ASSISTANT COMMISSIONER OF INCOME TAX, CHHINDWARA vs. M/S. CENTRAL MADHYA PRADESH GRAMIN BANK, CHHINDWARA

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank SHRI NRS GANESAN, JUDICIAL MEMBER & SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITANo.135/JAB/2018 Assessment Year: 2012-13 Assistant Commissioner of vs. Central Madhya Pradesh Income Tax, Circle – Chhindwara, Gramin Bank, 800/19, South Civil Lines, Shardha Saburi Bhawan, Opp. Chhindwara,(M.P.) -480001 Danielson College, Nagpur Road, Chhindwara, (M.P.) – 480001 [PAN: AACAS4446H] (Appellant) (Respondent) Revenue by Shri Sarabjeet Singh, CIT-DR Assessee by Shri S. S. Deshpandey, CA Date of hearing 21/10/2020 Date of pronouncement 10/12/2020

ORDER Per Sanjay Arora, AM: 1. This is an Appeal by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeal)-1, Jabalpur (‘CIT(A)’ for short) dated 12.3.2018, partly allowing the assessee’s appeal contesting its assessment u/s.147 r.w.s. 143(3) of the Income Tax Act, 1961(‘Act’ hereinafter) for Assessment Year (AY) 2012-13. 2. The appeal raises a single issue, per its’ sole ground, reading as under: ‘1. On the facts and circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs. 5,33,72,693/- on account of claim of depreciation as section 43 does not require establishing any direct relationship between the assistance received under (*) utilization of the same in purchase of assets. 2. Any other ground that may be adduced at the time of hearing.’ [(*) be read as ‘and’] 1 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank 3. The facts in brief are that the assessee, a Regional Rural Bank (RRB), established under the Regional Rural Bank Act, 1976, promoted by Government of India (GoI), Government of Madhya Pradesh, and Central Bank of India, (with shareholding of 50%, 15% and 35% respectively), received a capital support of Rs.20 crores during the relevant previous year, being financial year (f.y.) 2011-12, from GoI, to maintain capital adequacy. The assessee purchased computer hardware for Rs.1779.09 lacs during the relevant year, claiming depreciation thereon in the impugned sum, at 50% of the eligible rate of 60%, having been put to use for a period of less than 180 days during the year. In view of the Assessing Officer (AO), section 43(1) read with Explanation 10 thereto, which reads as under, was applicable in the facts and circumstances of the case: 43. Definitions of certain terms relevant to income from profits and gains of business or profession. In sections 28 to 41 and in this section, unless the context otherwise requires- (1) “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: Provided…. Provided further… Explanation 1 – 9 … Explanation 10.- Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee: Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee. He, accordingly, disallowed the same relying on the decision by the Hon’ble Karnataka High Court in CIT vs. Shree Renuka Sugars Ltd. (in ITA Nos. 5006 and 5007 of 2011, dated 31.8.2012). In appeal, the ld. CIT(A) was of the view 2 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank that the amount was given by the GoI for recapitalization, Further, that the same had been utilized for purchasing computers was also not established. The disallowance of depreciation was, under the circumstances, not justified, and directed its deletion. Aggrieved, the Revenue is in appeal. 4. The respective cases 4.1 The Revenue’s case is that the sole premise of the deletion by the ld. CIT(A) is the non-establishment of the nexus between the funds received by the Bank from GoI and the purchase of the computer hardware. The bank facing shortage of capital would not have been able to purchase the computer system otherwise, i.e., but for the receipt of the capital grant, received in May/June, 2011, i.e., much prior to the said purchase in December, 2011/January, 2012. It was, rather, on the contrary, for the assessee-bank to show that the money received had not been utilized for the purchase of computers. The nomenclature or the name given to the capital contribution is not relevant, but its nature. Reliance was placed on Shree Renuka Sugars Ltd. (supra). 4.2 The assessee’s case, on the other hand, is that the amount had been received by the bank toward share capital. The same was for improving the Capital to Risk weighted Assets Ratio (CRAR), which had indeed shown an improvement, i.e., from 6.52% at the end of the immediately preceding year, to 7.62% at the end of the relevant year (PB pg. 125). The decision in Shree Renuka Sugars Ltd. (supra) is not applicable inasmuch as in the facts of that case the assessee had received capital subsidy from the State Government for commissioning a co-generation power plant. Further, though it was explained, on being enquired by the Bench, that the fixed assets are taken into account, and without any discount (i.e., at 100%), in computing the CRAR, so, however, that would not in any manner imply that the funds had been either used for or even granted for the acquisition of the fixed assets. Finally, even if regarded as

