Deccan Grameena Bank, Hyderabad vs Department Of Income Tax

This is an appeal filed by the Revenue against the order of

the ld CIT (A)-VI Hyderabad dated 29.08.2014 passed for A.Y

2010-11.

2. The assessee, a regional rural bank, deemed to be a

cooperative society, for the purpose of Income-tax Act, 1961,

has been into the business of banking and filed the return of

income for the year under reference, declaring a total income

of Rs. 52,85,83,150/-. While completing the assessment

Page 1 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

order, the total income was determined at Rs.65,12,31,956/,

on account of the following additions:

1. Disallowance of Depreciation on securities held as stock in trade Rs. 976,74,332/-

2. Addition on account of disallowance of broken period interest on purchase of securities held as stock in trade Rs. 3,73,12,444/-

3. Addition on account of disallowance of deduction claimed u/s. 36(1)(viia) of IT Act Rs. 4,44,52,560.

3. For the year under reference the assessee has filed the

revised return of income on 31.03.2012, admitting an income

of Rs. 43,09,08,818/- as against the income of Rs.

52,85,83,150/- admitted in original return of income filed on

09.10.2010. The revision was on account of omission to claim

depreciation of Rs. 976,74,332/- on securities held as stock

in trade. The AO rejected the revised return on the ground

that there is no change in columns filled as per original and

revised returns, except the columns for Profits and Gains

from business other than speculative business and

subsequent columns, in the case of assessee and a revised

return can be filed only when any omission or wrong

statement was discovered in original return. For this

proposition the AO relied on the decision of Assam High

Court in the case of Sunanda Rao Deka Vs. CIT (210 ITR

Page 2 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

988), wherein it was held that filing of revised

return after discovery of omission or wrong statement in

original return is not by itself sufficient to bring revised

return in the ambit of Sec. 139(5) of the Income Tax Act, but

further requirement is that omission or wrong statement in

original return due to bonafide inadvertence or mistake on

part of assessee.

4. The ld CIT (A) perused the submissions of the assessee

in this regard w.r.to the observations of the AO and facts of

the case. The opinion of the AO was that there was no

change in columns of returns as per original and

revised returns and no change in claim of depreciation of

Rs. 2,56,93,000 as per original and revised return. The

CIT(A) observed that the AO got confused between the

depreciation on fixed assets (Rs. 256,93,000) and

depreciation on securities held as stock in trade (Rs.

976,74,332) and the observations in this regard appear to

be factually incorrect. The CIT (A) further held that as

regards the claim of depreciation on securities to the extent

of Rs.976,74,332/-, which is an issue of debate, was not

claimed by assessee in original return, as such

filed revised return of income, within the due date, while

Page 3 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

claiming such depreciation. The CIT (A) concluded that the

omission to claim such allowance, definitely amounts to

reasonable ground for filing the revised return and held

that where such revised return is filed in time, the same

cannot be rejected and the case law relied upon by the AO,

thus is distinguishable on facts according to the CIT (A) and

the revised return filed by the assessee is held to be in

order. The CIT (A) directed the AO to adopt the revised

returned income, while computing the total income on the

issue of allowability of depreciation on securities, which is

dealt separately, in this order.

5. Aggrieved, the Department has raised ground No.2

(part). We find no infirmity with the order of the CIT (A). For

the AY 2010-11 the assessee has filed its return on

9.10.2010 by declaring a net taxable income of

Rs.52,85,83,150. After filing original return, the assessee

found that there is an omission of claim of depreciation on

investment of Rs.9,76,74,332 held as stock-in-trade. To

offset the omission, the assessee has filed revised on

31.03.2012 which is with the statutory period allowed

under the I.T. Act, 1961.

