Gozaria Nagrik Sahakari Bank Ltd.,, ... vs Department Of Income Tax

Income Tax Officer, Patan, Ward 4, Mehsana Appellant

Vs.

Gozaria Nagarik Sahakari Bank Ltd. Bazar, At. & Post: Gozaria, Dist: Mehsana Respondent

PAN: AAAAT1074G

अपीलाथ क ओर से /By Appellant : Shri B. L. Yadav, Sr.D.R. ू यथ क ओर से/By Respondent : Shri S. R. Shah, A.R. with Shri Ketan Mistry सुनवाई क तार!ख/Date of Hearing : 02.03.2015 घोषणा क तार!ख/Date of Pronouncement : 13.03.2015

ORDER

PER SHAILENDRA KUMAR YADAV, J.M:

This appeal has been filed by Revenue against the order of Commissioner of Income Tax (Appeals), Gandhinagar, I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 2

Ahmedabad, dated 17.01.2011 for A.Y. 2007-08 on the following grounds.

"1. The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.91,03,750/-, made on account of disallowance of provision for depreciation on government securities.

2. The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.8,05,841/-, made on account of disallowance of provision for bad debts."

2. First issue is with regards to addition of Rs.91,03,750/- made on account of disallowance of provision for depreciation on government securities. Assessee is engaged in activity of banking business. Assessing Officer has made disallowance basically on the following two grounds:

a) that all provisions which were debited in the profits and loss account have to be disallowed and added back to the total income as per Income Tax Act.

b) assessee has shown Government Securities in the Balance sheet as investment and debited the profit and loss account on account of provision for depreciation amounting to Rs.91,03,750/- which is not allowable under the Act.

3. Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee. CIT(A) found that CBDT has issued instruction for assessment of banks vide its Instruction No. 17/2008 dated 26.11.2008 (F. No. 228/3/3008 - ITA- III). Point no. VII of the said instruction states as under:

I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 3

"As per RBI guidelines dated 16th October 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HF and AFS securities forming stock in trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims."

3.1 Bank has correctly followed guidelines issued by the Reserve Bank of India for the classification and valuation of Investment. As per this guideline, individual scrip in 'available for sale' category will be marked to market at the year end or at more frequent intervals.

3.2 Assessee bank is regularly following method of accounting for the valuation of securities based on the Reserve Bank Instructions/Guideline time to time and generally accepted accounting standards. Accordingly assessee bank is regularly valuing Government Securities held as AFS on mark to market (cost or market value whichever is less). The provision for depreciation is debited to profit & loss account as an expense.

The method and computation has been verified and certified by Reserve Bank of India in its Inspection Report dated 5th December, 2007. Following are the year- wise provision I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 4

amount for the depreciation in values of Government securities.

Sr. No. Financial Amount of Provision for Depn.

Year In Government Securities Debited to P&L Account (Amt. in Rs.)

1. 2002-03 13,55,000.00

2. 2003-04 12,44,750.00

3. 2004-05 Nil

4. 2005-06 3,30,000.00

Income Tax assessment for the above said years were completed allowing the claim of Provision for depreciation in Government Securities. Similarly for A.Y.2007-08 also assessee debited provision for the depreciation in Value of Government Security to the profit & Loss Account. Same was disallowed by Assessing Officer and same Assessing Officer has allowed claim on provision for the depreciation in Value of Government Security for F.Y. 2005-06 relevant to A.Y.2006-07. Circular no.665,Guideline issued by the RBI, Instruction No. 17/2008 issued by CBDT, Decision of the Bank of Baroda 262 ITR 334 (BOM) and CIT vs. Nedungadi Bank Ltd (2003) 130 TAXMAN 93 (Ker) were requested to be considered and based on the regularly followed accounting method, the claim of provision for depreciation in the value of securities was requested to be allowed. Having considered the same, CIT(A) has allowed the claim of assessee.

4. Same has been opposed before us on behalf of Revenue inter alia submitted that deletion of addition of Rs.91,03,750/- made on account of disallowance of provision for depreciation I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 5

on Government securities was not justified. Accordingly, order of CIT(A) be set aside and that of Assessing Officer be restored. On other hand, learned Authorized Representative supported the order of CIT(A).

5. After going through rival submissions and material on record, we find that as per Section 6 read with Section 5(b) and

(c) Banking Regulation Act and as per guideline issued by the Reserve Bank Of India, investment activities is normal banking activity and should be treated as banking stock in trade. The format of balance sheet has been prescribed by legislature and bank has to report their financial result in that format only. As per this format, investment in Government security though treated as banking assets (stock in trade) has to be shown in the balance sheet as investment. Further, banks are showing gain or loss arises from sale of security as business income/loss rather than capital gain. The above position has also been clarified by Circular no. 665 dated 05-10-1993.

