M/S. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA,MUMBAI vs. DCIT 3(3)(2), MUMBAI

PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against order dated 21.03.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2010-11, raising following grounds:

“1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in disallowing the claim for deduction u/s 36(1Xviil) by Rs. 1, 40, 26, 066/-, without considering the facts and circumstances of the case.

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(i)Allowance of D (i)Allowance of Deduction of Rs.22,49,00,000/- towards provision for towards provision for restricting of asset written back. restricting of asset written back. (ii) Allowance of deduction for Rs.1,44,25,367/ (ii) Allowance of deduction for Rs.1,44,25,367/- towards provision for bad towards provision for bad and doubtful debt written back. and doubtful debt written back. (iii) The interest on Income tax refund of Rs.22,94,71,711/ (iii) The interest on Income tax refund of Rs.22,94,71,711/ (iii) The interest on Income tax refund of Rs.22,94,71,711/- should have been reduced while computing profits and gains of business and the said been reduced while computing profits and gains of business and the said been reduced while computing profits and gains of business and the said income was not reduced leading to excess allowance of deduction u/s income was not reduced leading to excess allowance of deduction u/s income was not reduced leading to excess allowance of deduction u/s 36(1)(viii) by Rs.1,40,26,066/ 36(1)(viii) by Rs.1,40,26,066/-. 2.1 In the consequent assessment order passed on 15.02.2016, In the consequent assessment order passed on 15.02.2016, In the consequent assessment order passed on 15.02.2016, the Assessing Officer for the purpose of sing Officer for the purpose of third issue of third issue of deduction u/s 36(1)(viii) of the Act computed the profits and gains of business 36(1)(viii) of the Act computed the profits and gains of business 36(1)(viii) of the Act computed the profits and gains of business after reducing the interest on income tax refund and thereafter after reducing the interest on income tax refund and thereafter after reducing the interest on income tax refund and thereafter computed computed computed the the the deduction deduction deduction amounting amounting amounting to to to Rs.80,96,44,862/-. Rs.80,96,44,862/ Rs.80,96,44,862/

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According to the Assessing Officer, the interest on to the Assessing Officer, the interest on to the Assessing Officer, the interest on income tax refund was part of revenue from the operations and therefore, he refund was part of revenue from the operations and therefore, he refund was part of revenue from the operations and therefore, he reduced the said interest of refund only for the purpose of reduced the said interest of refund only for the purpose of reduced the said interest of refund only for the purpose of computation of ‘profit and gains of the business profit and gains of the business’ and not for profit and gains of the business quantum of ‘total revenue from operations l revenue from operations’. The relevant finding of . The relevant finding of the Assessing Officer is reproduced as under: the Assessing Officer is reproduced as under:

