principles laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra), the claim for deduction should be allowed. We accordingly direct the AO to allow the claim of the assessee in this regard. Grounds No.1 & 2 raised by the assessee are accordingly allowed.

88. Ground No.3 raised by the assessee reads as follows:—

"3. That the learned CIT-A ought to have accepted the Appellant's contention that not being a company under the Companies Act, 1956 but being a bank governed by the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and deemed as a company under the latter Act could not be construed as a company for the purposes of charging MAT in the light of a decision of Mumbai Bench of the Tribunal in the case of Maharashtra State Electricity Board v. JCIT reported in 82 ITD 422 and therefore should not have to be subjected to the MAT."

89. The assessing officer rejected the computation of book profits made by the appellant on the ground that it was done as per Schedule-VI of the Companies Act, but had not adopted the profit arrived at in the profit and loss account approved by shareholders in the Annual General Meeting, certified by the auditors, and filed before RBI. He rejected the assessee's contention that the bank was not a company as per Companies Act, 1956, but a statutory corporation governed by the provisions of Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970. It had prepared the profit and loss account as per the latter Act, and not in accordance with the provisions of the Companies Act. However, in view of the requirements of section 115JB(2), it had redrawn the profit and loss account in accordance with the provisions of Parts II and Ill of Schedule VI to the Companies Act. Therefore, the MAT computed in accordance with the redrawn profit and loss account was in order.

90. Before the CIT(Appeals), the assessee stated that the assessing officer had erred in adopting the net profit as per the profit and loss account prepared on the basis of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, for computing the book profit under section 115JB. He ought to have called for and adopted the profit and loss account as required under section 115JB(2) and prepared as per Schedule-VI of the Companies Act. The assessee also questioned the various other adjustments made by the assessing officer in computing the book profit. On 16.02.2010, the assessee filed an additional ground of appeal, questioning the applicability of section 115JB, while the other adjustments made by the assessing officer in computing the book profit under that section were challenged in the original grounds.

91. On the applicability of section 115JB, the assessee placed reliance on the decision of the Mumbai Bench of the Hon'ble ITAT in the case of Maharashtra State Electricity Board v. Jt. CIT [2002] 82 ITD 422, where it was held that a company which was not constituted as a company within the meaning of section 3 of the Companies Act, 1956, could not be deemed as a company within the meaning of section 616(c) of the Companies Act and since such company was not required to distribute any dividend, it would not come under the mischief of section 115JA.

92. The CIT(Appeals) was of the view that this decision is not applicable to the assessee's case because the decision was rendered in the context that the concept of an annual general meeting was alien to the Electricity Board and the reference to section 616(c), which was relevant to a company engaged in the generation or distribution of electricity.

93. The assessee bank does conduct annual general meetings, declares dividends, and is not engaged in generation or distribution of electricity. The Mumbai bench of the Hon'ble ITAT has, in the case of Union Bank of India v. Jt. CIT in their order dated 25.07.2006 in ITA Nos. 5493-5495/Mum/2000 for assessment years 1988-89 and 1990-91, held that, even though the assessee was functionally regulated by Banking Regulations Act, it was equally governed by the provisions of the Companies Act as it was basically a corporate entity. Therefore, the assessee company was bound by the provisions of law contained in section 115J. In these circumstances, the CIT(A) held that there is nothing in the provisions of section 115JB to exclude its applicability to banking companies. As regards the adoption of profit declared in the profit and loss account prepared under the Banking Companies (Acquisition and Transfer of Undertakings) Act, he relied on the decision of the Hon'ble Supreme Court has, in case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562, wherein it was held that the assessing officer had no power to rework the book profit if the profits were computed in accordance with Parts II and II of Schedule VI to Companies Act. Accordingly, he referred to his own order dated 15.01.2010 in ITA No. RB-III/UDP/CIT(A)MNG/2008-09 in the assessee's own case for assessment year 1990-91 holding that if the adjustments carried out in preparing the revised profit and loss account were in accordance with the provisions of Parts II and Ill of Schedule V to the Companies Act, the assessing officer ought to consider only the revised profit and loss account for purposes of computation of book profit under section 115J, and not the profit as per the profit and loss account prepared in accordance with the Banking Regulation Act. Following the same reasoning, the CIT(A) directed that computation of MAT may be done on the basis of the profit and loss account redrawn by the assessee in accordance with the Companies Act. The assessee was directed to furnish the profit and loss account redrawn in accordance with Schedule VI of Companies Act.

94. Aggrieved by the order of the CIT(A), the assessee has raised ground No.3 before the Tribunal.

95. At the time of hearing, it was submitted by the ld. DR that the issue can be remanded for fresh consideration as was done by the Tribunal in A.Y. 2005-06 in ITA No.504/Bang/2009, order dated 13.01.2012. The ld. counsel for the assessee, however, submitted that the Tribunal in its earlier order though noted direct judgments on the point viz.,

(1)		Order dated 30.09.2010 in ITA No.3390/2009 passed by ITAT 'G' Bench, Mumbai in the case of Krung Thai Bank PCL v. Jt. DIT (International Taxation) [2012] 49 SOT 70 (URO)/[2011] 16 taxmann.com 239;
(2)		Order dated 30.06.2011 in ITA Nos.4702 to 4706/2010 passed by the ITAT, Mumbai 'F' Bench in the case of Union Bank of India; and
(3)		Order dated 03.08.2011 in ITA No.469/2010 passed by the ITAT 'C' Bench, Chennai in the case of Indian Bank,

did not adjudicate on the applicability of section 115JB, but following an earlier order in the assessee's own case for earlier years (at which point of time the above Tribunal's decisions were not available), restored the matter to the Assessing Officer to compute book profits based on recast P & L account prepared in accordance with the Schedule-VI of the Companies Act.

