Shri R. P. Tolani And Shri T. R. Meena,JJ.

ORDER

T. R. Meena, A. M.-The ITA No. 278/JP/2009 filed by the assessee as well as cross appeal No. 436/JP/2009 by the Revenue are against the order dated 24/03/2009 of the learned C.I.T.(A)-II, Jaipur for the A.Y. 2004-05. The grounds of assessee's appeal as well as the Revenue are as under:-

Grounds of ITA No. 278/JP/2009
"1(i) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in upholding the applicability of the provision of section 14A and thereby upholding the disallowance of proportionate interest and estimated administrative expenditure of the banking business of the appellant bank.

(ii) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in quantifying the disallowance u/s 14A at a sum of Rs. 11,21,00,000/-.
(iii) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has further erred in calculating the amount of disallowance u/s 14A in terms of provisions of Rule 8D. He has also erred in applying these provisions of Rule 8D for the year under consideration as the same have been introduced on 24/03/2008.
2. Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs. 6,98,07,032/- made by the Assessing Officer by disallowing the depreciation on investment in respect of securities shifted from 'Held for Trading' category to 'Available for Sale' category.

3. Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs. 5,86,050/- by reducing the appellant's claim of depreciation u/s 32.
4(i) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of prior period expenses of Rs. 34,23,944/-. He has further erred in not directing the A.O. to allow this claim in the preceding respective assessment years.

(ii) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in not allowing the relief in respect of disallowance of alleged prior period rent and other miscellaneous expense of Rs. 28,85,358/- and sending it back to A.O. for verification."
Ground of ITA No. 436/JP/2009

"On the facts and in the circumstances of the case and in law the learned CIT(Appeals) has erred in-deleting the addition of Rs. 4,56,60,998/- made by the A.O. taking the interest income on Government and other securities on accrual basis instead of due basis as shown by the assessee."

2. Ground No. 1 of the assessee's appeal is against confirming the disallowance U/s 14A of the Income Tax Act, 1961 (hereinafter referred as the Act) read with Rule 80D of the Income Tax Rules (in short the Rules) of Rs. 11,21,00,000/-. The Assessing Officer observed that the assessee is an associate bank of State Bank of India. It is engaged in all banking operations and trading in government and other securities. The assessee derives income from interest, dividend, trading and securities etc. It was found during the assessment proceedings that the assessee's income includes substantial income, which is not charged to tax as under:-

The learned Assessing Officer gave reasonable opportunity of being heard on dividend income of Rs. 17,11,94,151/-, which was availed by the assessee vide letter dated 26th December, 2004. After considering the assessee's reply, the Assessing Officer held that Section 14A of the Act in case of assessee is applicable. There is no dispute that the assessee bank had earned dividend income from mutual fund, interest income from tax free bonds, income from infrastructure lending and income by way of dividends. The corresponding income is exempt U/s 10(33), 10(23G) and Section 10(34) of Chapter-III of the Act, which provides details of various exempted income, and those income, which had been form part of total income. When the assessee has taxable as well as non-taxable income, the expenses is to be apportioned on the basis of total receipts under both the heads and disallowance U/s 14A of the Act is required to be made by the Assessing Officer. The assessee had claimed that its business is indivisible but the assessee runs various divisions and different branches and the expenditures usually can be worked out by the assessee. The appellant arguments of interest free fund available with him were not found tenable to the Assessing Officer that there is no direct nexus has been established by the appellant between both that tax free fund were utilized in investment in shares. The Assessing Officer held that there is no doubt about the fact that part of the interest can certainly be attributed to the tax free income. The total interest earned by the assessee is Rs. 1573,57,13,330/- as against total interest expenditure incurred by the assessee at Rs. 857,13,41,288, thus, he calculated the ratio of total interest expenditure over total interest earned i.e. Rs. .5447. As regard the administrative expenses, he estimated 5% of tax free interest receipt as administrative expenses. Thus, he made addition of Rs. 10,18,09,800/- U/s 14A of the Act.

3. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter before the learned CIT(A). The learned CIT(A) enhanced the disallowance U/s 14A of the Act by observing as under:-