Page 4 of 15

ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

6. A revised return can be filed at any time before the

expiry of one year from the end of relevant ay or before the

completion of the assessment, whichever is earlier. In the

case of F.C. Agarwal vs. CIT (1976) (102 ITR 408 (Gau.) it

was held that section 139(5) has brought on the statute to

correct some bonafide omission or bonafide wrong

statement which may have occurred so that correct total

income is disclosed. It is inherent in the section that if

while submitting a return any information is left out

accidentally computing the income of the assessee, then to

enable the assessee to communicate such information to

the revenue, the facility or revised return is given. However,

the omission or wrong statement must be discovered by the

assessee himself and must be bonafide. During the course

of assessment proceedings, assessee has submitted written

statement dated 11.03.2013 informing the reasons for

submission of revised return and the same was reproduced

as under:

"At the time of filing original return, we have inadvertently not claimed the "Depreciation/Loss on investment" which were considered as stock-in- trade. In our earlier submission, we have given the detailed working on "Depreciation/loss on investment".

Page 5 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

Depreciation on securities held as stock in trade Rs.976,74,332/-

7. While completing the assessment and computing the

total income, the AO has not considered the claim of Rs.

976,74,332/-, towards depreciation on securities held as

stock in trade, which was omitted to be claimed in original

return of income, on the ground that the revised return of

income was not acceptable. The other reason for disallowing

the claim was that the assessee's sources of investments

being public money, supposed to invest in securities and

banks and investments in derivatives is not in consonance

with its objectives and such investments are in

contravention of information provided in annual report of

the bank. Hence, it was held that the claim is against the

directives of RBI and disallowed the claim of Rs.

976,74,332/-.

8. The assessee objected for such disallowance and

submitted that to meet the statutory obligation the

assessee banker had invested certain funds in government

securities to meet the SLR ratios, and banks invest in

securities for the purpose of trading irrespective of period

of holding of such securities and such treated as stock in

Page 6 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

trade and once the investments are treated as stock in

trade, the fall in the value of such securities from opening

balances to the closing balances, is treated as depreciation

and be allowed as deduction. The assessee relied on the

order of the Hon'ble ITAT in the case of SBH Vs. DCIT in

ITA No. 1232/Hyd./2006and decision of Kerala High Court

in the case of CIT Vs. Nedungadi Bank Ltd. (264 ITR 545),

to support their claim.

9. The CIT (A) perused the submissions of the assessee

and the observations of the AO. The CIT (A) held as follows:

"As could be seen from the facts, the AO failed to appreciate that the appellant bank invested in certain government securities, as per the SLR requirement and claimed depreciation on the variation in value of such securities between the opening balance and closing balance. Such claim was omitted to be claimed in original return of income, as indicated; and filed revised return while claiming the depreciation. In this regard, it may be reasonable to hold that it is not the case of the AO to treat such investments in securities as non existing or treated as securities held to maturity. It is also relevant to hold, that even if the securities are classified as held to maturity (HTM), the courts have held that even if the securities which are held in permanent category, are supposed to be dealt in market, with the very nature of these investments is to trade in securities and as such treated as stock in trade for the assessee banks. It was also held that where there is no distinction between the

Page 7 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

categories of securities, the assessee can provide depreciation on securities".

10. The ld CIT (A) relied on the order of the ITAT

Hyderabad in case of AP Grameen Vikas Bank (ITA

No.610/Hyd/2013) dated 13.03.2014 and the CIT (A) held

that disallowance of Rs.9,76,74,332 made by the AO does

survive and the ground was treated as allowed.

Addition on account of disallowance of broken period interest on purchase of securities held as stock in trade Rs. 3,73,12,444/-

11. While computing the taxable income of the assessee,

AO has disallowed the claim of Rs. 373,12,444/- made

towards the broken period of interest in acquiring the

securities, which are held as stock in trade by the assessee

bank relying on the decision of Supreme Court in the case of

Vijaya Bank Vs. ClT, reported in 187 ITR 541.

12. The assessee objected for such disallowance and

submitted that the securities were held as stock in trade on

the lines of State Bank of Hyderabad, which is the holding

bank of the assessee bank, where the similar claim was

Page 8 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

upheld by the Hon'ble' ITAT, Hyderabad, dt. 18.03.2005. The

assessee also relied on the order of the ITAT Hyderabad in the

case of AP Grameena Vikas Bank, Warangal dated

29.04.2013.