96. The learned counsel for the Assessee also submitted that the provisions of Sec.115JB of the Act were amended with effect from 01.04.2013 making it obligatory, inter alia, for banks to prepare P & L account in accordance with the Banking Regulation Act is clearly indicative of legislative understanding that up to and including A.Y. 2012-13, section 115JB had no application to banks and insurance companies. It was so held by ITAT, Hyderabad in the case of State Bank of Hyderabad dated 07.09.2013 in ITA No. 578/Hyd/2010 and ITAT Mumbai in the case of ICICI Lombard General Insurance Co. Ltd. v. Asstt. CIT [2012] 54 SOT 538/27 taxmann.com 326.
97. The learned DR relied on the order of the CIT(A).

98. We have considered the rival submissions of the ld. counsel for the assessee. We find that this issue was considered by the Mumbai Bench of the Tribunal in the case of Krung Thai Bank PCL (supra) and on the above issue held as follows:-

"5. Learned counsel for the assessee, however, contends that the provisions of MAT do not apply to the assessee, and, for this reason, very foundation of impugned reassessment proceedings is devoid of legally sustainable merits. His line of reasoning is this. The provisions of MAT can come into play only when the assessee prepares its profit and loss account in accordance with Schedule VI to the Companies Act. It is pointed out that, in terms of the provisions of Section 115JB(2),every assessee is required to prepare its profit and loss account in terms of the provisions of Part II and III of Schedule VI to the Companies Act. Unless the profit and loss is so prepared, the provisions of Section 115JB cannot come into play at all. However, the assessee is a banking company and under proviso to Section 211(2) of the Act, the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act, and the assessee is to prepare its books of account in terms of the provisions of Banking Regulation Act. It is thus contended that the provisions of Section 115JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act. Since the provisions of Section 115JB do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient. We are urged to quash the reassessment proceedings on this short ground.

6. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of the learned counsel, according to the departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute.

7. The plea of the assessee is indeed well taken, and it meets our approval. The provisions of Section 115JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The starting point of computation of minimum alternate tax under section 115JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211(2) of the Companies Act. The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act. The provisions of Section 115JB cannot thus be applied to the case of a banking company."

99. We are of the view that in the light of the decision of the Mumbai Bench of the Tribunal, we have to necessarily hold that provisions of section 115JB of the Act are not applicable to the assessee which is a banking company. The decisions relied upon by the ld. counsel for the assessee, clearly support the plea of the assessee in this regard. Consequently, ground No.3 raised by the assessee is also allowed.

100. In the result, the appeal by the assessee is partly allowed.
ITA 709 & 669/Bang/2010 (A.Y. 2007-08)
101. ITA No.709/B/10 is an appeal by the revenue, while ITA 668/B/10 is an appeal by the assessee. Both these appeals are directed against the order dated 25.03.2010 of the CIT(Appeals), Mangaluru relating to A.Y. 2007-08.
ITA No.709/B/2010 (Revenue's appeal)

102. We shall first take up for consideration the revenue's appeal in ITA No.709/B/2010.
103. Ground No.1 raised by the revenue is general in nature and calls for no adjudication. Ground No.2 raised by the assessee reads as follows:—
"2. Estimated Expenditure on earning tax free income u/s 14A - Rs.7,23,63,117.
2.a The learned CIT(A) erred in deleting the disallowance of Rs.7,23,63,117/- on a/c of estimated expenditure on earning income exempt u/s 10(23G) by placing reliance on the following decisions.

i.		Rajasthan State Warehousing Corp. v. CIT [2000] 242 ITR 450
ii.		Wimco Seedings (P) Ltd. v Dy. CIT (2007) 107 ITD 267 (Hon'ble Delhi Bench of ITAT)
iii.		Maruthi Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Hon'ble Delhi Bench of ITAT)

2.b The learned CIT(A) failed to appreciate the fact that the dept. has taken a stand of disallowing proportionate expenditure in earning the exempted income for the earlier Asst Year also.

2.c. The learned CIT(A) failed to appreciate the fact that the issue is still in dispute for various AYs before appellate authorities.

2.d The learned CIT(A) failed to appreciate the fact that the assessee banks contention that being a banking company, it does not incur any expenditure on earning exempt income also is not acceptable as the investment made for shares for earning exempt income will always have a notional interest cost attached to it and the same has to be proportionately arrived at and disallowed as no expense incurred on earning exempt income is allowable as per IT Act."