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ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank financing the asset purchase indirectly, the reduction in the cost can only be on a proportionate basis. 5. We have heard the parties and perused the material on record. The law 5.1 Section 43(1) provides for, in reckoning ‘actual cost’, a reduction in the cost to the assessee, where the same is, to whatever extent, met by any other person or authority, directly or indirectly. Explanation 10 clarifies that where the cost is so met by another, directly or indirectly, the cost relatable to the asset is to be reduced. Proviso thereto further provides that this relation is to be worked qua a particular asset on a proportionate basis where a group of assets are under consideration. Analysis 5.2 Our first observation in the matter is that the finding by the ld. CIT(A), and which forms the basis of the impugned order, is inconclusive. If, in his view, the AO was required to establish the nexus between the funds and their utilization for computers, before he could invoke section 43(1), it was incumbent on him to either do that himself or, in the alternative, seek a remand report from the AO in the matter, so as to settle the matter one way or the other, i.e., on the anvil and on the basis of definite finding/s which in his view is decisive of the matter. How could, one wonders, the matter be left open-ended or decided on that basis? It is well-settled that the appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden by law from doing so by the statute (refer: Kapurchand Srimal v. CIT [1981] 131 ITR 451 (SC)). We speak of self- determination by the ld. CIT(A) or calling for a remand report, as sec. 251(1)(a)

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ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank stands amended by Finance Act, 2001, excluding the power of set aside with the first appellate authority w.e.f. 01/6/2001. The impugned order does not, even as contended by the Revenue per its’ Ground, address the issue as to if a nexus was required to be established? This is as the provision includes, besides ‘direct’, ‘indirect’ meeting of cost as well, while a nexus could only be in case of a direct funding. That apart, wherever there is a time lag between the receipt of funds and the purchase of an asset, one preceding the other, it could always be contended that the cost was met from the common pool of funds, which included, or indeed did not – as where the cost is paid prior to the receipt, the grant. Even as reimbursement would ordinarily apply in case of direct funding, it does clarify that the timing of the receipt of funds and the acquisition may not be in tandem, to though no consequence. In the facts of the case, it also needs to be appreciated that the AO was constrained for want of the necessary details. No cash-flow statement, that would be required for the purpose, was provided by the assessee at any stage. The reason as to the money being given for recapitalization is, again, neither here nor there, as it does not, in any manner, preclude the same from being utilized by the assessee-bank for acquiring the fixed assets of it’s business. 5.3 Coming to the merits of the case, we shall consider the case of the assessee, which has not based it, or entirely so, case on the findings by the ld. CIT(A), and only rightly so. This is as, without doubt, the matter would have to be based on definite findings, of fact and/or law, and which have thus far eluded the case, and which, in the main, is the Revenues’ case. We are unable to place much store on the contention that the amount received being neither a ‘subsidy’ nor ‘grant’ nor ‘reimbursement’, the section is inapplicable. The said terms, even as clarified per the section itself, are illustrative, and it is the purpose for which the same has been given that is relevant. In fact, toward this, the ld. counsel for the assesse, Shri Deshpandey, was asked by the Bench during

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ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank hearing, to no satisfactory answer, as to why the receipt in the instant case could not be considered or construed as a ‘grant’ from the Central Government. The argument as to the provision being applicable only when the unit is set-up and not to a running concern, is without any basis either on facts or in law. We have already clarified that it is the nature of the sum, determined by the purpose for which it is given, that is relevant and determinative of the matter. As long as it is for meeting the cost of an asset, directly or indirectly, it is irrelevant whether the asset purchased or setup is at the commencement of the operations or by way of a substantial expansion or even in the regular course of business; a business enterprise being required to constantly upgrade itself as well as to replace the assets which have over time become obsolete, technologically or functionally, or otherwise worn out through user. The argument is de hors the express provision of law and, consequently, without reference to any judicial precedent. On facts, there has in fact been a substantial expansion during the relevant year; the fixed asset block showing a quantum jump, i.e., from Rs. 467.10 lacs (as on 31/3/2011) to Rs. 2597.95 lacs (as on 31/3/2012), an increase by Rs. 2130.85 lacs, or 456%, with both the figures being taken, so as to arrive at the correct amount of addition (net of deletion), prior to deprecation, a book entry (PB pg. 27). The argument that the asset (computer hardware) was acquired much later and, therefore, not