13. The ld CIT (A) perused the submissions of the

assessee and the order of the AO. The CIT (A) held as

follows:

"As could be seen from the facts of the case, the interest claimed on purchase of security were held as stock in trade by the appellant bank, and the AO has relied on the decision of Supreme Court in the case of Vijaya Bank Ltd Vs. CIT (supra), wherein the investments in securities were considered as capital investments and as such the interest on such acquisition was treated as disallowable expenses. However, in this case, the investments in securities were treated as stock in trade, which was not disputed by the AO, either. Further, vide the decisions by various High Courts and Supreme Court, subsequent to the decision of Vijaya Bank case (supra), have held that interest for broken period should be treated as part of purchase price and distinguished the decision of Apex Court in the case of Vijaya Bank, where no distinction was made with regard to the character of securities. In the case of AP Grameena Vikas Bank, the Hon'ble ITAT, Hyderabad, vide its order dt. 13.03.2014 in ITA No. 610jHyd./2013, has upheld such claims by bank".

14. Respectfully following the order of the Hon'ble ITAT,

Page 9 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

in the case of AP Grameena Vikas Bank, the ld CIT (A)

was of the considered opinion that the broken period

interest on acquisition of securities held as stock in trade,

is much allowable expense and as such the disallowance

of Rs. 373,12,444/- made by the AO was held to be

unsustainable by the CIT (A). This ground of appeal is

treated as allowed by the CIT (A).

Addition on account of disallowance of deduction claimed u/s. 36(l)(viia) of IT Act Rs. 4.44,52,560/-

15. While computing the total income for the year under

reference the AO has disallowed the claim of Rs.

4,44,52,560/-, made by the assessee in the

computation furnished along with the return of income.

Such claim was made as per the provisions of Sec.

36(1)(viia) of the Income-tax Act, calculated at

the rate of 7.5% of the total income. The AO has observed

that the deduction was claimed based on statutory

provision, without there being any claim in

books of account. It was further opined by the AO that any

provision created should have a purpose and in the case of

assessee provision was created without any necessity as

such the provision was unwarranted and the said

claim towards bad and doubtful debts under 7.5% category

Page 10 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

is disallowed to be added back to the returned income and

brought to tax.

16. The assessee's objection for such disallowance/addition

was on the ground that the provisions of Sec. 36(1)(viia)

permits banking company to claim a deduction not

exceeding 7 .5% of total income computed, towards bad

and doubtful debts. The assessee relied on the decision of

ITAT, Hyderabad, in the case of SBH Vs. DCIT (ITA No.

1232/Hyd./2006) to support the claim of deduction @ 7.5%

of the total income. The assessee also relied on the decision

of Karnataka High Court, in the case of DCIT, SR Vs.

Karnataka Bank Ltd., to support the argument that

deductions u/s. 36(1)(vii) are allowable independently and

irrespective of provisions for bad and doubtful debts,

without claiming the deduction u/s 36(1)(vii) and 36(1)(viia)

simultaneously.

17. The ld CIT (A) perused the submissions of the assessee

and the observations of the AO. The CIT (A) held as follows:

"As could be seen from the facts of the case brought on record, the assessee claimed a deduction of Rs. 4,44,52,560/- being the deduction @7.5% of the total income, as peer the

Page 11 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

provisions of Sec. 36( l)(viia) before claiming deductions u/s. Chapter VI A and the deduction under said clause, while computing the total income. The AO disallowed the same on the ground that there was no necessity of such provision, with the advances secured and no provision for bad and doubtful debts have been made in books of account and the deduction was claimed, just because it was provided by the provisions of Income-tax Act. In this context, it may be relevant to hold that, the deduction was claimed, as provided in Sec. 36(1)(viia) of the Act and no infirmity was pointed out by the AO in this regard. The deduction was made by the assessee as per the provisions of the I.T. Act (Sec. 36(1)(viia) restricting to the 7.5% of the total profits, in addition to deduction of Rs.1,96,65,088 claimed towards the doubtful and bad debts of rural advances, which was allowed by the AO".