"I have considered facts of the case and arguments taken by Sh. Jhanwar and Sh. Parwal quite carefully. How the contention of AR that no expenditure is relatable to such exempt income to be disallowed U/s 14A of I.T. Act is not acceptable has been discussed in detail by CIT(A)- II, jaipur in para 3.5 and para 3.6 of the appellate order dated 30/3/2005 for A.T. 2003-04 and since facts of the case and arguments taken by the AR are more or less similar therefore, for the similar reasons as stated in the aforesaid appellate order of the appellant bank for A.Y. 2003-04 for this year also I hold that expenditures are relatable to such exempt income which are to be disallowed U/s 14A of I.T. Act. Now the question arises that what should be the quantum of disallowance and whether such disallowance made by A.O. is justified. Earlier, there was no mechanism to compute such relatable expenditure with reference to exempt income and because of this the Assessing Officer and CIT(A) has adopted different formulas to work out such expenditures to be disallowed U/s 14A of the I.T. Act. Now Rule 8D is introduced which prescribes the mechanism and method to work out relatable expenditures with reference to exempt income to be disallowed U/s 14A of I.T. Act. When the mechanism is prescribed in the income tax rule then obviously in my considered view it has to be followed in preference to any formula adopted by Assessing Officer and by earlier CIT(A) in their own wisdom. As far as argument of Sh. Parwal is concerned that committee of dispute vide their meeting dated 16/10/2008 has denied the permission to the income tax department to file the appeal before ITAT for A.Y. 2001-02 to 2003-04 it has to be appreciated that the insertion of Rule 8D on this issue was not before COD while taking said decision and keeping in view the fact that now income tax rules prescribes such mechanism to compute relatable expenditure with reference to exempt income to be disallowed U/s 14A of I.T. Act then only as per this rule the disallowance has to be worked out. With this discussion and by rejecting the arguments taken by Sh. Parwal which were taken in response to opportunity given I hereby direct the Assessing Officer to adopt such disallowance at Rs. 11,21,00,000/- as against such disallowance adopted by Assessing Officer in the assessment order at Rs. 10,18,09,800/-."

Now the assessee is in appeal before us.

4. The learned A.R. for the assessee has submitted that the learned CIT(A) made disallowance by applying Rule 8D of the Rules. Rule 8D is applicable prospectively from A.Y. 2008-09 as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT 328 ITR 81, therefore, the disallowance made by the learned CIT(A) by applying Rule 8D of the Rules is incorrect. He further relied upon the following case laws:

(i) CIT Vs. Walfort Share and Stock Brokers (P) Ltd. 326 ITR 1.
(ii) Maxopp Investments Ltd. & Ors. Vs. CIT 347 ITR 272 (Del.).
(iii) DCIT Vs. Maharashtra Seamless Ltd. 52 DTR 005 (Del.)(Trib.).
(iv) CIT Vs. Metalman Auto (P) Ltd. 199 Taxman 149 (P&H) (Mag)
(v) Bunge Agribusiness (India) (P) Ltd. Vs. DCIT 132 ITD 549 (Mum)
(vi) CIT Vs. Hero Cycles Ltd. 31 DTR 301 (P&H).
(vii) ACIT Vs. Mohan Exports (P) Ltd. 138 ITD 108 (Del.)
(viii) ACIT Vs. SIL Investment 73 DTR (Del.)(Trib.) 233.

He has further drawn our attention on assessee's own case for A.Y. 2001-02 to 2003-04 and argued that by following the Hon'ble ITAT order in assessee's own case, no disallowance of interest pertaining to the investment, which has related both the exempted as well as taxable income can be made under Rule 8D has been allowed. He has also worked out total disallowance as per Rule 8D of the Rules at Rs. 7.06 crores. Therefore, he requested to set aside the order of the learned CIT(A) to recomputed the disallowance U/s 14A of the Act.

5. At the outset, the learned D.R. has supported the order of the learned CIT(A).

6. We have heard the rival submissions of both the parties, perused the relevant material on record. The Hon'ble Bombay High Court in case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT (supra) has held that Rule 8D is application from A.Y. 2008-09. It is further held that disallowance for earlier period to be determined on reasonable basis U/s 14A. Thus, we set aside the issue to the Assessing Officer to recomputed the disallowance U/s 14A of the Act after providing reasonable opportunity of being heard to the assessee.

7. The second ground of assessee's appeal is against confirming the addition of Rs. 6,58,07,032/- by the Assessing Officer by disallowing the depreciation on investment in respect of securities shifted from "Held For Trading" category to "Available for Sale" category. The Assessing Officer observed that the assessee bank is trading in securities. For arriving at the profit from the trading of securities, valuation of securities at the end of financial year is undertaken. The valuation method did on the basis of cost or market value of securities whichever is lower and market price is lower than cost price. The assessee is debiting the provision for depreciation on investment in profit and loss account but when securities appreciated it is ignored by the appellant. If the provision for depreciation on investment at the beginning of the year is higher than the provision for depreciation on investment at the closing of the year then depreciation being negative is offered for taxation at Rs. 4,37,57,567/- during the year under consideration. The learned Assessing Officer analysed the valuation method of securities under the head "Individual Scrip Method, Global Method and Category Wise Method". The assessee had followed category wise method of valuation of scrips and in A.Y. 2002-03, the assessee had debited Rs. 12.58 crores on account of difference in provision of depreciation on securities at the closing and the beginning of the year in profit and loss account, but on the basis of global method, the above difference was zero. The learned Assessing Officer had disallowed the above depreciation computed on the basis of category wise method. The logic behind the above addition was that category wise method prescribed by the Reserve Bank of India (RBI) was not binding on the Income Tax Department and the global method adopted was also in accordance with the accounting standard even as in this method the costing of stock was being done at cost or market value whichever is lower. In assessment year 2003-04, the difference in provision for depreciation on securities at the closing and the beginning of the year was (-)3.03 crores, which was offered by the assessee in profit and loss account and also for income tax purposes in accordance with method adopted by it in earlier year. The Assessing Officer had allowed the difference of valuation method adopted by the Assessing Officer in A.Ys. 2002- 03 and 2003-04. For assessment year 2004-05 once again, the difference in "provision for depreciation on securities" at the closing and the beginning of the year was (-) Rs. 4,37,57,567/- which was offered by assessee in P&L account and also for income tax purposes, in accordance with method adopted by it in earlier year. Since the CIT(A) has also upheld the method of valuation of stock on the basis of category wise method correct, against which no decision is received, the above income has to be included in the income of assessee without prejudice to stand taken in assessment year 2002-03 by the Assessing Officer. The Assessing Officer has given reasonable opportunity of being heard on this issue, which was availed by the assessee vide letter dated 31/1/2005. After considering the assessee's reply, the Assessing Officer held as under:-

