THE ACIT CIR-1(1), THRISSUR vs. SOUTH INDIAN BANK LTD, THRISSUR

Per CHANDRA POOJARI, AM:

These appeals filed by the assessee as well as the Revenue are directed against

the order passed by the CIT(A), Thrissur dated 21/02/2018 and pertain to the

assessment year 2012-13.

I.T.A. Nos.215&219/Coch/2018 2. The first ground in assessee’s appeal in ITA No. 215/Coch/2018 is with regard

to disallowance of Rs.10,10,99,840/-.

Rs.10,10,99,840/- u/s. 14A r.w.r. 8D towards expenditure incurred in relation to

income not includible in total income.

similar issue came up for consideration before this Tribunal in assessee’s own case

in ITA No.29/Coch/2017 dated 13/12/2017 wherein it was held as under:

"5. What we have slated above is only a reasonable suggestion for the Assessing Officer to adopt which arises only if assessee is not able to establish more accurately the interest spent on earning tax free income. We, therefore, leave this matter to be decided by the Assessing Officer with reference to the accounts of the assessee- Banks for each year. Since we find that the rationale adopted by the Assessing Officer to estimate the expenditure for the purpose of disallowance under Section 14A is not tenable, we feel the matter should be restored to the Assessing Officer for making disallowance under section 14A by reasonably estimating as nearly as possible the expenditure incurred for earning the tax free income. This should be done after giving opportunity to '.he asses see-banks to suggest their own formula with reference to accounts for the purpose of arriving at the actual amount or near actual amount The disallowance on estimated basis has to be done as above until Rule 80 was framed and thereafter it is for the Assessing Officer to make

I.T.A. Nos.215&219/Coch/2018 disallowance by following sub-section (2) of Section 14A and Rule 80 of the Income Tax rules. 6. So far as the disallowance of administrative expenditure is concerned, we feel considering the fact that there is no precise formula for proportionate disallowance, no disallowance is called for, for proportionate administrative cost attributable to earning of tax free income until Rule 80 came into force. We, therefore, dispose of the appeals by setting aside the orders of the Tribunal and that of the first appellate authority on this issue and remand all the assessments back to the Assessing Officer for reworking disallowance under section 14A in the case of each assessee for each assessment year. The proportionate disallowance under Section 14A should be limited to only interest liability and not overheads or administrative expenditure; which should be considered for disallowance under rule 80 from 2007-08 onwards."

4.1 In view of the above order of the Tribunal, we are inclined to reject this ground

of appeal of the assessee.

Revenue’s appeal in ITA No. 219/Coch/2018 is with regard to disallowance of

deduction of Rs.10,79,80,515/- (later re-worked and revised at Rs.9,53,09,753/-)

during the course of the appeal) claimed in respect of special reserve u/s.

36(1)(viii) of the Act.

I.T.A. Nos.215&219/Coch/2018

of Rs.10,79,80,515/- being the deduction claimed u/s. 36(1)(viii) of the Act holding

that the assessee had not advanced any loan as long term finance for development

of housing in India, industrial or agricultural development or development of

infrastructure facility in India.

income generated from advancing loans to industrial or agricultural development

and development of infrastructure facility in India by following the decision of this

Tribunal in the case of Ernakulam District Co-op. Bank Ltd. vs. Jt. Director of

Income-tax (TS-7866-ITAT-2017), However, with regard to long term finance for

development of housing in India, he observed that construction/purchase of

individual houses does not tantamount to housing development. Hence, he upheld

the action of the Assessing Officer in so far as the disallowance of the claim of the

assessee for advances given for development of housing is concerned u/s.

36(1)(viii) of the Act.

The Ld. AR had made elaborate submissions which has been extracted in the

CIT(A)’s order. The Ld. DR relied on the order of the Assessing Officer.

I.T.A. Nos.215&219/Coch/2018 9. We have heard the rival submissions and perused the record. As regards the

eligibility of the assessee for deduction u/s 36(1)(viii), first point to be considered is

whether the assessee is a Specified Entity. For this we will have to consider

Explanation (a) to Section 36(1)(viii) which is reproduced below:

(i) A Financial Corporation specified in Section 4A of the Companies Act, 1956 (1 of 1956);

(ii) A financial corporation which is a public sector company

(iii) A banking Company

(iv) A co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;

(v) A housing finance company and

(vi) Any other financial corporation including a public company

Being a Banking Company, it is clear that the assessee is a Specified entity within

Clause (iii) of Explanation (a) to Section 36(1)(viii).

9.1 Next point to be considered is whether the assessee will be entitled to

deduction u/s. 36(1)(viii) for income generated by giving loans to their customers

for purchase/construction of individual houses. For this we will have to consider

Explanation (b) to Section 36(1)(viii).