"The question whether a particular item of investment in securities constitutes stock-in-trade or a capital asset is a question of fact In fact, the banks are generally governed by the instructions of the Reserve Bank of India from time to time with regard to the classification of assets and also the accounting standards for investments. The Board has, therefore, decided that the Assessing Officers should determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time. "

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CBDT has further issued instruction for assessment of banks vide its Instruction No. 17/2008 dated 26.11,2008 (F. No. 228/3/3008 -- ITA-III). Point no. VII of the said instruction, which has been discussed above. The accounts had been maintained and shown as per RBI guidelines. The depreciation of assets has been claimed on securities which had been classified as 'Available for Sale' (AFS). As per the board's circular, the depreciation is to be aggregated scrip wise and net depreciation, if any, is required to be provided for in the accounts. Same is the claim of assessee. Assessing Officer has not rebutted any of the above contention legal as well as factual aspects of the issue. The contention of Assessing Officer that only provision has been debited to the P&L account and not expenses does not carry any weight in view of Reserve Bank of India directions and CBDT instructions discussed above. The circular and the instruction of the board as quoted above are squarely applicable in this case, where the provision for depreciation on the "available for sale' category of securities has correctly been claimed. So, claim of assessee is allowable as per circular and instruction. Similar claim of depreciation and value of Government securities was made and allowed in earlier assessment year. In such circumstances, same method of accounting has been followed and disallowed from year to year. Such claim has been allowed by various judicial pronouncements. Hon'ble Mumbai High court in case of CIT vs Bank of Baroda (2003) 262 ITR 334 has held that "Depredation in value of investment held by bank was I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 7

allowable as deduction more so when the loss was debited to P&L A/c which was reflected as provision for liability in the balance sheet and the share and securities were valued at cost on the asset side " Similar view has been taken by Hon'ble Kerala High Court in case of CIT vs Nedungadi Bank Ltd (2003) 130 TAXMAN 93 (Ker). Therefore, depreciation in value was allowable even if specific instructions of the board were not there. Circular and instruction of the CBDT being squarely applicable on facts of assessee's case, so CIT(A) was justified in allowing the same which needs no interference from our side. We uphold the same.

6. Next issue is with regards to disallowance of claim u/s.36(1)(viia) in respect of provision for bad debts made by the Co-operative Bank. Assessing Officer has made disallowance after making comments as reproduced in para-3(b) by observing as under:

"The submission of the assessee regarding Bad Debts provision is also duly considered. However, it is not acceptable or tenable. Section 36(l)(viia) clearly states that in respect of any provision for bad debts made by a co- operative bank other than primary agriculture credit society or a primary co-operative agriculture and rural development bank, an amount (not exceeding seven and one half percent) of the total income (computed before making any deduction under this clause and chapter VIA) and an amount not exceeding ten percent of the aggregate average advance made by the rural branches of such back computed in the prescribed manner.

It is very clear that as per Finance Act.2007, for co-operative bank this is only effective from 01/04/2007 i.e. for A.Y. I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 8

2008-09, since this assessment pertains to the A. Y. 2007- 08 the claim of assessee is not allowable. Hence I make an addition of RS.8,05,841"

6.1 Matter was carried before First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same, it was observed by CIT(A) that amendment was brought in so that it was made applicable also to the Co-operative banks with effect from 01.04.2007. This provision was substantive provision therefore assessee was justified in submitting that it is applicable from assessment year 2007-08 and not from Year 2008-09 as held by Assessing Officer . This issue was clarified in Notes on Clauses to the Finance Bill, 2007 itself. The relevant portion is reproduced below:

"It is proposed to amend the Explanation to the said item (fa) in view of the amendment to the definition of "scheduled bank" as given in the explanation to clause (viia) of sub-section 36 which excludes co-operative bank from purview of the said definition. This amendment is of consequential nature. This amendment will take effect retrospectively from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years."

In view of this, no ambiguity remains on the issue and assessee had justified the computation of allowable deduction of the provision in its written submissions before the Assessing Officer . Assessing Officer has not disputed the computation. In view of above, CIT(A) was justified in deleting the disallowance of the claim made u/s.36(1)(viia) of the Act. This I T A N o . 1 0 2 6 / A h d / 1 1 A. Y . 2 0 0 7 -0 8 [ I T O v s . G o z a r ia N a g a r i k S a h a k a r i B a n k L t d . ] Page 9

reasoned finding needs no interference from our side. We uphold the same.

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

Pronounced in the open Court on this the 13th day of March, 2015.

Sd/- Sd/- (N. S. SAINI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 13/03/2015 True Copy S.K.SINHA

आदे श क ूितिल'प अमे'षत / Copy of Order Forwarded to:-

1. राजःव / Revenue

2. आवेदक / Assessee

3. संबंिधत आयकर आयु0 / Concerned CIT

4. आयकर आयु0- अपील / CIT (A)

5. 'वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड9 फाइल / Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।