M/S Deccan Grameen Bank, Hyderabad vs Department Of Income Tax

Asst. Commissioner of Income- vs. M/s Deccan Grameen Bank, tax, Circle - 9(1), Hyderabad Lalitha Nagar, Hyderabad.

PAN - AAAAD3893M (Appellant) (Respondent)

ITA No. 1579/Hyd/2012 Assessment Year: 2009-10

M/s Deccan Grameen Bank, vs. Asst. Commissioner of Lalitha Nagar, Hyderabad. Income-tax, Circle - 9(1), Hyderabad PAN - AAAAD3893M

Revenue by : Shri Ramakrishna Bandi Assessee by : Shri Mohd. Afzal

Date of hearing 05-06-2015 Date of pronouncement 12-06-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

These cross appeals by the department and assessee are directed against the order dated 16/07/2012 of ld. CIT(A)-VI, Hyderabad for the AY 2009-10.

ITA No. 1536/Hyd/2012 by revenue 2. In this appeal, department has raised three grounds.

2 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

3. First issue as raised in ground Nos. 1 & 2 relates to deletion by ld. CIT(A) of addition made by AO on account of disallowance of broken period interest.

4. Briefly the facts relating to this issue are, assessee a regional rural bank is doing banking activity in the state of undivided AP. For the AY under consideration, assessee filed its return of income on 25/09/2009 declaring total income of Rs. 36,33,59,291. During the assessment proceeding, AO noticed that assessee has claimed an amount of Rs. 1,58,65,512 as broken period interest paid on purchase of securities. When AO called upon assessee to explain whether the broken period can be allowed as business expenditure, assessee submitted that RBI had advised banks that they should not capitalize broken period interest paid to the seller as part of cost but to treat it as an expenditure in P&L A/c. Subsequently, circulars issued by RBI also reiterated the same fact. It was submitted, as per RBI guidelines assessee bank debited broken period interest paid to seller to P&L A/c. It was submitted that assessee bank has been following same method of accounting consistently which is also followed by other banks. AO, however, did not find merit in the submissions of assessee. He was of the view that the provisions of Income-tax Act will supersede not only accounting norms, but, also the circulars issued by RBI. AO, thereafter, referring to certain judicial precedents ultimately concluded that the broken period interest is not allowable as expenditure and accordingly disallowing the same added back the amount of Rs. 1,58,65,512 to income of assessee. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT(A).

5. Ld. CIT(A) after considering the submissions of assessee found that ITAT, Hyderabad Bench in case of SBH Vs. JCIT [2005] 94 ITD 219 has held that broken period interest paid by assessee bank is allowable as deduction. Ld. CIT(A) also referring to the some other decisions of the High Court as well as Special bench of the Tribunal, ultimately, held that broken period interest paid by assessee is 3 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

allowable as deduction and accordingly deleted the addition made by AO. Being aggrieved, department is before us.

6. We have considered the submissions of the parties and perused the materials on record as well as the orders of revenue authorities. Both the counsels agreed before us that the issue in dispute is squarely covered by the decision of the Tribunal in assessee's own case for AY 2010-11 in ITA No. 1742/Hyd/2014 dated 25/03/2015. On perusal of the said order of ITAT, a copy of which is placed before the Bench, it is noticed that Tribunal while deciding the issue in assessee's own case for AY 2010-11 has held as under:

"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."

Respectfully following the decision of the coordinate bench in assessee's own case (supra) we hold that broken period interest claimed by assessee is an allowable deduction. Accordingly, we uphold the order of ld. CIT(A) on this issue by dismissing the ground raised.

7. In Ground No. 4 department has challenged the decision of ld. CIT(A) in deleting the addition made by AO on account of amortization of premium paid in excess of face value of securities.

8. Briefly the facts are, during the assessment proceeding, AO noticed that assessee has debited an amount of Rs. 2,70,27,000 to P&L A/c towards amortization provided on government securities. He observed, to meet the Statutory Liquidity Ratio as per Banking Regulations Act, 1949, bank purchases government securities in the market through SBI. While purchasing bank needs to pay premium on the face value of the government security. As per RBI guideline bank holds the government securities till its maturity (held to maturity). The 4 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

premium is bifurcated from the date of purchase till the date of maturity and the same is called amortization. AO called upon assessee to explain why the expenditure claimed should not be disallowed u/s 37(1). In response to the said query raised by AO, assessee submitted that according to AS-26 read with income-tax Act, 1961 the premium paid on government securities is an intangible asset whose life can be ascertained and accordingly the same should be amortized and written off over the useful life of interest. AO, however, did not find merit in the submissions of assessee. Referring to the provisions of section 35D, AO ultimately, held that as the claim of amortization is not in accordance with the provisions of the said section, assessee's claim is not allowable. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT(A).

9. In course of hearing of appeal before ld. CIT(A), it was submitted by assessee that all the investments in government securities were held as stock-in-trade and not as investment and the securities on which premium was paid even though held under the HTM (held to maturity) category, but, they were to be treated as stock-in-trade and the amortization on the HTM securities is a revenue expenditure. In support of such contention, assessee relied upon a decision of Hon'ble Supreme Court in case of UCO Bank, 237 ITR 889 and the decision of Mumbai Bench of ITAT in case of ACIT Vs. Bank of Rajasthan Ltd., 2011-TIOL-35-ITAT-Mum. Ld. CIT(A) after considering the submissions of assessee and going through the principle of law laid down in the decisions cited before her held that assessee is eligible for deduction claimed. Accordingly she deleted the addition made by AO.