104. Ground No.2 is identical to ground No.6 raised by the revenue in the A.Y. 2006-07. For the detailed reasons given while deciding the identical ground in A.Y. 2006-07, we are of the view that the order of the CIT(Appeals) on the issue should be set aside and the issue remanded to the AO for fresh consideration in the light of the directions given in A.Y. 2006-07. It is ordered accordingly.
105. Ground No.3 raised by the revenue reads as follows:—

"3. Interest on Securities on accrual basis - Rs.295,47,10,034
3.a The learned CIT (A) erred in allowing relief to the assessee on the point of accrued interest on securities amounting to Rs.295,47,10,034/- offered on cash basis.

3.b The learned CIT (A) while acceding to the fact that the said interest income from securities is assessable on accrual basis under the mercantile system of accounting, has erred in taking a stand that the assessee has legal right to receive such income on the specified dates for payment of interest on Govt. securities.

3.c The learned CIT (A) erred in not appreciating the fact that the assessee is following mercantile system of accounting in respect of interest from securities for the purpose of final accounts as per annual report under the Companies Act but had deviated and sought to reduce a sum of Rs. 295,47,10,034/- as interest accrued but not fallen due for the purpose of taxation under the Income Tax Act.

3.d The learned CIT (A) failed to appreciate the fact that the assessee while acknowledging the interest income as accrued in the annual report for the year ending 31.03.2007 and the basis on which accounts finalized and dividends paid, has sought to defer the taxation under the I.T. Act of the above amount on the ground that it is yet to receive the same. This in other words, represents dual treatment of the same income under different acts and the assessee has followed receipt or cash system of accounting in respect of interest accrued during asst. year 2007-08 by offering it for taxation under the I.T. Act in the subsequent year which is not permissible under the amended provisions of sec. 145.

3.e The learned CIT (A) failed to appreciate the fact that the securities have been classified as current investments and hence may be sold freely at will at any point of time. In such a situation, though the purchaser of the security is entitled to receive the full accrued interest on the security on the specified due date, he still has to part with the proportional interest accrued on the said security as on the date of sale to the seller. In view of the same, it is incorrect to state that unless right to receive the accrued interest arises it does not accrue at all or that there is no legal right to receive the interest. The same issue is pending with the Hon'ble ITAT in the case of Karnataka Bank Ltd., Mangalore."

106. The assessing officer noted that the appellant had not offered to tax an amount of Rs. 295,47,10,034 representing interest income credited to profit and loss account but not offered to tax. Since the bank's accounting policy was to recognise revenue and expenses on accrual basis and broken period interest was to be treated as revenue as per Reserve Bank of India (RBI) guidelines, he sought the bank's explanation as to why this amount should not be brought to tax in the current assessment year. The bank replied that, though it was following the mercantile system of accounting, it had consistently offered to tax interest on securities on cash basis and this was accepted by the Commissioner (Appeals) in assessment year 2005-06. The assessing officer rejected this contention on the ground that the department had not accepted the Commissioner (Appeals)'s decision in assessment year 2005-06 and the same issue was in various levels of appeals in the case of other banks also, for earlier assessment years. He was of the view that according to section 145, the assessee could not follow dual method of accounting and should have offered to tax interest on securities on accrual basis only, as that was the regular method of accounting it employed.

107. Before the CIT(Appeals), the assessee submitted that interest on securities accrued only on the due date for interest and not on any earlier dates. Therefore, interest accrued but not due could not be charged to tax. It had been consistently following this basis of accounting which had been accepted by the department and there is no cause to disturb the method of accounting followed by the assessee. It was submitted that this issue had been decided in favour of the assessee by the Hon'ble High Court of Madras in the case of Bilahari Investments (P.) Ltd. v. CIT [2007] 294 ITR 353 and affirmed by the Hon'ble Supreme Court in CIT v. Bilahari Investment (P.) Ltd. [2008] 168 Taxman 95, in the case of CIT v. Tamilnadu Mercantile Bank Ltd. [2007] 291 ITR 137 (Mad), CIT v. City Union Bank Ltd. [2007] 291 ITR 144/163 Taxman 495 (Mad.), Dy. CIT v. HDFC Ltd. [2006] 98 ITD 319 (Bom), and CIT v. FederaI Bank Ltd. [2008] 301 ITR 188/170 Taxman 238 (Ker).