"C. I have considered arguments in assessee's reply, RBI guidelines and other relavant aspects I hold that the depreciation of Rs. 6,98,07,032 in respect of Central Government Securities shifted from "held for trading" category to "available for sale" category should have been set off against appreciation of Rs. 289.717 crores available in the same category and by not setting it off, the income of assessee is being under stated by the same amount for Income tax purposes, for the following reasons:

(a) Assessee has justified its act of not setting off the depreciation created at the time of shifting of category against appreciation available in same category at the closing of the year by claiming that it is as per RBI guidelines. Therefore, the first issue is whether RBI guideline permit above treatment and the second issue is even if the RBI guidelines permit above treatment, whether it will be allowable under Income Tax Act.

(b) As per prudential norms for classification, valuation and operation of investment portfolios by bank, issued by RBI vide DDOD No. BP.BC.21/21.04.141/2003-04 dated 2nd September, 2003, which is a compilation of Instructions/guidelines issued to bank up to June, 2003 (Para 2.3 which prescribes guidelines for shifting of securities amongst different categories, "transfer of scrips from one category to another under all circumstances, should be done at the acquisition cost/book value/market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for."

Thus, it is clear that though, depreciation has to be provided at the time of shifting of category as per RBI guidelines, it nowhere says that such depreciation should not also be set off against appreciation in the same category on the closing.

(c) Even if it would have been permissible under RBI guideline, it would not mean that it is in accordance with accounting standards and therefore, it is not binding on the Department under Section 145 of I.T. Act.

(d) In fact the DBOD circular dated 06/9/2001, states, "it is to be noted that the above accounting treatment does not take into account taxation implications and hence the banks should comply with the requirements of Income Tax Authorities in the manner prescribed by them.

(e) Now, if we go on merits and facts as to what has really happened then we see that as per category wise method, on the one hand depreciation on all securities of the same category can be set off against the appreciation in the same category but in this case depreciation on securities which have come to the category "available for sale" to the extent of Rs. 6.98 crores is not being set off despite an appreciation of Rs. 289.72 crores. This means in this category, if the cost of securities was say for example 1,000 crores then despite composite market value of securities in this category being 1283.74 crores, the valuation of securities of this category is being done at 993.02 crores which is less than the cost (which in turn is less than the market value). This is going against basic accounting principles.

(f) To further elaborate the issue and the distortions which above method can bring to the profit, we can taken an example of a security valuing Rs. 10. If the market value of the security on the date of shifting was Rs. 9 then depreciation of 1 rupee has to be provided as per RBI guideline. If on the closing of F.Y. the market value of above scrip goes to Rs. 11, appreciation on this scrip itself will be Rs. 2 compare to the value at which scrip is transferred to this category and depreciation will be Rs. 1 in assessee's books. However, the depreciation will not be set off even against the appreciation of Rs. 2 on the same scrip as per interpretation and method adopted by assessee. Since the appreciation has to be ignored and depreciation has to be provided for, it would mean that assessee would be providing depreciation of Rs. 1, this means the cost of security being Rs. 10 and market value of security being Rs. 11 on the date of closing, still just because on the date of transfer of category its value was Rs. 9, in the valuation of stock, the valuation of security is being done at Rs. 9. Thus, just by shifting the category during the accounting year one will be permitted to take valuation of stock at a figure which is less than both cost and market value. It clearly proves that the results will become absurd. Therefore, even if the above treatment is considered in accordance with RBI guidelines (which, it is not, as already discussed), is distorting the picture of profits and is therefore, not permissible for computing the profit for purpose of Income Tax Act.

D. Therefore, depreciation of Rs. 6,98,07,032/- in respect of Central Government Securities shifted from "held in trading" category to "available for sale" category, should have been set off against appreciation of Rs. 289.717 crores available in the same category, even as per the system of category wise valuation of scrips being adopted and followed by assessee. Accordingly, the total depreciation on securities at the closing of F.Y. should have been 12,83,07,884/- as against 19,81,14,316/- computed by the assessee. Since depreciation at the beginning of F.Y. was Rs. 24,18,71,884/-, the difference Rs. 11,35,64,599/- should have been offered for taxation as against an amount of Rs. 4,37,57,567/- offered by assessee. The above addition will be without prejudice to the stand of department taken for A.Y. 2002- 03, which has not been accepted by the CIT(A) and is being further contested, as per method being followed by assessee and confirmed by CIT(A), thereby resulting into an addition of Rs. 6,98,07,032/-.

8. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter before the learned CIT(A), who had confirmed the addition by observing as under:-

"I have considered facts of the case and arguments taken by Sh. Jhanwar and Sh. Parwal quite carefully. It is true that as per RBI guidelines the banker has provided depreciation of Rs. 6,98,07,032/-in respect of securities shifted from "held for trading" category to the category of "available for sale". For this purpose they have relied upon master circular issued by RBI on prudential norms for classification, valuation and operation of investment port folio by bank dated 2.9.2003. Besides this following category wise valuation such depreciation as on 31.3.2003 was held at Rs. 24,18,71,884/-and as per guidelines category wise such depreciation as on 31.3.2004 has been worked out at Rs. 19,81,14,316/- and since, there was no further requirement to charge anything to the P&L A/c of current year therefore, the excess sum of Rs. 4,37,57,567/- was credited to the P&L A/c. Following the CIT(A)'s order for A.Y.2002-03 in the case of appellant banker which has been discussed in earlier part of this appellate order I agree that as per RBI guidelines the banker has correctly valued the depreciation category wise and accordingly in the correct manner they have credited their P&L A/c of the year by Rs. 4,37,57,567/-. However, another development for the year was that during the year itself certain investments were shifted from "held for trading category" to the category of "available for sale" and in respect of such investment for which category has been changed the depreciation in the value as on the date of shifting has been worked out at Rs. 6,98,07,032/- and the same was claimed as deduction even though following the category wise method of valuation overall in the said category there was no net depreciation. However, following master circular issued by RBI on 2.9.2003 the banker has provided for aforesaid depreciation of Rs. 6,98,07,032/- for which even the RBI vide their letter dated 23.12.2005 has clarified that the depreciation on account of shifting of securities has to be fully provided and it cannot be netted off against the appreciation in same classification and category as on the valuation date of investment port folio which in the present case was 31.3.2004. It is a fact that as on 31.3.2004 in the category of central government securities which are available for sale the total depreciation is Rs. 15.11 crore as against that total appreciation in this category is of Rs. 289.717 crores. Following the consistent method of valuation which is also held as correct in the form of category wise valuation by CIT(A) in earlier appeals which is discussed in earlier part of appellate order then for this category no deprecation is required to be allowed, though, it has been worked out as on the date of shifting of such investment from the category of "held for trading" to category of "available for sale". Reasonably the question of appreciation and depreciation in the value of securities has to be seen as on 31.3.2004 only for the present A.Y. and undisputedly for the securities available in category of available for sale since appreciation is more as compared with depreciation therefore there is no question of allowing any further depreciation in respect of securities lying in the said category of investment. In this respect the instruction No. 17/2008 issued by CBDT vide its letter F.No.228/3/2008 - ITA -III dated 26.11.2008 which was issued after the review of assessment of bank carried out by C&AG. CBDT vide aforesaid instruction has clarified that in particular deductions under the provisions referred to below should be allowed only after a thorough examination of the claim on facts and on law as per provisions of the I.T. Act. Thereafter, in item No. 2 (VII) of the instruction the RBI guidelines dated 16.10.2000 in respect of investment port folio classification in three different categories has been discussed and has been clarified that in the case of "held for trading" and "available for sale" categories securities forming stock in the trade of bank, the depreciation / appreciation is to be aggregated scrip wise and only net depredation if any, is required to be provided for in the accounts. In my considered view for this category as per aforesaid instruction dated 26.11.2008 there is no net deprecation since the appreciation of securities in the category of "available for sale" is more than the depreciation of securities in the same category i.e. "available for sale" and therefore, in my considered view the appellant bank has wrongly claimed deduction for depreciation in respect of such securities which were shifted from the category of "held for trading" to "available for sale" category and with this discussion, the disallowance made by AO is confirmed of Rs. 6,98,07,032/- by rejecting relevant ground of appeal."

Now the assessee is in appeal before us.

9. The learned A.R. for the assessee submitted that the assessee deals in securities and value them as at the end of the year as per the guidelines prescribed for this purpose by the RBI, which are mandatory to be followed by the bank. The same guidelines had been followed by the assessee as per the RBI guidelines, the securities are classified in six classifications i.e. (i) Government Securities, (ii) Other approved securities, (iii) Shares, (iv) Debentures and Bonds, (v) Subsidiaries and Joint Ventures, (vi) Others. All these six classifications of securities are to be recognized in Held to Maturity (HTM), Held for Trading (HTF) and Available for Sale (AFS), which are held as under:-
i) Held to Maturity (HTM): To be carried at cost. However, if the cost is more than the face value, the premium should be amortised over the period remaining to maturity.

ii) Available For Sale (AFS): After getting the market value of all the scrips net depreciation under each classification should be charged to profit and loss account but if the result is net appreciation under any classification, it should be ignored.
iii) Held for Trading (HTF): Valuation is required to be done in the same manner as required as in the case of available for sale.

