ACIT, NAINITAL vs. M/S. THE NAINITAL BANK LTD., UTTRAKHAND

In this appeal, the Revenue has raised the following Grounds of appeal :-

Insofar as first Ground is concerned, the dispute revolves around the disallowance made by the Assessing Officer under Section 14A of the Act. In this context, the relevant facts are that the AO disallowed a sum of Rs.1,55,24,593/- out of interest expenditure by invoking Rule 8D(2)(ii) of the Income-Tax Rules, 1962 (in short ‘the Rule’), read with Section 14A of the Act. Before the AO as well as before the CIT(A), one of the principal arguments of the assessee was that it had sufficient interest free funds necessary to cover the investments which have yielded interest free income, that was liable for exclusion under Section 10 of the Act. The AO, however, disagreed with the submission of the assessee and noted that since the assessee was having a common pool of funds and a major part included interest bearing deposits, therefore, the formula prescribed in Rule 8D(2)(ii) of the Rules requires to be applied in order to make a partial disallowance out of interest expenditure in respect to exempt income, in terms of Section 14A of the Act. The CIT(A), however, concurred with the position canvassed by the assessee and found no reasons to sustain the disallowance of Rs.1,55,24,593/- made by the AO out of interest expenditure over and above an amount of Rs.13,05,497/- suo-motu made by the assessee. In coming to his conclusion, the CIT(A) noted that a similar view was upheld in the appellate proceedings in assessee’s own case for Assessment Years 2003-04, 2004-05 and 2005-06.

From the side of the appellant-Revenue, the learned DR has not controverted the factual matrix brought out by the respondent-assessee but has placed reliance on the order of the Assessing Officer in support of the case of the Revenue.

Having considered the rival submissions, we find that the impugned dispute with regard to the disallowance of interest under Section 14A of the Act is no longer res-integra and has already been decided in the earlier years in the assessee’s own case by the Tribunal as well as by the Hon’ble High Court of Uttarakhand. We have also perused the impugned order of the CIT(A), wherein the factual aspects of the dispute have been outlined. The submissions of the assessee, noted by the CIT(A) and which have not been controverted before us, clearly establish that the interest free funds available with the assessee bank were in excess of the investments in the tax free securities in question and, therefore, the disallowance out of interest made by the Assessing Officer has been rightly deleted by the CIT(A). In this view of the matter, we hereby affirm the order of CIT(A) and Revenue fails on this aspect.

Insofar as the second issue in this appeal is concerned, the same emanates from the action of the AO in scaling down the deduction claimed by the assessee under Section 36(1)(viia) and Section 36(1)(viii) of the Act of Rs.16,76,198/- and Rs.63,98,257/- respectively. On this aspect, the assessee canvassed before the CIT(A) that there was a mistake in the computation of the respective deductions

Following the aforesaid, the CIT(A) directed the AO to recompute the deductions allowable to the assessee under Section 36(1)(viia) and 36(1)(viii) in terms of the principles laid down in the case of Tourism Finance Corporation of India Limited (supra). In this background, the Revenue is in appeal before us.

At the time of hearing, the learned Representative for the respondent- assessee pointed out that the principle adopted by the CIT(A) is the correct legal position which continues to hold the field. It was pointed out that even the AO has followed the same principle while completing the assessments for Assessment Year 2012-13 and 2014-15, and copies of such assessment orders have also been annexed in the Paper Book filed before us. It was, therefore, contended that the order of learned CIT(A) does not require any interference.

After hearing both the sides, it is seen that the controversy regarding the quantum of eligible deduction allowable to a banking company under Section 36(1)(viia) and 36(1)(viii) of the Act has been decided by the Delhi Bench of the Tribunal in Tourism Finance Corporation of India Limited (supra), which has since been applied by the first Appellate Authority. No decision to the contrary has been brought to our notice, rather, the spirit of the judgment of Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. Vs. CIT – Civil Appeal No.1147 of 2011 and Others, dated 17th February, 2012, in our view, clearly supports the conclusion drawn by the learned CIT(A). Moreover, there is also no controversion to the assertions of the learned Representative for the respondent-assessee that in Assessment Years 2012-13 and 2014-15, the Assessing Authority itself has accepted the stand of the assessee and that such assessments have since become final. In this view of the matter, we hereby affirm the order of learned CIT(A) on this issue. Thus, the Revenue fails on this aspect.

In the result, the appeal of the Revenue is dismissed. Decision pronounced in the open Court in the presence of both the parties on conclusion of hearing on 5th March, 2021.