acquired out of the capital contribution, but out of the common pool of funds available with the bank, is also neither here nor there and, therefore, of no assistance to the assessee. The moment the bank receives the sum (Rs. 20 crores), which, being from three different parties, would itself be over a period of time, it improves it’s capital base to that extent, irrespective of it being kept as cash or advanced to parties or otherwise in short-term instruments, etc. It is not the case of the said money having been lost during the interim period (i.e., from May/June, 2011 to December, 2011); the bank in fact reporting a profit (even after depreciation) for the period. The money is thus for 6 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank being applied toward the assets of the business, so that the time of their acquisition would not be material as long as it is, wholly or partly, attributable to the said sum. The plea, made w.r.t. the proviso to the Explanation 10, for applying the provision, where regarded as applicable, proportionately, i.e., though valid in principle, would also not be of much assistance to the assessee. This is as, as afore-stated, the gross acquisition of the fixed assets during the year is at Rs. 2130.85 lacs, almost matching the capital grant for Rs. 2000 lacs, so that it would cover almost (94%) the entire cost of the assets acquired during the year, inclusive of computer hardware at Rs. 1779.09 lacs. 5.4 We, however, for reasons discussed hereinafter, do not consider the provision of s. 43(1) as applicable in the facts and circumstances of the case. There is nothing to show of any proposal for the acquisition of fixed assets. Rather, the capital infusion is a part of an all India exercise, undertaken covering all RRBs across India, under the aegis of RBI & NABARD, under whose administrative control the RRBs function, to improve their capital adequacy. The funds have been provided by the Central and State Governments and CBI, in the ratio of their respective shareholdings, and not by GoI alone, as has been stated in the assessment and the impugned order, at paras 2 & 7.2.4 thereof respectively (Sch. 8 to the BS as at 31/3/2012/PB pg. 39). Further, it is by way of risk capital, specifically toward enhancing the risk bearing capacity, measured as the ratio of the risk capital to the assets of the bank, with the associated risk varying between 0% (as for ‘cash’) and 100% (as for ‘fixed assets’), i.e., CRAR. True, the grant was allowed by GoI on accepting the recommendations of the Dr. K.C. Chakrabarty Committee toward improving the capital adequacy of the RRBs, of which the assesse-bank is one. Though a part of Rs.1100 crs. released by GoI over a period of 2 years (fys. 2011-12 & 2012- 13), the same, at Rs. 10 cr. each for the said two years for the assessee-bank, 7 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank was subject to and, consequently, accompanied by a proportionate contribution by the other two share-holders as well. The bank has accordingly rightly characterized it as part of the equity (risk) capital, reflecting it as share capital deposit, even as no shares stand allotted against the same (PB pg. 22). The non- issue of shares would have no material bearing in the matter as it does not, in view of contributions proportionate to their respective shareholdings, disturb the ratio of either their voting rights or the proportion of the risk borne by the promoters, the providers of the risk capital. While, therefore, it is not correct to say that the funds were not meant for computers, being an eligible asset of the business, acquired for its purposes, it also cannot be said that the same is for meeting their cost, even as we have found that the same is not a relevant consideration in the instant case inasmuch as the same do not qualify to be a subsidy, grant, reimbursement, or the like. That the bank was free to, and did indeed acquire fixed assets, i.e., subsequent to the receipt of funds, which it, facing shortage of capital, may not have otherwise, is of no consequence. Rather, as afore-noted, the same being reckoned in computing CRAR, investment therein shall improve the CRAR. The raising of money to finance the acquisition of an asset, as by way of borrowing, is a transaction separate and distinct from the transaction of acquiring an asset. The two signify separate transactions, the raising and application of funds, even as explained in CIT v. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285 (SC). In the facts of that case, the assessee had borrowed funds in foreign exchange to acquire an asset. However, due to fluctuation in the foreign exchange rate, the assessee had to repay a much lesser amount than he would otherwise have. It was held that this was not a factor which could alter the cost incurred by the assessee for the purchase of the asset. The assessee might have raised funds to purchase the asset by borrowing, but what the assessee had paid for it was the price of the asset. That price could not change by any event subsequent to the acquisition of the asset. The manner or mode of 8 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank repayment of the loan had nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. The depreciation would thus have to be computed without reference to the said reduction in the borrowing on