The learned A.R. further submitted as under:
1. The RBI Guidelines provide for category wise valuation of the securities. As per this rules the banks are to liquidate the securities held under 'Held for Trading' category on or before 90 days of its purchase. However, where there is diminution in the market value of the securities, as prudent businessmen the banks do not generally liquidate these securities on loss. In these circumstances the banks with the approval of Board of Directors can shift these securities in the category of 'Available For Sale'. The RBI guidelines requires to provide depreciation at the time of such transfer for the reason that banks should not be allowed the set off of the depreciation of the securities originally held as Held for Trading category with the appreciation in the securities held as Available for Sale category. The basic principle behind this guideline is to retain the depreciation as per the original classification so as to regulate the act of shifting of securities from one category to other category.
2. The CBDT in its instruction No. 17/2008 dated 26/11/2008 in para (vii) with reference to allowing the depreciation on the securities has directed that the latest guidelines of RBI is to be taken into consideration for allowing any such claim. In respect of shifting of securities from one category to another, the same should be at lower of acquisition cost/book value or market value and the depreciation on such transfer should be fully provided for. Accordingly, the assessee has correctly provided for the depreciation of Rs. 6.98 crores on shifting of securities from HFT to AFT category.

3. The CIT(A) though principally accepting the above contention has wrongly inferred that the question of appreciation and depreciation in the value of securities in a particular category is to be seen only at the year end and since the appreciation in the category of Available for Sale in more than the depreciation of the securities in the same category at the year end, the deduction for depreciation at the time of shifting cannot be allowed. This view of CIT(A) is apparently incorrect because the securities Held for Trading are allowed to be shifted as Available for Sale only in exceptional conditions. Had this shifting not been allowed, the assessee had to dispose of these securities incurring the loss. Therefore, once such shifting is allowed, the depreciation in the value of the securities which is shifted to another category is required to be fully provided for. This has no relationship whatsoever for valuing the security of a particular category at the year end. This is consistently followed by all the banks. Since the Board instruction also requires that RBI guidelines is to be followed for allowing the claim of depreciation, the claim of depreciation made by the assessee at Rs. 6.98 Crores be directed to be allowed. Reliance is placed on the decision of Hon'ble ITAT Bangalore Bench in the case of State Bank of Mysore Vs. DCIT 33 SOT 7 wherein it was held that in view of the clear cut guidelines of the RBI regarding transfer of AFS category investment into HTM category investment, the claim of the assessee bank towards provisions of depreciation on account of transfer of securities from AFS category to HTM category is allowed.

4. Otherwise also in case the depreciation is not allowed in this year, the value of inventory for the subsequent year would increase to that extent. In the next year, the CIT(A) has accepted the valuation of the inventory at the year end and therefore this amount would automatically get allowed in the next year. Further had these securities been kept under the category of Held for Trading, the depreciation on such securities would have increased to 7.17 Crores as on 31st March, 2004."

10. At the outset, the learned D.R. supported the order of the learned CIT(A).

11. We have considered the rival submissions of both the parties and perused the material on record. As per paper book submitted by the appellant at page No. 53, total depreciation, which were shifted from HFT category to AFS category at Rs. 6,98,07,032/-. All the banks are regulated by the RBI and all instructions issued by the RBI are binding on every banks. The RBI issued circular on 2nd September, 2003 and prescribed Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks in master circular. The prudential norm classified the investment portfolio in A to F categories. These investments are to be kept by the bank under the three heads namely Held to Maturity (HTM), Held for Trading (HTF) and Available for Sale (AFS). As per this norm, the bank can shift investments to/from Held to Maturity category, Available for Sale category to Held for Trading category and from Held for Trading category to Available for Sale category for clarified these terms, the definition given in the circular as under:-

(i) Held to Maturity: the Securities which are acquired with an intention to held up their maturity.
(ii) Held for trading: To trade by taking advantage of shirt term price/interest rate moments will be classified under Held for Trading.

(iii) Available for Sale: The security which do not fall within the above two categories will be classified under Available for Sale. On transfer of scrip from one category to another.

The RBI also prescribed the valuation method of securities as per the circular under all circumstances, should be done at the acquisition cost/book value/market value on the date of transfer, which is the least and the depreciation if any on such transfer should be fully provided for. It is further clarified that there is a note in the prudential norm in point No. 3.2 Available for Sale: "Securities under this category shall be valued scrip wise and depreciation/appreciation shall be aggregated for each classification referred to in item 2(i) above. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification." The appellant had claimed depreciation on the basis of master circular of RBI, on the basis of category prescribed in point No. 2.1 of this circular. According to the calculated depreciation at Rs. 6,98,07,032/-, the learned CIT(A) had considered his predecessor's order in earlier years appeal but the RBI has changed the valuation method on securities in year under consideration, which is binding on the bank. The appellant can transfer the securities during the year as per this circular. During the year as well as 31st March, 2004 and appreciation of any category is to be ignored as per this circular, which has been followed by the appellant. The learned CIT(A) referred the CBDT instruction No. 17/2008 vide letter no. F.No.228/3/2008-ITA-III dated 26/11/2008 wherein RBI guideline dated 26/10/2000 had been clarified. The learned CIT(A) has not controverted the calculation made and claimed by the appellant that there is no net depreciation. Since the appreciation of securities in the category of Available for Sale is more than the depreciation of securities in the same category i.e. Available for Sale. Therefore, we are of the considered view that the appellant had rightly claimed depreciation on transfer from securities Held for Trading category to Available for Sale category at Rs. 6,98,07,032/-. The case law relied upon by the appellant in case of State Bank of Mysore Vs. DCIT and ITAT Bangalore 'B' Bench is squarely applicable being an identical fact of the case wherein denomination in value of securities consequent to conversion of securities from AFS category to HTM category held allowable. The assessee's appeal is allowed on this ground.