8.4. Apart from the above, in the assessment order, the Assessing Officer 8.4. Apart from the above, in the assessment order, the Assessing Officer 8.4. Apart from the above, in the assessment order, the Assessing Officer allowed the deduction W/S.36(1)(vil) of the Income Tax Act, 1961 at allowed the deduction W/S.36(1)(vil) of the Income Tax Act, 1961 at allowed the deduction W/S.36(1)(vil) of the Income Tax Act, 1961 at Rs.82,71,73,952 Rs.82,71,73,952 as against Rs.83,31,54,923 by reducing the deduction as against Rs.83,31,54,923 by reducing the deduction u/s.36(1)(viia)(c) of the Act from the profits of business. However, the u/s.36(1)(viia)(c) of the Act from the profits of business. However, the u/s.36(1)(viia)(c) of the Act from the profits of business. However, the learned Commissioner of Income Tax(A) has restored the deduction learned Commissioner of Income Tax(A) has restored the deduction learned Commissioner of Income Tax(A) has restored the deduction W/S.36(1) (viii) to assessee's claim at Rs.83,31,54,923. W/S.36(1) (viii) to assessee's claim at Rs.83,31,54,923. W/S.36(1) (viii) to assessee's claim at Rs.83,31,54,923. However, on account of additions/ disallowance of provision for bad and doubtful debts account of additions/ disallowance of provision for bad and doubtful debts account of additions/ disallowance of provision for bad and doubtful debts written back and treatment of interest on income tax refund as Income written back and treatment of interest on income tax refund as Income written back and treatment of interest on income tax refund as Income from Other Sources, the business income of the assessee will undergo a from Other Sources, the business income of the assessee will undergo a from Other Sources, the business income of the assessee will undergo a change. Accordingly, the deduction a Accordingly, the deduction allowable to the assessee company llowable to the assessee company u/s.36(1)(vili) is allowed on the revised income taking into the said aspects u/s.36(1)(vili) is allowed on the revised income taking into the said aspects u/s.36(1)(vili) is allowed on the revised income taking into the said aspects in to consideration. The working of deduction allowa in to consideration. The working of deduction allowable to the assessee is ble to the assessee is as under: Rs. Rs. I. Business Income as per return Business Income as per return 1363,07,75,789 Add: Addition made in the order u/s 143(3) Addition made in the order u/s 143(3) OF OF THE THE Act Act Dated Dated 31.12.2012 31.12.2012 confirmed by the Commissioner of confirmed by the Commissioner of Income Tax(A) Income Tax(A) (i) Amortization of Rent Amortization of Rent 60,79,783 (ii) Disallowance u/s 14A Disallowance u/s 14A 3,30,83,433 (iii) Bad Debts Disallowed Bad Debts Disallowed 36,07,44,658 39,99,07,874 Add: Additions/Disallowance Additions/Disallowance as as discussed above. discussed above. (i) Provision for Bad & Doubtful debts Provision for Bad & Doubtful debts 1,44,25,367 written back (as per Para 7 above) written back (as per Para 7 above) 1381,56,36,319 Less: Deduction u/s 36(1)(viia)(c) (As per Deduction u/s 36(1)(viia)(c) (As per 56,94,84,305 Asst. order dated 31.12.2012** Asst. order dated 31.12.2012** Income from Business/Profession Income 1324,61,52,014 The The Assessing Officer The Assessing Officer Assessing Officer in in Para in Para Para 9 9 has 9 has has observed observed observed that that deduction that deduction deduction u/s.36(1)(via)(c) of the Act is restricted to the provision created by the u/s.36(1)(via)(c) of the Act is restricted to the provision created by the u/s.36(1)(via)(c) of the Act is restricted to the provision created by the assessee amounting to 256,94,84,305. In the present proceedings also, 5% assessee amounting to 256,94,84,305. In the present proceedings also, 5% assessee amounting to 256,94,84,305. In the present proceedings also, 5% of the enhanced total enhanced total income exceeds the provision created by the exceeds the provision created by the assessee, therefore the deduction is restricted to the provision created. assessee, therefore the deduction is restricted to the provision created. assessee, therefore the deduction is restricted to the provision created. Profit and gains of business (As per above Profit and gains of business (As per above 1324,61,52,014 (A) 1324,61,52,014 computation)

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Revenue from long term finance Revenue from long term finance 938,85,59,239(B) 938,85,59,239(B) Total Revenue from operations Total Revenue from operations 3072,02,05,538(C) 3072,02,05,538(C) Deduction allowable 20%*A*B/C Deduction allowable 20%*A*B/C 80,96,44,862 80,96,44,862 Accordingly, the deduction U/s.36(1)(vi) is allowed at 80,96,44,862/ Accordingly, the deduction U/s.36(1)(vi) is allowed at 80,96,44,862/ Accordingly, the deduction U/s.36(1)(vi) is allowed at 80,96,44,862/-.” 3. On further appeal, the Ld. CIT(A) upheld the finding of the On further appeal, the Ld. CIT(A) upheld the finding of the On further appeal, the Ld. CIT(A) upheld the finding of the Assessing Officer that the interest on income tax Officer that the interest on income tax refund refund is part of the total revenue from the operations. The relevant finding of the revenue from the operations. The relevant finding of the revenue from the operations. The relevant finding of the Ld. CIT(A) is reproduced as under: Ld. CIT(A) is reproduced as under:

“Decision on Ground No. 2 “Decision on Ground No. 2 The appellant company has received an amount of Rs. 22,94,72,711/ The appellant company has received an amount of Rs. 22,94,72,711/ The appellant company has received an amount of Rs. 22,94,72,711/- by way of Interest on Income Tax refund. The appellant has not considered way of Interest on Income Tax refund. The appellant has not considered way of Interest on Income Tax refund. The appellant has not considered the same as Income from Other Sources, and thus, not reduced the same the same as Income from Other Sources, and thus, not reduced the same the same as Income from Other Sources, and thus, not reduced the same from the business income. As a result of the same, the appellant computed from the business income. As a result of the same, the appellant computed from the business income. As a result of the same, the appellant computed the deduction u/s 36(1) (vi) of the Inco the deduction u/s 36(1) (vi) of the Income Tax Act, 1961 on the business me Tax Act, 1961 on the business income, which included said interest on income tax refund. income, which included said interest on income tax refund. In this regard, the appellant submitted that the deduction u/s 36(1)(viii) is In this regard, the appellant submitted that the deduction u/s 36(1)(viii) is In this regard, the appellant submitted that the deduction u/s 36(1)(viii) is allowable in respect of reserves created out of profits & gains computed allowable in respect of reserves created out of profits & gains computed allowable in respect of reserves created out of profits & gains computed under the head Business. The Ld.A stated that the appellant is wrong in d Business. The Ld.A stated that the appellant is wrong in d Business. The Ld.A stated that the appellant is wrong in interpreting that the income earned by way of interest on income tax interpreting that the income earned by way of interest on income tax interpreting that the income earned by way of interest on income tax refund should be deducted from total income (denominator in the formula). refund should be deducted from total income (denominator in the formula). refund should be deducted from total income (denominator in the formula). Further, nowhere the formula is defined to calculate t Further, nowhere the formula is defined to calculate the profit derived from he profit derived from eligible business'. It has to be ascertained in a practical manner keeping eligible business'. It has to be ascertained in a practical manner keeping eligible business'. It has to be ascertained in a practical manner keeping the nature of business of the appellant in mind. While proportionating the the nature of business of the appellant in mind. While proportionating the the nature of business of the appellant in mind. While proportionating the profit of the business between eligible and non eligible business, the profit of the business between eligible and non eligible business, the profit of the business between eligible and non eligible business, the numerator shall be the receipt of the eligible business and denominator all be the receipt of the eligible business and denominator all be the receipt of the eligible business and denominator shall be the total revenue. shall be the total revenue. Therefore, appellant is not correct in saying that Therefore, appellant is not correct in saying that interest on Income Tax interest on Income Tax Refund should be deducted from both places. Refund should be deducted from both places. Clearly, it is not part of profit of Clearly, it is not part of profit of eligible business but should be part of total ness but should be part of total revenue. In view of the above submissions and information, I do not find In view of the above submissions and information, I do not find In view of the above submissions and information, I do not find any justification to interfere with the A's order and I do not find any merit any justification to interfere with the A's order and I do not find any merit any justification to interfere with the A's order and I do not find any merit in the appeal of the appellant. Hence this ground of appeal is, accordin in the appeal of the appellant. Hence this ground of appeal is, accordin in the appeal of the appellant. Hence this ground of appeal is, accordingly, disallowed and decided as above. disallowed and decided as above.” 4. Before us, the Ld. Counsel of the assessee referred to the order Before us, the Ld. Counsel of the assessee referred to the order Before us, the Ld. Counsel of the assessee referred to the order of the Tribunal passed in ITA No. 2996 and 2997/Mum/2015 for of the Tribunal passed in ITA No. 2996 and 2997/Mum/2015 for of the Tribunal passed in ITA No. 2996 and 2997/Mum/2015 for assessment year 2010 assessment year 2010-11 and 2011-12, wherein the Tribunal has 12, wherein the Tribunal has quashed the order passed b quashed the order passed by the Ld. PCIT u/s 263 of the Act in y the Ld. PCIT u/s 263 of the Act in respect of two issues namely issue of allowance of deduction of respect of two issues namely issue of allowance of deduction of respect of two issues namely issue of allowance of deduction of