account of foreign exchange rate fluctuation. It went on to say that even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. The observation was made without reference to s. 43(1), which was not brought to it’s notice, much less Explanation 10 thereto, inserted on the statute later. Even the fluctuation in the foreign exchange rate stands since provided u/s. 43A. The point, however, that is being sought to be drawn and brought home is that except where and to the extent an expense or credit is specifically, i.e., by legal fiction or otherwise, statutorily brought within the framework of the definition, the ‘actual cost’, a matter of fact, would continue to be governed by the normal and accepted principles of commercial accounting, i.e., the price at which the asset is acquired. Reference in this regard may also profitably be made to the decision by the Apex Court in Challapali Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC), where the issue was the inclusion of interest incurred for the normative preoperative period on the capital borrowed for capital investment, which has now been specifically provided under Explanation 8 to s. 43(1) and proviso to s. 36(1)(iii). Continuing further, for the same reason, i.e., Explanation 10, the decision in CIT v. P.J. Chemicals [1994] 210 ITR 830 (SC) shall apply no longer. In that case, it was held that it is the predominant object for which the subsidy is granted by the Government that is relevant, so that where the same is toward incentivizing the movement of the industry to a backward area, the same would not impact the cost of the project and, thus, the depreciation or the development rebate is to be allowed without reference thereto, even where the subsidy is with reference to the cost of the project, which was only a manner of quantifying it.

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ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank In fine, the limits of the provision, i.e., even after the insertion of Explanation 10, broadening its scope, are implicit therein. It is only where the funds are given toward meeting the cost of an asset, directly or indirectly, that the same can be reduced from the cost to the assessee. That is, it is where the sum is allowed toward decreasing the risk of the recipient entity by reducing its financial exposure and, further, by a person who is otherwise not obliged to provide the risk capital so as to enable the recipient entity to bear risk, that the cost reduction to that extent takes place. The condition is implicit in the section as the funds for the acquisition of an asset, depreciable or otherwise, are to be in any case raised where the business enterprise is unable to generate sufficient funds on, or does not have adequate capital of, its’ own. It is this capital that has been raised by the assessee-bank. Borrowing of money would fall in the same category. It is for this reason that the enumeration of the nature of the capital, as by way of subsidy, grant or reimbursement, defining the character of the sum, in the Explanation 10 appended to the provision, assumes significance. One could argue, and not unreasonably so, that the contribution by GoI, and consequently by others, is by virtue of its’ status as the Central Government, and not in its’ capacity as a shareholder, which was only incidental. That is, the contribution by it be regarded as by GoI, as envisaged by the provision, and not as a share-holder. It is not clear if the GoI is a major shareholder in all RRBs, as appears to be the case, or not so. Be that as it may, it is so in the case of the assessee. Not only that, it has insisted on a proportionate contribution by the other two shareholders, i.e., in their shareholding ratio, making its’ contribution subject thereto (PB pg. 116). The amount received has been accordingly credited by the assessee to the share capital deposit account. Though termed ‘deposit’, it is non-refundable, increasing the promoter capital to that extent. It is all these undisputed, admitted facts that have led us to say of the necessary funds have been raised by way of equity capital toward risk mitigation. The same thus have no relation with cost reduction, either under 10 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank Explanation 10 or under the normal percepts of commercial accounting. A lender, for example, provides capital, which may be for acquisition of an asset, yet, the same cannot, by any score, be regarded as toward meeting the cost of the asset. The risk capital raised is, in this context, of the same species. 