12. Ground No. 3 of assessee's appeal is against confirming the addition of Rs. 5,86,050/- by reducing the appellant's claim of depreciation U/s 32 of the Act. As per audit report, the allowable depreciation was Rs. 36,80,29,161/-. However, the assessee had claimed depreciation of Rs. 36,86,15,211/-, the Assessing Officer gave reasonable opportunity of being heard on this issue. After considering the assessee's reply, it has been held by the Assessing Officer that depreciation was allowed only to the extent as it was computed by the auditor in A.Y. 2003-04 and the addition has been contested by the assessee before the learned CIT(A), where the appeal is still pending. On the same line, claim of depreciation is allowed at Rs. 36,80,29,161/- as against claim of Rs. 36,86,15,211/- by allowing depreciation on electric fittings at the prescribed rate of 15% instead of allowing depreciation @ 25% just because these assets were part of plant and machinery of block assets in earlier assessment year. Accordingly he made the addition of Rs. 5,86,050/-.

13. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter to the learned CIT(A), who had confirmed the order by observing as under:-

"I have considered facts of the case and arguments taken by Sh. Jhanwar and Sh. Parwal quite carefully. This issue has also been disposed off against the appellant by CIT(A) for A.Y. 2003-04 vide appellate order dated 30/3/2005 in which the CIT(A) has confirmed the Assessing Officer's stand on the issue of allowability of depreciation. Under these circumstances following the aforesaid CIT(A) order in this case for A.Y. 2003-04, I hereby confirm the disallowance of depreciation claim to the extent of Rs. 5,86,050/-.

Now the assessee is in appeal before us.
14. The learned A.R. for the assessee submitted that depreciation rate U/s 32 of the Act has been amended w.e.f. A.Y. 2003-04. As per new rules, electric fitting including fans are to be included in the block of furniture and fittings (15% depreciation). Earlier, fans etc. were included in plant and machinery (25% depreciation). The tax Auditor altered the opening Written Down Value ( WDV) of the blocks of furniture fittings and the plant and machinery to shift the amount relating to fans etc. from plant and machinery to furniture and fittings. It is argued that when the assets had been included in the block of assets, it lost is individual identity. Section 43(6) of the Act defines WDV for the block of assets. As per this definition, the calculation of WDV start with WDV of previous year, cannot be changed as per the provisions of the Act. Section 2(11) of the Act defines block of assets in tangible assets and intangible assets. As per provisions of the Act, change in block of particular assets for the reasons of change in depreciation of rate does not affect the WDV of previous year. In case of change in the rate of depreciation of particular assets from a particular year, these assets shall be included in the block applicable for the new rate from the year in which, change took place. The WDV for the previous year, however, cannot be changed in any case. The learned A.R. further drawn our attention on identical issue decided by the Hon'ble ITAT 'B' Bench, Jaipur in ITA NO. 329/JP/2009 for the A.Y. 2003-04 order dated 30/10/2009 wherein identical issue has been decided by the Hon'ble Bench in favour of the assessee.

15. At the outset, the learned D.R. supported the order of the learned CIT(A).
16. We have considered the rival contentions of both the parties and perused the material on record. The Coordinate 'B' Bench of ITAT, Jaipur decided identical issue in A.Y. 2003-04 in favour of the assessee wherein the Coordinate Bench has accepted the assessee's submission and Assessing Officer was directed to work out the depreciation without shifting the opening written down value of plant and machinery to the written down value of furniture and fixture. Accordingly, we allow the assessee's appeal on this ground.

17. Ground No. 4 in assessee's appeal is against confirming the disallowance of prior period expenses of Rs. 34,23,944/- and other Misc. expenses of Rs. 28,85,358/-. The Assessing Officer observed that as per audit report, prior period expenses of Rs. 1,23,94,487 had been debited in profit and loss account. The Assessing Officer gave reasonable opportunity of being heard on this issue, which was availed by the assessee. After considering the assessee's reply, the learned Assessing Officer partly accepted the assessee's submission but interest expenses of Rs. 34,23,944/- had been claimed as wrong calculation of earlier year i.e. for A.Y. 2003-04. As the assessee has not revised its return U/s 139(5) of the Act for claiming these expenses in respective years. Lease rent of Rs. 14,40,086/- of office building and Rs. 28,300/- for residence had been claimed on the basis of settlement of lease enhancement but the terms and conditions of the lease agreement do not show clause of enhancement of rent on expiry of certain period, therefore, total expense under this head was Rs. 14,68,386/-. The misc. expenses of Rs. 5,30,283/- was also not found allowable, thus he made total addition of Rs. 63,09,302/- in the income of the assessee.

18. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned CIT(A), who has allowed the appeal partially by observing as under:-

"I have considered facts of the case and arguments taken by Sh. Jhawar and Sh. Parwal quite carefully. CIT(A)-II, Jaipur while disposing the appeal of the appellant for A.Y. 2003-04 vide order dated 30/3/2005 in para 9.2 of the appellate order has held that such claim for interest payment was not allowable in absence of cogent reasons. Since, there is no change in the circumstances, for the present A.Y. therefore, following the same reasoning I also hereby confirm such disallowance of interest expenses pertaining to prior period of Rs. 34,23,944/-. Further, regarding remaining claim of Rs. 28,85,358/- which is in respect of rent of office building and for misc. expenses following the view taken by CIT(A)-II, Jaipur in para 9.3 of the appellate order for A.Y. 2003-04 for this year also in my considered view, the A.O. was partially correct that the appellant was aware of the liability of the lease rent on expiry of existing lease agreement on the basis of certain increase in the rent schedule but settlement of lease rent take some reasonable time and therefore, the A.O. is directed to verify the claim of the appellant and he is directed to allow the amount of such claim for which the appellant has furnished the details which could not be paid in earlier years on account of non availability of the bills and because of certain formalities to be completed regarding approval of management etc. With this discussion, the same claim of Rs. 28,85,358/- is allowed subject to complete verification from the details furnished and payment made during the year in respect of electricity/water/rent expenses/audit fee/taxes/business development/law charges/statutory/news paper in view of ITAT Jaipur Bench decision in the case of RIICO which has been referred by CIT(A)."

Now the assessee is in appeal before us.

19. The learned A.R. for the assessee has submitted that expenditure to the tune of Rs. 34,23,944/- pertaining to waiver of penal interest, realization of interest due to change of computer system, for overdraft charges received after closing of books. The expenditure to the tune of Rs. 14,68,386/- was pertained to previous year but crystallized during the year under consideration. Mostly pertained to enhancement of rent of various branches. The other expenses were booked as and when claims are made against the bank to pay the same. The accounts of the branch gets finalized within a week of any of the year and therefore, the claims for these expenses made thereafter are taken in the year of claim only. These expenses are nature of electricity/water/rent/audit fees/taxes, which has been allowed by the CIT(A) but subject to verification by the Assessing Officer. By following the decision of the Jaipur ITAT Bench decision in the case of RIICO and even the Hon'ble Supreme Court in the case of CIT Vs. Excel Industries Ltd. 93 DTR 457 has held that when the rate of tax remained the same in present assessment year as well as subsequent assessment year, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. Therefore, he requested to delete the addition made by the Assessing Officer and confirmed by the CIT(A). He further argued that in A.Y. 2003-04, identical issue has been decided by the ITAT Jaipur Bench in assessee's own case in ITA No. 329/JP/2005 for A.Y. 2003-04.

20. At the outset, the learned DR supported the order of the learned Assessing Officer.

21. We have considered the rival submissions of both the parties and perused the material on record. The period expenses were claimed by the assessee have been crystallized during the year under consideration. The assessee has number of branches in all over the India and certain expenses of previous year were claimed after the closing of books of account, which has been clarified by the auditor in audit report. The genuineness of the expenses has not been doubted by the lower authorities. Thus, these expenses were allowable in respective year to which they pertained but information of expenses with evidence received by the appellant from the various branches after closing of books of account. The Coordinate Bench has considered this issue in A.Y. 2003-04 in assessee's own case. The operative finding is as under:-

"Considering the above submissions we find substance in the argument of the Ld. AR. Prior period expenditure refers to those expenses which arise as a result of error or omission in preparation of the financial statement of earlier years as explained in Accounting Standard-5 issued by ICAI. It is not the case of the A.O. that in earlier years interest on FDR was not provided. Such interest was provided manually and the difference has arisen because of the calculation of interest on computerization. Such difference cannot be categorized as an error or omission. Otherwise also the earlier years appeal were pending before us and if it is not allowed in this year the claim of the assessee that it should be allowed in earlier years is reasonable and permissible in view of the decision cited by learned AR. We therefore direct the Assessing Officer to allow the claim of prior period expenses of Rs. 36,46,004/-. This ground is allowed."

By respective following the Coordinate Bench decision in assessee's own case, we also have considered view that these expenses are allowable during the year under consideration. Thus, the assessee gets relief fully on this issue.

22. Ground No. 4(ii) of the assessee's appeal is against disallowance of Misc. expenses of Rs. 28,85,358/-, which has not been pressed as claimed by the appellant. The Assessing Officer himself allowed the expenses.