108. The CIT(Appeals) found that the assessee has consistently offering to tax interest on securities only on due date basis and not on the basis of the alleged accrual. He referred to the order of the Tribunal dated 21.11.2008 in ITA No. 1160(BNG)/07 in the case of Karnataka Bank Ltd., (supra) for assessment year 2004-05, wherein the ITAT has observed that the issue of broken period interest on Government securities stood covered in favour of the assessee as considered by the CIT(A) following the ITAT's decision in that bank's case and hence did not call for any further interference. The CIT(A) also followed his own order dated 31.12.2004 in ITA No. 255/MNG/CIT(A)MNG/2003-04, in the case of Karnataka Bank Ltd. for assessment year 1998-99, in which he held that assessing officer's action in bringing to tax interest on securities, even though interest had not legally and rightfully accrued or become due to the appellant in view of the specified dates for interest on Government securities, as laid down therein, was not sustainable. Accordingly, he held that the assessing officer was not justified in bringing to tax the interest on securities and deleted the addition made on that score. The CIT(Appeals) was also of the view that the Income-tax Act envisages levy of tax on real income and not on income which is not followed by the right to receive income. Mere entries in the books of account do not create a right to receive. Unless the right to receive arises in respect of accrued interest, it is not income under section 5 of the Act. Interest on securities is receivable and taxable only on due basis, as the holder of the securities does not get a right to receive the interest before the due date. Section 145(1), as amended by the Finance Act, 1995, with effect from 01.04.1997, provides that the income chargeable under the head 'profits and gains of business or profession' or 'income from other sources' shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assesses. So far as the system of accounting is concerned, he was of the view that the assessee bank has been following the same system in returning interest on Government securities since last several years and there is no change in the method of accounting. The bank has been consistently and regularly following the mercantile system of accounting only and not a hybrid system. The CIT(Appeals) further observed that a right to receive income does not constitute accrual and the assessee bank is entitled to recognize the revenue from interest on Government securities at the point of accrual or actual receipt, according to its own accounting policy. He was of the view that there was no material on record to show that the assessee had changed its method of accounting. Thus the CIT(A) deleted the addition of Rs.295,47,10,034 as interest accrued on Government securities.

109. At the time of hearing before us, it was agreed by the parties that the issue raised by the revenue in this appeal has already been decided by the Hon'ble Madras High Court in the case of Tamilnadu Mercantile Bank Ltd., (supra). The question of law before the Hon'ble Madras High Court was as follows:—

"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that interest on securities is taxable only on specified dates when it became due for payment and not on accrued basis?"

110. The Hon'ble Madras High Court held as follows:—

"In view of the deletion of section 18 of the Income-tax Act, 1961, with effect from 1st April, 1989, the third proviso to section 145(1) was inserted with effect from April 1, 1989, which is a saving clause. Although the amendment was with effect from April 1, 1989, it clearly provides that any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where no method of accounting is regularly employed by the assessee. In other words, if the assessee is maintaining cash system of accounting, the aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on such securities might become due.

The assessee, while filing the return of income for the assessment years 1989-90 and 1990-91, claimed exclusion of the sums representing the accrued interest for the periods till March 31, 1989, and till March, 31, 1990, for the respective assessment years, in respect of the securities held by it on the ground that it did not become due in the respective previous years and that even after the omission of section 18, the interest on securities should be charged only when it became due for payment as it did not accrue on day-to-day basis. The Assessing Officer, however, disallowed the claims of the assessee, holding that after the omission of section 18 of the Act, i.e., after July 8, 1988, interest is to be assessed under the head "Business" or "Other Sources" as the case may be, and therefore, the interest which accrued up to the end of the accounting year became taxable as the income of the previous year. The Commissioner of Income-tax (Appeals) held that the Assessing Officer was not justified in holding that the interest accrued up to the last day of the accounting year should be subjected to tax. This was upheld by the Tribunal.

On appeal to the High Court:
Held, dismissing the appeal that even though section 18 of the Act was deleted, the assessee was taxable for interest on securities only on specified dates when it became due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years."

111. It is not in dispute before us that identical decision has also been rendered by the Hon'ble High Court of Kerala in the case of Federal Bank Ltd. (supra). In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the revenue in the past. In view of the aforesaid decision, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, ground No.3 raised by the revenue is dismissed.

112. Grounds No. 4 & 5 and additional grounds being ground No.5 (f) raised by the revenue in the covering letter dated 01.05.2012 and grounds i to iii raised by the revenue in its covering letter dated 11.06.2012 are identical to grounds No.2 & 3 and the additional grounds raised in A.Y. 2006-07, except for change in the quantum of deduction claimed. For the detailed reasons given while deciding those grounds in A.Y. 2006-07, we are of the view that the ground No.4 has to be dismissed and ground No.5 allowed. Similarly, the additional grounds sought to be raised are all dismissed either as not admissible or maintainable on merits.

113. Ground No.6 raised by the revenue is with regard to loss on valuation of investment. The said ground is identical to ground No.4 raised by the revenue in A.Y. 2006-07. For the detailed reasons given while deciding those grounds, ground No.6 raised by the revenue is dismissed.

114. Ground No.7 raised by the revenue reads as follows:—
"7. Deduction u/s 35D - Rs.3,13,56,154
7.a The learned CIT(A) erred in allowing the assessee's claim for deduction u/s 35D amounting to Rs.3,13,56,154.
7.b The learned CIT(A) failed to appreciate that expenses are admissible after commencement of business only in connection with either extension of industrial undertaking or setting up of new industrial unit.

7.c The learned CIT(A) failed to appreciate the fact that the words "Industrial undertaking" had been substituted with the word "Undertaking" only w.e.f. 01.04.2009 by the Finance Act 2008 deduction u/s 35D is not available to the bank in the current assessment."

115. As far as a sum of Rs.2,45,15,858 which is a part of sum of Rs.3,13,56,154 disputed by the revenue in ground No.7 is concerned, the facts are identical to similar ground raised by the revenue in A.Y. 2006-07. For the reasons given while deciding identical grounds for the A.Y. 2006-07, we have already held that disallowance made by the AO had to be restored by reversing the order of the CIT(Appeals). Similar decision in the present assessment year will also be applicable so far as the said sum is concerned.

