ITAT Jaipur Grants ₹40.06 Crore Relief to Rajasthan Marudhara Gramin Bank: MTM Loss on AFS Securities and Standard Asset Provision Held Allowable

Overview of the Dispute

The Income Tax Appellate Tribunal, Jaipur Bench, in the matter of Rajasthan Marudhara Gramin Bank Vs DCIT (ITAT Jaipur), adjudicated two significant disallowances that had been sustained by the lower authorities against a Regional Rural Bank established under the Regional Rural Banks Act, 1976. The combined relief directed by the Tribunal — comprising ₹37,41,31,381 on account of mark-to-market (MTM) losses on Available for Sale (AFS) securities and ₹2,65,00,000 on account of provision for bad and doubtful debts relating to standard assets — amounted to approximately ₹40.06 crore in aggregate, as per the order dated 28.09.2026.

The ruling is significant not merely for its outcome but for the clarity it provides on how general anti-MTM provisions in Income Computation and Disclosure Standards interact with sector-specific standards applicable to banks, and on the scope of deduction available under Section 36(1)(viia) of the Income Tax Act, 1961 for provisioning on standard assets.

Background: From Accepted Return to Consequential Assessment

For Assessment Year 2018-19, the assessee filed a return of income declaring total income of ₹96,50,67,205. The original assessment completed under Section 143(3) of the Income Tax Act, 1961 accepted the returned income without modification.

Subsequently, an order under Section 263 dated 30.03.2023 set aside the completed assessment and restored it to the Assessing Officer (AO) for fresh examination. In the consequential assessment proceedings, the AO introduced two disallowances:

  1. MTM loss on AFS securities — ₹37,41,31,381, disallowed under Section 37 of the Act
  2. Provision for bad and doubtful debts on standard assets — ₹2,65,00,000, disallowed under Section 36(1)(viia) of the Act

The CIT(A), functioning through the National Faceless Appeal Centre (NFAC), Delhi, confirmed both disallowances through an ex parte order without independently examining the factual and legal submissions already placed before the AO by the assessee. This infirmity was among the central complaints before the Tribunal.

Preliminary Issue: Condonation of Three-Day Filing Delay

Before proceeding to the merits, the Tribunal addressed the assessee's application for condonation of a three-day delay in filing the appeal. The assessee explained that its professional consultant was first engaged in religious observances (Parushan Parv) and subsequently suffered from physical illness, both of which prevented timely filing.

The Departmental Representative (DR) opposed condonation, characterising the reason as reflective of laxity.

The Tribunal, drawing from the settled legal position articulated by the Hon'ble Supreme Court in Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors. (1987) 167 ITR 471 (SC), condoned the delay. That judgment establishes that the expression "sufficient cause" in limitation law must receive a liberal construction to advance substantial justice, and that there is no presumption of deliberate or mala fide delay. Given the brevity of the delay and the explanation offered, the Tribunal admitted the appeal.

Issue 1: Allowability of MTM Loss on AFS Securities — ₹37,41,31,381

The Investment Classification Framework Applicable to Banks

The assessee's counsel placed before the Tribunal the RBI-prescribed framework governing bank investment portfolios. Under applicable RBI guidelines (RPCD.CO.RRB.BC.No./74 103.05.33/2013-14 dated January 07, 2014), all bank investments are mandatorily classified into three categories:

  • **Held to Maturity (HTM)😗* Carried at acquisition cost; not marked to market
  • **Available for Sale (AFS)😗* Treated as stock-in-trade; valued at cost or market value, whichever is lower, on a scrip-wise basis at year-end; net depreciation must be provided for in accounts
  • **Held for Trading (HFT)😗* Similarly valued at cost or market value, whichever is lower

The assessee held a portfolio of approximately ₹1,344.09 crore in Government Securities classified as AFS. As on 31 March 2018, the market value of these securities had declined by approximately ₹48.17 crore from book value. Since approximately ₹10.76 crore had already been recognised as provision in earlier years, the MTM loss provision recognised during Financial Year 2017-18 was approximately ₹37.41 crore — precisely the amount in dispute.

Role of ICDS VIII, Part B

Beyond the RBI framework, the assessee demonstrated that its accounting treatment also aligned with the Income Computation and Disclosure Standards (ICDS) prescribed under Section 145(2) of the Income Tax Act, 1961. Specifically, ICDS VIII, Part B — applicable to securities held by scheduled banks and public financial institutions formed under a Central or State Act — provides:

"Securities shall be classified, recognised and measured in accordance with the extant guidelines issued by the Reserve Bank of India in this regard and any claim for deduction in excess of the said guidelines shall not be taken into account."