10. We have considered the submissions of the parties and perused the orders of the revenue authorities as well as other materials on record. Undisputedly, the government securities under HTM category have been held as stock-in-trade by assessee. As held by Hon'ble Supreme Court in case of UCO Bank (supra), securities on which 5 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

premium is paid, if held under HTM category are to be treated as stock-in-trade. ITAT Mumbai Bench in case of ACIT Vs. the Bank of Rajasthan Ltd. in ITA No. 3238/Mum/2010 and others dated 09/09/2011 while deciding the issue relating to allowability of deduction claimed towards amortization on premium paid on excess face value of securities held under HTM category has allowed assessee's claim holding as under:

"10. At the time of hearing before us, the learned representatives of both the sides have agreed that this issue is also squarely covered in favour of the assessee by the various orders of the Tribunal passed in assessee's own case for earlier years. Copies of the said orders are placed on record before us and a perusal of the same shows that in one of such orders dated 22nd Dec., 2010 passed in assessee's own case for assessment years 2002-03 to 2006-07, the coordinate bench of this Tribunal has directed the AO to allow the premium amortized by the assessee over the period remaining to maturity holding that the same was claimed as per the relevant RBI guidelines and even the CBDT has issued instructions to allow the same. Respectfully following the said order of the Tribunal in assessee's own case for earlier years, we uphold the impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue and dismiss ground No. 3 of the Revenue's appeal."

Ld. DR has not been able to bring to our notice any other contrary decision either of the ITAT or any high court to take a different view on the issue. In view of the aforesaid, we uphold the order of ld. CIT(A) by dismissing the ground raised.

11. In the result, appeal of department is dismissed.

ITA NO. 1579/Hyd/2012 by assessee

12. The only issue in assessee's appeal relates to disallowance of deduction claimed u/s 36(1)(viia) amounting to Rs. 2,94,61,564.

13. Briefly the facts relating to this issue are, during the assessment proceeding AO noticed that in the computation of income filed along with return of income assessee has claimed deduction of an amount of Rs. 2,94,61,564 u/s 36(1)(viia) being provision made for bad and doubtful debts of rural branches. However, on verifying the 6 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

audited statement of accounts and other documents, he noticed that assessee had not made any provision for bad and doubtful debts in the books of account. Accordingly, he disallowed the deduction claimed by assessee. Being aggrieved of such disallowance, assessee preferred appeal before ld. CIT(A).

14. Ld. CIT(A) on referring to a decision of State Bank of Patiala Vs. CIT, 272 ITR 54 (P&H), wherein it was held that unless provision for bad and doubtful debts is made in the books of account, no deduction u/s 36(1)(viia) can be allowed, upheld the disallowance since assessee has not made any provision in the books of account. Being aggrieved, assessee is before us.

15. Ld. AR submitted before us, the issue is covered by the decision of the Tribunal in assessee's own case for AY 2010-11 in ITA No. 1742/Hyd/14 dated 25/03/2015.

16. Ld. DR, on the other hand, submitted that the said decision has not taken into consideration the judgment of the P&H High Court in case of State Bank of Patial (supra), which is directly on the issue.

17. We have considered the submissions of the parties and perused the materials on record. Undisputedly, assessee has not made any provision for bad and doubtful debts in the books of account as required u/s 36(1)(viia). Only in computation of income filed along with return of income assessee has claimed deduction towards provision for bad and doubtful debts. On perusal of section 36(1)(viia), it is very much clear that for claiming deduction under the said provision, the mandatory requirement is assessee must have made a provision in the books of account for claiming deduction in the manner prescribed therein. Therefore, when assessee has not made any provision in the books of account in so far as bad and doubtful debts are concerned, assessee is not eligible for deduction u/s 36(1)(viia). The Hon'ble P&H High Court in case of State Bank of Patiala Vs. CIT (supra) while interpreting the provisions of section 7 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

36(1)(viia) has held that unless assessee bank makes a provision for bad and doubtful debt in the books of account, no deduction is allowable. As regards the decision of the coordinate bench in assessee's own case for AY 2010-11 relied upon by the ld. counsel for the assessee, it is observed that a similar issue was decided by the coordinate bench for AY 2010-11 in favour of the assessee relying on the decision of Hon'ble Supreme Court in case of Cahtolic Syrian Bank Vs. CIT, [2012] 343 ITR 270 which was not directly on the point and the decision of State Bank of Patiala Vs. CIT, 272 ITR 54 (P&H), which is directly on the point, was not brought to the notice of the coordinate bench. The benefit of the said decision in the case of State Bank of Patiala Vs. CIT (supra), thus, was not available to the coordinate bench while dealing a similar issue for AY 2010-11 and since the same is squarely applicable to the issue under consideration, as agreed even by the ld. counsel for the assessee, we decide this issue against the assessee following the same. In the aforesaid view of the matter, finding no infirmity in the order of ld. CIT(A), we uphold the same by dismissing the ground raised.

18. In the result, appeal of assessee is dismissed.

19. To sum up revenue's appeal in ITA No. 1536/Hy/12 and assessee's in ITA No. 1579/Hyd/12 are dismissed.

Pronounced in the open court on 12 th June, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 12 th June, 2015 kv 8 ITA Nos. 1536 & 1579 /Hyd/2012 M/s Deccan Grameen Bank

Copy to:-

1) ACIT, Circle - 9(1), Hyderabad

2) M/s Deccan Grameen Bank, Lalitha Nagar, Dilsukhnagar, Hyderabad.

3 CIT(A)-VI, Hyderabad

4) CIT-VI, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.