116. The remaining sum of Rs.68,40,296 being 1/5th of expenses of Rs.3,42,01,479 is the expenses incurred by the assessee on public issue of bonds. We have already held while deciding the ground No.5 of the revenue in A.Y. 2006-07 that expenditure incurred on raising funds by issue of bonds is akin to cost of borrowing. In the present year, we find that the claim of the assessee has been tested u/s. 35D of the Act. We are of the view that the claim of the assessee is allowable u/s. 37(1) of the Act as expenditure wholly and necessarily incurred in connection with the business of the assessee. The assessee has claimed only 1/5th of the total expenses and has amortised the claim of expenses for the period of the bond. We therefore uphold the order of the CIT(Appeals) to the extent of allowing deduction of a sum of Rs.68,40,296. Thus, ground No.7 of the revenue is partly allowed.

117. In the result, the appeal by the revenue is partly allowed.

ITA No.669/B/2010 (Assessee's appeal)
118. The only ground of appeal raised by the assessee in this appeal reads thus:—
"That the learned CIT(A) ought to have accepted the appellant's contention that not being a company under the Companies Act, 1956 but being a bank governed by the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and deemed as a company under the latter Act could not be construed as a company for the purposes of charging MAT in the light of a decision of Mumbai Bench of the Tribunal in the case of Maharashtra State Electricity Board v. JCIT in 82 ITD 422 and therefore should not have to be subjected to the MAT."

119. This ground is identical to ground No.3 raised by the assessee in A.Y. 2006-07. For the details reasons given while deciding similar ground in A.Y. 2006-07, we are of the view that the claim of the assessee has to be accepted. Consequently, provisions of section 115JB will not be applicable.

120. In the result, the appeal by the assessee is allowed.

121. To sum up, the appeals by the assessee are allowed, while the appeals by the revenue are partly allowed.

The order pronounced in the open court on 19 JUNE, 2013.

[2013] 26 ITR [Trib] 501 (BANG)

Assessee not entitled to deduction as it was not an industrial undertaking eligible for deduction-Amortization after commencement only to industrial undertaking- Expenditure not allowed as issue of share capital expands the capital base and hence, capital in nature.

ITAT BANGALORE BENCH 'A'

IT Appeal Nos. 668, 669, 708 and 709 (Bang.) of 2010
[ASSESSMENT YEARS 2006-07 & 2007-08]

N. BARATHVAJA SANKAR, VICE-PRESIDENT
AND N.V. VASUDEVAN, JUDICIAL MEMBER

Date : JUNE 19, 2013

Appearances

K.P. Kumar and Ms.Tanmayee Rajkumar for the Appellant.
S.K. Ambastha for the Respondent.

Section 35D & 32 of the Income Tax Act, 1961 — Amortization of Certain Preliminary Expenses — Assessee not entitled to deduction as it was not an industrial undertaking eligible for deduction - Amortization after commencement only to industrial undertaking- Expenditure not allowed as issue of share capital expands the capital base and hence, capital in nature.

FACTS

HELD

Business loss of banking company — Diminution in the value of stock-in-trade as on the last day of the previous year to be allowed as deduction.

FACTS

HELD

Capital or Revenue Expenditure — Stamp duty expenses incurred in issuing bonds to public allowed as revenue expenditure as raising of funds by issue of bonds akin to borrowing.

FACTS

HELD

ORDER

The order of the Bench was delivered by

N.V. Vasudevan, Judicial Member - ITA Nos.708 & 668/Bang/2010 ( A.Y. 2006-07).

ITA Nos.708/Bang/2010 (Revenue's appeal)

2. First, we shall take up for consideration the revenue's appeal. Ground No.1 is general in nature and calls for no adjudication. Grounds No.2 & 3 raised by the revenue are as follows:-

'2. Bad debts of non-rural branches written off under section 36(1)(vii) - Rs.170,62,86,4841

3. Provision for Bad & Doubtful Debts claimed to the extent eligible u/s 36(1) (vii a) - Rs.207,83,45,3381-.

"The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of the Hon'ble Tribunal:

(i)		Assessee's claim of deduction u/s 36(1)(viia) of Rs. 503.49 crore is not in accordance with the provisions under the Act, read with Rule 6ABA of the IT Rules, 1962, and hence not allowable to that extent?
(ii)		Since (a) non-rural bad and doubtful debts may be written off and allowable u/s 36(i)(vii) independently, and (b) only rural debts written off can be set off/debited against the provisions made u/s 36(1)(viia) in previous years, and/or to be made during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to 10% thereof, subject to available credit balance to this account.
(iii)		Alternatively, and without prejudice to the grounds above, if the computation of the provision has to also include any amount not exceeding 7.5% of the total income, such income should be restricted to the total income of rural branches, or to the amount as prescribed under the RBI prudential norms.

