Write-Off of Deposits With Bank Whose License Was Cancelled by RBI Allowed as Deduction u/s 37 | ITAT

Case Details: Surat National Co.op Bank Ltd. vs. ACIT - [2024] 169 taxmann.com 624 (Surat-Trib.)

Judiciary and Counsel Details

• Pawan Singh, Judicial Member & Bijayananda Pruseth, Accountant Member
• Hiren Vepari, CA for the Appellant.
• Ravi Kant Gupta, CIT-DR & Mukesh Jain, Sr. DR for the Respondent.

Facts of the Case

The assessee-bank had fixed deposits (FDs) with a Co-operative Bank. During the year under consideration, the assessee had written off the deposits as the write-off was necessitated on account of the fact that RBI had directed the bank to write off the said amount since the Cooperative bank was not solvent and its banking license was cancelled by RBI. The deposits were ultimately written off by debiting various reserves. Even though the amount was debited and credited to the P&L account, ultimately, the sum was written off by debiting the above reserves only.

The Assessing Officer (AO) disallowed the claim on the ground that the loss was on capital account and could not be allowed as deduction under section 36(1)(vii).

On appeal, CIT(A) sustained the additions made by AO. Aggrieved by the order, an appeal was filed to the Surat Tribunal.

ITAT Held

The Tribunal held that the FDs can be treated as stock-in-trade if they form part of the banking business. It was seen that as per section 6 of the Banking Regulation Act, 1949, which deals with the form and business in which the banking companies may engage, dealing in funds is a part of the banking business. Apart from accepting deposits and lending money, investing in deposits is also a part of the banking business.

Accepting deposits, giving loans and advances, making investments, making deposits, etc., form part of the core activity of the banking business. Thus, the deposits placed with the bank were wholly in the course of and for business. Therefore, the deposits held by the assessee cannot be treated as capital assets, and they formed part of stock-in-trade. This was also fortified by the fact that the interests earned on such deposits were offered to tax and were taxed as business income.

Once it was held that holding deposits forms part of the banking business, writing off such loss will be a loss arising while carrying on the banking business. The records showed that the same bank incurred huge losses, and the RBI cancelled its license to carry on with the banking business. The RBI also directed the banks that had deposits with such banks to write off those losses. Accordingly, it was viewed that the loss incurred by the assessee was a business loss incurred while carrying on its banking business.

List of Cases Reviewed

• Bharuch Dist. Central Co-op. Bank Ltd. v. ITO (2013) 36 taxmann.com 517 (para 9) followed.
• Kodungallur Town Co-operative Bank Ltd. 72 taxmann.com 205 (Cochin Trib)
• (ii) ING Vysya Bank 42 taxmann.com 303 (Bangalore Trib)
• (iii) State Bank of Hyderabad, 63 taxmann.com 322 (Hyderabad Trib.) (para 9) distinguished.
• Dharangadhra People’s Co-Op. Bank Ltd. v. DCIT, ITA No.130 to 131/Rjt/2017, dated 18.12.2019 (para 17.2) followed.

List of Cases Referred to

• Catholic Syrian Bank Ltd. v. CIT (para 5)
• Kodungallur Town Co-op Bank Ltd. v. Asstt. CIT [2016] 72 taxmann.com 205/160 ITD 132 (Cochin – Trib.) (para 7)
• Dy. CIT v. ING Vysya Bank Ltd. [2014] 42 taxmann.com 303/149 ITD 611/62 SOT 26 (Bangalore – Trib.) (para 7)
• State Bank of Hyderabad v. Dy. CIT [2015] 63 taxmann.com 322 (Hyderabad – Trib.) (para 7)
• Bharuch Dist. Central Co-op. Bank Ltd. v. ITO [2013] 36 taxmann.com 517/59 SOT 150 (Ahmedabad – Trib.) (para 9)
• National Thermal Power Co. Ltd. v. CIT 229 ITR 283 (SC) (para 12)
• Jute Corpn. of India Ltd. v. CIT [1990] 53 Taxman 85/[1991] 187 ITR 688 (SC) (para 12)
• Dharangadhra People’s Co-Op. Bank Ltd. v. DCIT (para 16.1)
• Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 17.2).