18. The ld CIT (A) held that it is also a fact that, no other

deductions were claimed by the assessee bank u/s 36(1)(vii)

towards write off of bad debts. In this context it is relevant

to refer to the decision of the ITAT Hyderabad, in the case of

State Bank of Hyderabad vs. DCIT dated 28.11.2008 in ITA

No.1232/Hyd/2006 wherein the Tribunal held that

deduction u/s 36(1)(viia) of the Income Tax Act, not

exceeding 7.5% of the total income computed, is to be

allowed for provision of bad and doubtful debts.

Considering the facts of the case that the deduction claimed

by the assessee to the extent of Rs.4,44,52,560 was claimed

as per the provisions of section 36(1)(viia) and without

Page 12 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

claiming any deduction towards bad debts written off as per

the provisions of section 36(1)(vii) and also respectfully

following the decision of ITAT in the case of SBH vs. DCIT

(Supra), The CIT (A) was of the opinion that there is no

infirmity in the claim of the assessee. Accordingly the

addition of Rs.4,44,52,560 was held to be unsustainable

and this ground of appeal was treated as allowed by the CIT

(A).

19. Aggrieved, the Department is in appeal before us and

raised the following grounds:

"1. The order of ld CIT (A) is against facts of the case.

2. Whether the ld CIT (A) is correct in considering the contents of revised return and allowing the depreciation on securities held as stock in trade Rs.9,76,74,332

3. Whether the ld CIT (A) is correct in law in holding that the expense of broken period interest on purchase of securities held as stock in trade Rs.3,73,12,444

4. Whether the ld CIT (A) is correct in allowing law in deduction claimed u/s 36(1)(viia) of IT Act Rs.4,44,52,560".

20. We find that the issue on Depreciation on securities

(premium on govt. securities) for Rs.9,76,74,332/- is squarely

covered by the order of the ITAT Hyderabad in the case of AP

Page 13 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

Grameena Vikas Bank, Warangal passed in ITA

No.610/Hyd/2013 for the relevant A.Y 2009-10, order of ITAT in

the case of SBH Hyderabad in ITA No.666/Hyd/2013 dated

29.11.2013 and the order of the Hon'ble jurisdictional High

Court in ITTA No.566 of 2014 dated 4.9.2014 in the case of A.P.

Grameena Vikas Bank, Warangal for A.Y 2007-08, Vijaya Bank

vs. CIT (1999) 187 ITR 541 and CIT vs. Nedungadi Bank Ltd

(2003) 264 ITR 545 (Ker.). Hence, respectfully following the order

of the Coordinate Benches, we dismiss part of the Revenue's

appeal.

21. With regard to the issue of broken period of interest for an

amount of Rs.3,73,12,444/- the issue is covered by the orders

cited above and also in the case of United Commercial Bank vs.

CIT (1994) 240 ITR 355 (S.C), CIT vs. South Indian Bank Ltd

(2000) 241 ITR 374 (Ker.) and Board's circular No.665 dated

5.10.1993 issued by the CBDT. Hence, respectfully following the

order of the Coordinate Benches, we dismiss Ground No.3 of

Revenue's appeal.

22. With respect to the issue of claim of deduction u/s

36(1)(viia) for an amount of Rs.4,44,52,560, this issue is also

Page 14 of 15 ITA No.1742 of 2014 Deccan Grameena Bank Hyderabad

covered by the order of the ITAT Hyderabad Bench in the case of

SBH Hyderabad in ITA No.584/Hyd/2013 and also Catholic

Syrian Bank Ltd vs. CIT (2012) 248 CTR (S.C). Respectfully

following the order of the Coordinate Benches, we dismiss

Ground No.4 of Revenue's appeal.

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

Order pronounced in the Open Court on 25th March, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 25th March, 2015.

Vnodan/sps Copy to:

1. Dy. Commissioner of Income Tax, Circle 9(1) Block No.2, Income Tax Towers, AC Guards Hyderabad -4

2. M/s Deccan Grameena Bank, 9-27/1 1st Floor, Lalitha Nagar, Dilsukhnagar, Hyderabad 500060

3. The CIT(A)-VI Hyderabad

4. The CIT-VI Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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