5.5 This leaves us with one aspect of the matter, i.e., the scope of the word ‘indirectly’ in section 43(1) as well as in Explanation 10 thereto. No judicial precedent toward the same has also been cited. Its scope, as one can gather upon reading Explanation 10 in conjunction with proviso thereto, as it ought to be, is where the cost of an asset is met – to whatever extent, either individually or as a part of the project cost, even as the object of the same, i.e., the grant or subsidy, is not specifically for meeting the said cost, but some other, as promoting industrial growth of a region, etc. As, nevertheless, it has the effect of meeting the cost to the recipient entity, the same shall be reduced to the extent relatable. The same, as apparent, has no bearing in the facts of the case. Cost, as afore- stated, and therefore it attributes, including reduction therein, are essentially matters of fact. For the reasons stated at para 5.4 hereinabove, the present cannot be said to be a case of indirect meeting of cost. In sum 6. The case of either side before the Tribunal was inchoate, even as it is obliged to adjudicate on firm findings, including inferential, of fact, based on the material on record, and in accordance with law. The money, it was stated, without showing where and how it was applied, was given to strengthen the capital structure of the bank, with the same, measured in terms of CRAR, showing an improvement. The fixed assets, being the assets of the business, could be acquired from the funds given (Rs.20 cr.), and were indeed acquired in a matching amount of Rs.21.31 cr. during the year (refer para 5.3). How could it be then said that the amount was not applied, particularly considering that the bank was facing shortage of capital, so that it, being obliged to maintain other 11 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank statutory ratios, viz. SLR, CRR etc., would not, at least ordinarily, divert its’ liquid resources for capital assets, as computers, which nevertheless are required to maintain its functional/business competence? The provision covers indirect meeting of cost as well. A one-to-one correspondence or direct nexus between the receipt and application of funds is therefore not required, even as the asset purchase, entail as it does different processes, would itself require some time to mature, as indeed would the receipt of the funds themselves, being from three different sources in the instant case, and in fact materialized from May to September, 2011 (PB pg. 115). Thus, even if envisaged to be acquired out of the said contribution, it would only fructify after a time lag. The money, in the meanwhile, could be retained as cash or parked in any liquid instrument by the bank. Further, the capital being at a fraction of the risk adjusted assets of the bank, an increase in both by like amount would increase the ratio of the capital and, thus, CRAR. As such, nothing turns on the increase in CRAR, which would be so on the investment of the increased capital in fixed assets, being computer hardware in the main. The money, however, has been contributed by all the shareholders by way of capital infusion, in the ratio of respective share-holdings. The same, therefore, belongs to a class separate and distinct from that of subsidy, grant or reimbursement. The scope of the words ‘(by whatever name called)’ in Explanation 10 is limited by the principle of Ejusdem generis to fall in the same class or category to which the words preceding it belong. Further still, inasmuch as the word ‘grant’, admittedly a word of wide amplitude, to which reference was also made during hearing (refer para 5.3), the principle of Noscitur a sociis would apply, so that it would take its colour from the other two words. i.e., subsidy and reimbursement, all the three forming a particular class/category. As such, it becomes largely immaterial whether the fixed assets or computers were financed, to whatever extent, directly or indirectly, by the said capital. This is as, even if so, the same were provided by way of equity (risk) capital raised 12 | P a g e

ITA No. 135/JAB/2018 (AY 2012-13) Asst. CIT v. Central Madhya Pradesh Gramin Bank from its’ share-holders, the providers of risk capital. The same is akin to the raising of money through borrowing, which though may be without undertaking any or minimal risk, as where it is secured. The same, even if for acquiring an asset, is a transaction separate and distinct from that of acquisition of the asset. Even if, therefore, toward raising funds to finance the acquisition of the assets, it cannot be said to be toward meeting the cost of the asset to be acquired therefrom, whether directly or indirectly, i.e., within the meaning of the same u/s. 43(1), and for which we may also advert to the word ‘context’ referred to in s. 43, i.e., prior to sub-section (1), so that it is only where the context admits thereof that the definition provided therein is to be adopted. The occasion to examine the scope of word ‘indirectly’, appearing both in section 43(1) as well as in Explanation 10 thereto, therefore, does not arise for consideration in the facts of the case. ‘Cost’, it attributes, as well as whether the same has been met directly or indirectly, in the facts of the case, by any person or authority, are essentially questions of fact. Qua the law in the matter, Explanation 10 read with proviso thereto clarifies that even where the grant, etc., is not specifically provided for that purpose, if it results in or leads to the cost of the asset being met by another, the same has to be given effect to. Surely, the same is not applicable in the facts and circumstances of the case. No portion of the cost of the computer hardware (i.e., Rs. 1779.09 lacs) can be said to be, in law or on facts, met by the capital contribution of Rs.20 cr. to any extent, for its ‘actual cost to the assessee-bank being reduced with reference to it. We decide accordingly. 7. In the result, the Revenue’s appeal is dismissed. Sd/- Sd/- (N.R.S.Ganesan) (Sanjay Arora) Judicial Member Accountant Member Dated: 10/12/2020 // True Copy // Aks/-*(P) 13 | P a g e