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Rs.22.43 crores towards provision for restructuring of assets Rs.22.43 crores towards provision for restructuring of assets Rs.22.43 crores towards provision for restructuring of assets written back and Rs.1.44 crores towards provision of bad and written back and Rs.1.44 crores towards provision of bad and written back and Rs.1.44 crores towards provision of bad and doubtful debt written back. As f doubtful debt written back. As far as 3rd issue of excluding excluding interest on income-tax refund for computation of deduction u/s 36(1)(vii tax refund for computation of deduction u/s 36(1)(vii tax refund for computation of deduction u/s 36(1)(viii) of the Act, the Tribunal directed that order of the Assessing Officer the Tribunal directed that order of the Assessing Officer the Tribunal directed that order of the Assessing Officer was prejudicial to the interest of the revenue however directed that was prejudicial to the interest of the revenue however directed that was prejudicial to the interest of the revenue however directed that while computing the excess deduction u/s 36(1)(viii), the Assessing ng the excess deduction u/s 36(1)(viii), the Assessing ng the excess deduction u/s 36(1)(viii), the Assessing Officer should exclude Officer should exclude ‘interest on income-tax refund tax refund’ from ‘profit and gains of business’ of business’ and also from the ‘total revenue from total revenue from operations’. The Ld. Counsel before us submitted that the Assessing . The Ld. Counsel before us submitted that the Assessing . The Ld. Counsel before us submitted that the Assessing Officer has not complied with the direction of the Tribunal (supra). cer has not complied with the direction of the Tribunal (supra). cer has not complied with the direction of the Tribunal (supra).

Deduction = 20% [Profit and gains of the business [Profit and gains of the business X Revenue from long term finance] Revenue from long term finance] ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ total revenue from the operations total revenue from the operations

5.1 We find that according to the Ld. PCIT We find that according to the Ld. PCIT ‘interest of income interest of income-tax refund’ was not being part of the was not being part of the ‘profit and gains of the business profit and gains of the business’ therefore, said interest therefore, said interest was not eligible for deduction u/s 36(1)(viii) was not eligible for deduction u/s 36(1)(viii) of the Act. The excess deduction allowed by the of the Act. The excess deduction allowed by the Assessing Officer in Assessing Officer in

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the original assessment passed u/s 143(3) of the Act dated the original assessment passed u/s 143(3) of the Act dated the original assessment passed u/s 143(3) of the Act dated 31.12.2012 has been 31.12.2012 has been directed by the Ld. PCIT in order dated directed by the Ld. PCIT in order dated 28.03.2015 to be recomputed as under: computed as under:

viii) In this regard, it is noted that for the year under consideration, the viii) In this regard, it is noted that for the year under consideration, the viii) In this regard, it is noted that for the year under consideration, the assessee had interest income of Rs.22,94,72,711/ assessee had interest income of Rs.22,94,72,711/- on account of income on account of income tax refund (vide note 20 to the balance sheet) and this was included in tax refund (vide note 20 to the balance sheet) and this was included in tax refund (vide note 20 to the balance sheet) and this was included in other income in P&L A/c, This income being income from other sources, it other income in P&L A/c, This income being income from other sources, it other income in P&L A/c, This income being income from other sources, it should have been reduced while computing should have been reduced while computing profits and gains of business. profits and gains of business. However, this was not done, leading to excess allowance of deduction by However, this was not done, leading to excess allowance of deduction by However, this was not done, leading to excess allowance of deduction by Rs,l,40,26,066/ Rs,l,40,26,066/- and the detailed working is as under: (in (in rupees) Profit and gains of business as per para 6 of A.O] Profit and gains of business as per para 6 of A.O] 13532935769 13532935769 Less: Income from other sources Less: Income from other sources 229472711 229472711 Profits and gains of business Profits and gains of business 13303463058(A) 13303463058(A) Revenue from long term finance Revenue from long term finance 9388559239(B) 9388559239(B) Total Revenue from operations Total Revenue from operations 30720205538 (C) 30720205538 (C) Deduction allowable 20%*A*B/C Deduction allowable 20%*A*B/C 813147886/- 813147886/ Deduction actually allowed Deduction actually allowed 827173952/- 827173952/ Excess allowed Excess allowed 14026066/- 14026066/ 5.1 However, the Tribunal However, the Tribunal (supra) gave a specific direction to the gave a specific direction to the Assessing Officer that amount of Assessing Officer that amount of ‘interest on income interest on income-tax refund’ should not only be reduced from the should not only be reduced from the ‘profit and gains of the profit and gains of the business’ but also from the but also from the ‘total revenue from operations operations’.