4. The revenue has sought to raise further additional ground vide letter dated 27.04.2012 and the additional ground is connected to Ground No.3. The ground so sought to be raised reads as follows:

7. We will deal with the admissibility of the additional grounds sought to be raised after considering the issue that was originally sought to be raised by the Revenue.

8. Since grounds 2 and 3 and the additional grounds sought to be raised are interlinked, we deem it convenient to deal with these grounds together.

Out of income	Rs. 57,66,26,877
Out of Provision	Rs. 112,96,59,608
	Rs. 170,62,86,485

10. The position with regard to claim for deduction on account of provision for bad and doubtful debts created by the Assessee u/s.36(1)(viia) of the Act was as follows:

A.	Provision u/s.36(1)(viia)
	1.04.2005 Balance B/F.		Rs. 912,57,47,169
	31.03.2006 Provision for NPA's		Rs. 295,55,54,682
	Balance u/s - provision claimed		Rs. 1208,13,01,851
B.	Debts written off u/s.36(1)(vii)
	Bad Debts written off during AY 2006-07
	Out of Income	Rs. 65,53,48,914
	Out of Provision	Rs. 112,96,59,608
	Debited to Gratuity paid A/c.	Rs. 71,80,470
		Rs. 179,21,88,992
	Less: Bad Debts Written Off
	By Non-rural branches
	Out of income	Rs. 57,66,26,877
	Out of Provision	Rs. 112,96,59,608
		Rs. 170,62,86,485
	Less: Bad debts written off pertaining to rural branches		Rs. 8,59,02,507
	Balance under provision carried over as on 31.3.2006		Rs.1199,53,99,344
	Average Advances at Rural Branches for FY 05-06(AY 06-07)		Rs.4656,87,24,770
	Rural Branch Average for 2004-05 - 10%		Rs. 465,68,72,477

11. The claim for deduction on account of Provision for Bad and Doubtful debts u/s.36(1)(viia) of the Act was claimed by the AO at Rs.503,49,00,000 comprising of the following two amounts:

10% Average rural advances 7.5% of gross total income	Rs.465,68,72,477
(7.5% of Rs.504,03,66,972)	Rs. 37,80,27,523
Total	Rs.503,49,00,000

12. In note Nos.6 and 7 filed along with the computation of Income the Assessee has explained its claim for deduction u/s.36(1)(vii) and 36(1)(viia) of the Act as follows:

13. The AO called upon the Assessee to explain the basis on which the above working of deduction u/s.36(1)(vii) and 36(1)(viia) of the Act was done by the Assessee.

1.		How prudential write off of Rs.112,96,59,608 can be claimed as a deduction u/s.36(1)(vii) of the Act.
2.		Under proviso to Sec.36(1)(vii) of the Act, bad debts written off has first to be adjusted against provision created. Since this has not been done, the AO proposed to do so. If so adjusted the credit balance in the Provision for Bad and Doubtful Debts account will still be available and therefore deduction u/s.36(1)(vii) of the Act will not be allowed in view of the proviso to Sec.36(1)(vii) of the Act.

15. With regard to the claim for deduction u/s.36(1)(viia) of the Act, the AO wanted two clarifications viz.,

1.		Whether 10% of average rural advances have been calculated on the basis of 2001 census or on 1991 census.
2.		The provision for bad and doubtful debts in respect of rural advances was created by debit to profit and loss account of only a sum of Rs.295,55,54,682 whereas the claim for deduction actually made u/s.36(1)(viia) of the Act was a sum of Rs.503,49,00,000/-. The AO was of the view that as laid down by the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54 (P & H), claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The AO therefore proposed to disallow a sum of Rs.207,93,45,318 (Difference between Rs.503,49,00,000 and Rs.295,55,54,682).

10% Average rural advances 7.5% of gross total income	Rs.465,68,72,477
(7.5% of Rs.504,03,66,972)	Rs. 37,80,27,523
Total	Rs.503,49,00,000

21. Aggrieved by the order of the AO, the Assessee preferred appeal with regard to disallowance of deduction both u/s.36(1)(vii) and 36(1)(viia) of the Act.

25. Aggrieved by the order of the CIT(A), the revenue has raised grounds No.2 & 3 and additional grounds referred to in the earlier part of this order.

26. The first aspect that needs to be addressed by us is with regard to the admissibility of the additional grounds for adjudication.

27. As far as the additional ground which is sought to be admitted as Gr.No.3f in the application dated 2.5.2012 of the DCIT Circle-1, Udupi, the same reads thus:

Sl. No.	Branch Name	Population claimed	Population as per Census 2001	Census Town/2001 Municipalities
15		7108	8604	Census Town
16		5390	15860	MC
20		8798	14913	MC
24		6754	11194	MC
38&39		7446	-	CMC, Bommanahalli
79		4504	6273	Census Town
150		9472	13186	CT
253,592		8708		CMC, BUA
299		9684	17980	TP
302		9659	18983	CT
336		4514		CMC, BUA
663		3935	9090	MC

32. With regard to the additional ground sought to be raised by the Revenue in the covering letter dated 11.6.2012, the same reads thus:

"The appellant seeks permission to raise the following additional grounds for the kind and favourable consideration of the Hon'ble Tribunal:

(i)		Assessee's claim of deduction u/s 36(1)(viia) of Rs. 503.49 crore is not in accordance with the provisions under the Act, read with Rule 6ABA of the IT Rules, 1962, and hence not allowable to that extent?
(ii)		Since (a) non-rural bad and doubtful debts may be written off and allowable u/s 36(i)(vii) independently, and (b) only rural debts written off can be set off/debited against the provisions made u/s 36(1)(viia) in previous years, and/or to be made during the year, amount of deduction should be computed only with reference to the average annual advances of the rural branches, and restricted to 10% thereof, subject to available credit balance to this account.
(iii)		Alternatively, and without prejudice to the grounds above, if the computation of the provision has to also include any amount not exceeding 7.5% of the total income, such income should be restricted to the total income of rural branches, or to the amount as prescribed under the RBI prudential norms."

"(i)		The provisions of Section 36(1)(vii) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other.
(ii)		Clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to sec. 36 demonstrate that the deduction on account of provisions for bad and doubtful debts under sec. 36(1)(viia) is distinct and independent of the provisions of s. 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches.
(iii)		The language of sec. 36(1)(vii) is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to sec. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of sec. 36(1)(vii) on the one hand and that it satisfies the requirements stated in sec. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under sec. 36(1)(viia). The Explanation to sec. 36(1)(vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of sec. 36(1)(vii) simpliciter.
(iv)		As per the proviso to cl. (vii) of sec. 36(1), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances."

The Hon'ble Chief Justice, His Lordship Mr. S.H. Kapadia, in his concurring judgment had summed up the position in the following words:

40. The ratio laid down by the Hon'ble Supreme Court can be summed up as follows:—

(1)		Deduction under Section 36(1)(vii) of the Act is available for deduction on account of Bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actually written off in the books and debited to Profit & Loss Account. Deduction cannot be claimed for creating Provision for Bad and Doubtful Debts of Non-rural branches. It is like any other bad debt written off which is allowed as deduction in the case of Assessees who are not in banking business.
(2)		Deduction u/s.36(1)(viia)(a) is allowed when a Provision for bad and doubtful debts relating to rural advances is made in the books of account subject to the limit laid down therein.
(3)		When a deduction is allowed u/s.36(1)(viia)(a) of the Act by way of provision, there will be no deduction under clause (vii) for actual write off of bad debts relating to rural advances, until or unless there is a balance lying in the provision account made under clause (viia). This so because of the Proviso to Section 36(1)(vii) of the Act which provides that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Thus the proviso ensures that there is no double deduction, i.e., firstly getting a deduction when a provision is created and secondly getting a deduction when bad debts are written off.

(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."

Example-1:
Provision made during the year	-	Rs.50 crore
10% of rural advances	-	Rs.35 crore
7.5% of total income before deduction u/s.36(1)(viia)	-	Rs.5 crore
Example-2
Provision made during the year	-	Rs.30 crore
10% of rural advances	-	Rs.35 crore
7.5% of total income before deduction u/s.36(1)(viia)(a)	-	Rs. 5 crore
Deduction u/s.36(1)(viia)(a)
Example:- 1:
Particulars	Amount (Rs. In crore)
10% of AARA	35
7.5% of total income	5
Total eligible amount	40
Provision made in the books during the year	50
Deduction allowable u/s.36(1)(viia)(a)	40
Example: 2
Particulars	Amount (Rs. In crore)
10% of AARA	35
7.5% of total income	5
Total eligible amount	40
Provision made in the books during the year	30
Deduction allowable u/s.36(1)(viia)(a)	30

(a)

48. As far as Gr.No.3 raised by the Revenue in the original grounds of appeal is concerned, the AO disallowed the entire claim for deduction of Rs.503,49,00,000/- on the following ground.

"(a)		The provision for bad and doubtful debts in respect of rural advances was created by debit to profit and loss account of only a sum of Rs.295,55,54,682 whereas the claim for deduction actually made u/s.36(1)(viia) of the Act was a sum of Rs.503,49,00,000/-. The AO was of the view that as laid down by the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT 272 ITR 53 (P & H), claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The AO therefore proposed to disallow a sum of Rs.207,93,45,318 (Difference between Rs.503,49,00,000 and Rs.295,55,54,682).
(b)		Apart from the above the AO also disallowed the sum of Rs.295,55,54,682 out of Rs.503,49,00,000 claimed as deduction u/s.36(1)(viia) of the Act. The reasons given for disallowing claim for deduction of Rs.295,55,54,682/- u/s.36(1)(viia) of the Act by the AO was that there was already credit balance in the PBDD as on 1.04.2005 Balance B/F was Rs. 912,57,47,169. According to the AO 10% of AARA can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the PBDD account. 10% of the AARA as admitted by the Assessee as per revised census of 2001 was 352.53 crore. According to the AO even if Bad debts written off of Rs.179,21,88,992 is reduced still the balance in the PBDD account was Rs.733,35,58,177/-. Since the balance so available in PBDD account was more than 10% of AARA, the AO held that deduction on the basis of new provision of Rs.295,55,54,682/- cannot be allowed. In this regard the AO referred to the contention of the Assessee which was to the effect that in each year the Assessee can create 10% of AARA and concluded that the expression "not exceeding ten per cent of the aggregate average advances" used in Sec.36(1)(viia) of the Act cannot mean that provision can be created each year irrespective of the available balance in the PBDD account. The AO also referred to a situation where there is no claim for bad debts in a year even then the Assessee will be entitled to claim deduction by way of PBDD which according to the AO would not be the intention of the legislature. The AO thus refused to allow the claim of the Assessee for deduction of 10% of AARA."