23. The cross appeal i.e. ITA No. 436/JP/2009 filed by the Revenue is against deleting the addition of Rs. 4,56,60,998/- by taking the interest income on government and other securities on accrual basis instead of due basis as shown by the assessee. The Assessing Officer observed that as per audit report and profit and loss account and balance sheet, the assessee had applied method of accountancy accrual basis for interest income. However, in computation of income, the interest income had been offered on due basis. The details are as under:-

The Assessing Officer gave reasonable opportunity of being heard on this issue, which was considered by the learned Assessing Officer. He considered the Coordinate ITAT Bench decision in assessee's own case for A.Ys. 1989-90, 1991-92 to 1996-97 and also analysed Section 145 of the Act. The learned Assessing Officer held that there is no dispute that the assessee had accounted for the interest on accrual basis by following the mercantile system of accounting. As per Section 145 of the Act, the assessee had to follow accounting system regularly. Computation of income does not derogate from the provisions of charging Section. As per provisions of Section 2(45) of the Act, the total income means the total amount of income referred to in Section 5 computed in the manner laid down in this Act. There are large number of court pronouncements wherein it has been held that the provisions of Section 145(1) of the Act are mandatory and the proper method of accounting regularly followed by the assessee is binding for the computation of total income of the assessee. He relied upon in the case of CIT Vs. Saharanpur Cotton Manufacturing Company Limited 6 ITR 36. The assessee prepared its account of mercantile system includes the accrual interest in total income and claimed entire cost whether on purchase of securities or broken period interest as expenditure. It has been concluded that accrual is rule of banking. The claim of uncertainty, which has not been reported in the notes to the annual accounts nor there is any adverse comment for the same was found in auditor's report. Any adjustment in commercially computed income could be allowed if there is a legal fiction available under the law, otherwise no such adjustment should be made. The same principle was also confirmed by the Hon'ble Supreme Court in the case of CIT Vs. Goverdhan Limited 69 ITR 675 S.C. The learned CIT(A) has confirmed the addition for A.Y. 1999-2000 to A.Y. 2001-02 under the same head. Accordingly, the addition of Rs. 4,56,60,998/- was made by the Assessing Officer.

24. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter to the learned CIT(A), who had allowed the appeal by observing as under:-

"I have considered facts of the case and arguments taken by Sh. Jhawar and Sh. Parwal quite carefully. It is a fact that right from A.Y. 1991-92 to A.Y. 2001-02 this issue has been decided by Hon'ble ITAT Jaipur Bench in favo8ur of the appellant bank. Hon'ble ITAT has upheld the view taken by the bank that it has rightly offered the interest income on due basis. Thereafter, on perusal of the minutes of the meeting of COD held on 06/12/2007 forwarded by Cabinet Secretariat vide their letter dated 26/12/2007 in which for item NO. 23 to 26 which were with reference to ITA No. 617, 618, 619 and 620/JP/2003 dated 7/11/2006 a decision has been conveyed that the dispute relates to the accounting principle to be followed for accounting for interest on government securities and debentures die not involve any loss of revenue to the department and therefore, it has declined permission to the CBDT to peruse appeals in aforesaid 4 cases before the High Court. Further, on perusal of cases listed at S.No. 23 to 26 the issue involved was that whether ITAT has erred in holding that interest on government securities and debentures is to be included in the income of assessee on actual and not on accrual basis despite the fact that the assessee is following mercantile system of accounting. With this discussion and considering ITAT Jaipur Bench decision on this issue in the case of appellant for earlier A.Yrs. as well as considering the declining of the permission to the CBDT to peruse appeals against ITAT orders before High Court, the said addition made by A.O. on this issue of Rs. 4,56,60,998/- is not sustainable and A.O. is directed to delete the same.

Now the Revenue is in appeal before us.

25. The learned D.R. relied upon the order of the Assessing Officer. At the outset, the learned A.R. for the assessee argued that this issue has been decided by the Hon'ble ITAT, Jaipur Bench, jaipur in favour of the assessee right from A.Y. 1991-92 to 2001-02. He also relied upon the following case laws:-

(i) CIT Vs. City Union Bank Ltd. 291 ITR 144 (Mad.).
(ii) CIT Vs. Federal Bank Ltd. 301 ITR 188 (Ker.)
(iii) Canara Bank Vs. JCIT 84 ITD 310 (Bang.) (Trib.)
The issue is identical, therefore, the Revenue's appeal may be dismissed.
26. We have heard the rival contentions of both the parties and perused the material on record. The facts are identical for A.Y. 2001-02. The Coordinate Bench in ITA No. 578/JP/2009 has decided this issue as under:-

"Considering the decision of this Bench in assessee's own case, the two decisions of the Hon'ble High Courts referred by the assessee, the refusal to the department by the committee of dispute to pursue this matter in the Hon'ble High Court in earlier years as also the dismissal of special leave petition of the department by the Hon'ble Supreme Court in case of CIT Vs. Federal Bank reported in 313 ITR 26 (Statute), we decide this issue in favour of the assessee. The income from interest on Government securities/debentures etc. is thus directed to be taxed on due basis. The effect of this for the year, however, be that the income assessed by the A.O. would increase by Rs. 2,26,89,880/-. Thus on principle the ground of the assessee is allowed."

By respectfully following the decision of the Coordinate Bench on identical issue, we also dismiss the Revenue's appeal.

27. In the result, the assessee's appeal is partly allowed and the appeal of the Revenue is dismissed.