5.2 In the case there is no dispute as far as profit and gains of the In the case there is no dispute as far as profit and gains of the In the case there is no dispute as far as profit and gains of the business and revenue from long term finance business and revenue from long term finance i.e. numerator of i.e. numerator of the above formula, computed above formula, computed by the Assessing Officer. The only issue in by the Assessing Officer. The only issue in dispute is regarding the quantum of total revenue from the dispute is regarding the quantum of total revenue from the dispute is regarding the quantum of total revenue from the operations i.e. denominator of the above formula i.e. denominator of the above formula. According to the . According to the assessee the amount of interest on income tax refund should be assessee the amount of interest on income tax refund shoul assessee the amount of interest on income tax refund shoul reduced from the total revenue ced from the total revenue from the operations also from the operations also as same is not derived from the operations of the assessee bank. We agree with not derived from the operations of the assessee bank. We agree with not derived from the operations of the assessee bank. We agree with

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the arguments of the Ld. Counsel of the assessee because interest the arguments of the Ld. Counsel of the assessee because interest the arguments of the Ld. Counsel of the assessee because interest on income-tax refund is not part of the business a tax refund is not part of the business a tax refund is not part of the business activity of the assessee and therefore, same cannot be form part of the total assessee and therefore, same cannot be form part of the total assessee and therefore, same cannot be form part of the total revenue from the operations revenue from the operations also therefore, same should be therefore, same should be excluded for the purpose of quantum of total revenue from the excluded for the purpose of quantum of total revenue from the excluded for the purpose of quantum of total revenue from the operations. We find that the Tribunal in ITA No. 2996 and operations. We find that the Tribunal in ITA No. 2996 and operations. We find that the Tribunal in ITA No. 2996 and 2997/Mum/2015 has also directed the Assessing Officer to exclude 2997/Mum/2015 has also directed the Assessing Officer to exclude 2997/Mum/2015 has also directed the Assessing Officer to exclude the interest on income tax refund both from the profits and gains of the interest on income tax refund both from the profits and gains of the interest on income tax refund both from the profits and gains of the business as well well as total revenue from the operations. We as total revenue from the operations. We accordingly set aside the finding of the lower authorities and direct accordingly set aside the finding of the lower authorities a accordingly set aside the finding of the lower authorities a the Assessing Officer to reduce the quantum of interest of income- the Assessing Officer to reduce the quantum of interest of income the Assessing Officer to reduce the quantum of interest of income tax refund from the total revenue from operations and thereafter tax refund from the total revenue from operations and thereafter tax refund from the total revenue from operations and thereafter compute the deduction u/s 36(1)(viii) of the Act accordingly. The compute the deduction u/s 36(1)(viii) of the Act accordingly. The compute the deduction u/s 36(1)(viii) of the Act accordingly. The grounds of appeal of the assessee are accordingly grounds of appeal of the assessee are accordingly allowed. allowed.

Order pronounced in the open Court on nced in the open Court on 05/09 /09/2023. Sd/ Sd/- Sd/- (PAVAN KUMAR GADALE PAVAN KUMAR GADALE) (OM PRAKASH KANT OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 05/09/2023 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai

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BY ORDER, BY ORDER, //True Copy// (Assistant Registrar) (Assistant Registrar) ITAT, Mumbai ITAT, Mumbai