51. Ground No.4 raised by the revenue reads as follows:—

'4. Profit on sale of investments and investment trading loss - Rs.446,82,97,535

Op. stock of Securities	Rs. 19694,87,62,367	By Sales	Rs.91858,05,08,997
Purchases	Rs.88562,07,25,257	Cl.Stock	Rs.16023,92,35,114
		Loss	Rs. 374,97,43,513
	Rs.108256,94,87,624		Rs.108256,94,87,624

57. Aggrieved by the order of the CIT(Appeals), the revenue has raised ground No.4 before the Tribunal.

'16. We have heard both sides and find that the Supreme Court in the case of UCO Bank in 240 ITR 355 has held as under :

i.		Rajasthan State Warehousing Corp v. CIT [2000] 242 ITR 450
ii.		Wimco Seedings (P) Ltd. v. DCIT [2007] 107 ITD 267 (Hon'ble Delhi Bench of ITAT)
iii.		Maruthi Udyog Ltd. v. DCIT [2005] 92 ITD 119 (Hon'ble Delhi Bench of ITAT)

6.b The learned CIT(A) failed to appreciate the fact that the deptt. has taken a stand of disallowing proportionate expenditure in earning the exempted income for the earlier Asst Year also.

6.c. The learned CIT(A) failed to appreciate the fact that the issue is still in dispute for various AYs before appellate authorities.

S.No.	Details of IPO Expenses	Amount (Rs.)
1.	Lead Managers Fees/Underwriting Commission	38436332.70
2.	Advertisement & Marketing Expenses	31493859.00
3.	Printing Charges (inclusive of Courier)	44220629.00
4.	Registrar's Fees	5279828.00
5.	Legal Fees	8820686.46
6.	Listing Fees	3616500.00
7.	Miscellaneous	426844.87
		132294680.03
	Less: Advertisement Expenses	9631723.00
		122662957.03
	Less: Excess provision made towards expenses	83666.70
	Follow on Issue Expenses eligible u/s 35D	122579290.33
	Less: 1/5th claimed during the ÀY 2006-07	24515858.00
	Balance	98063432.33

74. The AO was of the view that Sec. 35D of the Act allows Amortization of certain preliminary expenses. The deduction is admissible only if the following conditions are fulfilled.

(i)		An Indian Company incurs after 31.03.1970.
(ii)		Any expenditure specified under sub-section 2.
(iii)		Before commencement of its business.
(iv)		After commencement of business in connection with extension of industrial undertaking or in connection with setting up a new industrial unit.

76. On appeal by the assessee, the CIT(A) directed the AO to allow the claim for deduction holding as follows:-

79. In the result, the appeal by the revenue is partly allowed.
ITA Nos.668/Bang/2010 (Assessee's appeal)
80. Ground Nos.1 & 2 raised by the assessee reads as follows:—

"1.		That the learned CIT-A erred in law and on facts in confirming the disallowance of Rs.38,72,634/- being the provision made for credit card reward points.
2.		That the CIT-A ought to have appreciated that the Appellant had actually incurred the liability by way of credit card reward points with the cardholders availing the credit being a certainty."

84. Aggrieved by the order of the CIT(A), the assessee has raised grounds No.1 & 2 before the Tribunal.

86. The ld. DR relied on the order of the CIT(A).

88. Ground No.3 raised by the assessee reads as follows:—

94. Aggrieved by the order of the CIT(A), the assessee has raised ground No.3 before the Tribunal.

(1)		Order dated 30.09.2010 in ITA No.3390/2009 passed by ITAT 'G' Bench, Mumbai in the case of Krung Thai Bank PCL v. Jt. DIT (International Taxation) [2012] 49 SOT 70 (URO)/[2011] 16 taxmann.com 239;
(2)		Order dated 30.06.2011 in ITA Nos.4702 to 4706/2010 passed by the ITAT, Mumbai 'F' Bench in the case of Union Bank of India; and
(3)		Order dated 03.08.2011 in ITA No.469/2010 passed by the ITAT 'C' Bench, Chennai in the case of Indian Bank,

i.		Rajasthan State Warehousing Corp. v. CIT [2000] 242 ITR 450
ii.		Wimco Seedings (P) Ltd. v Dy. CIT (2007) 107 ITD 267 (Hon'ble Delhi Bench of ITAT)
iii.		Maruthi Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Hon'ble Delhi Bench of ITAT)

2.b The learned CIT(A) failed to appreciate the fact that the dept. has taken a stand of disallowing proportionate expenditure in earning the exempted income for the earlier Asst Year also.

2.c. The learned CIT(A) failed to appreciate the fact that the issue is still in dispute for various AYs before appellate authorities.