(b) eligible business means -

(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for -

I.T.A. Nos.215&219/Coch/2018

(A) industrial or agricultural development

(B) Development of Infrastructure facility in India; or

(C ) Development of Housing in India

(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and

9.2 Here it is quite apparent that a Housing Finance Company will be entitled to

the deduction u/s 36(1)(viii) from income generated out of the business of

providing long-term finance for the construction or purchase of houses in India for

residential purposes. A Banking Company will be entitled to the deduction u/s

36(1)(viii) from income generated out of the business of providing long-term

finance for only Development of Housing in India. This makes it abundantly clear

that for the purposes of section 36(1)(viii) providing long-term finance for the

construction or purchase of houses in India for residential purposes and providing

long-term finance for only Development of Housing in India are different.

9.3 The words Development of Housing or Housing has not been defined in he

Act. Hence, we will have to take the dictionary meaning. Housing means as per

dictionary meaning : -

Merriam Webster - Is a group of individual dwellings or apartment houses typically

of similar design that are usually built and sold or leased by one management.

I.T.A. Nos.215&219/Coch/2018

Cambridge : An area containing large number of houses or apartments built close

together at the same time.

Collins: A large number of houses or flats built together at the same time.

9.4 However, the assessee referred to legislative history of Section 36(1)(viii).

Prior to its amendment by the Finance Act, 2009 all Banking Companies were

entitled to deduction u/s 36(1)(viii) for the profits generated from the business of

providing long-term finance for the construction or purchase of houses in India for

residential purposes. Now let us quote from the Explanatory Circular for Finance

(No.2) Act, 2009.

“17. Special deduction under section 36(1) (viii) to National Housing Bank (NHB)

17.1 Clause (viii) of sub-section (1) of Section 36 [section 36(1)(viii)] provides special deduction to financial corporations and banking companies of an amount not exceeding 20% of the profits subject to creation of a reserve. Explanatory Circular for Finance (No.2) Act, 2009 Page 22 of 63

17.2 National Housing Bank (NHB) is wholly owned by Reserve Bank of India and is engaged in promotion and regulation of housing finance institutions in the country. It provides re-financing support to housing finance institutions, banks, ARDBs, RRBs etc., for the development of housing in India. It also undertakes financing of slum projects, rural housing projects, housing projects for EWS and LIG categories etc. NHB is also a notified financial corporation under section 4A of the Companies Act.

17.3 A view has been expressed that NHB is not entitled to the benefits of section 36(1)(viii) on the ground that it is not engaged in the long-term financing for construction or purchase of houses in India for residential purpose. Hence the Act has been amended to provide that corporations

I.T.A. Nos.215&219/Coch/2018 engaged in providing long-term finance (including refinancing) for development of housing in India will be eligible for the benefit under section 36(1)(viii).

17.4 Applicability - These amendments will be effective from the 1st April, 2010 and will accordingly apply in respect of assessment year 2010-11 and subsequent assessment years."

9.5 It is true that the Amendment provided the deduction to National Housing

Bank. But the amendment also substituted the previous words with words

'Development of Housing' which has to be interpreted in its plain dictionary

meaning in absence of any definition given. We cannot read into law anything that

is not specifically provided therein.

9.6 The assessee referred to the order of the Tribunal in the case of Ernakulam

District Co-Op Bank Ltd. vs. Joint Director of Income tax (TS-7866-IT AT-2017

(Cochin). It is stated that development of housing was not issue for adjudication

before the in this case. The ITAT had adjudicated upon the issue of development of

infrastructure vide the aforesaid order. Thus, the said case is of no help to the

assessee.

9.7 From the above, it is clear that construction/purchase of individual houses

does not tantamount to Housing Development. Hence, we uphold the action of the

lower authorities in so far as the disallowance of the claim of the assessee for

advances/loans given for Development of Housing is concerned. No deduction shall

be allowed to assessee u/s 36(1)(viii) for the amount claimed by assessee in

respect of advances/loans given for individual houses.

I.T.A. Nos.215&219/Coch/2018 10. The Revenue has also raised the following ground as Ground No. 4 in ITA No.

219/Coch/2018:

The learned Commissioner of Income Tax(Appeals) ought to have considered the CBDT circular No.665 dated 05/10/1993 and Instruction 17/2008 dated 26/11/2008 read with guidelines issued by Reserve Bank of India relied on by the Assessing Officer.

10.1 The Ld. DR submitted that as per sec.36(1)(viii), deduction is allowable to a

banking company for eligible business of providing long term finance for:

(a) Industrial or agricultural development.

(b) Development of infrastructure facility in India or

(c) Development of housing in India.

According to the Ld. DR, with regard to eligibility for deduction u/s. 36(1)(viii), the

assessee should advance loan for eligible business, however, the assessee had not

advance any loan for such purposes.

10.1 We have heard the rival submissions and perused the record. The CIT(A)

has placed reliance on the decision of the ITAT in the case of Ernakulam District

Co-op. Bank Ltd. vs. Joint Director Income-tax (TS-7866-IT AT-2017 (Cochin)

wherein it was held as under:

“9. Briefly stated the facts in relation to the revenue's appeal is that during the assessment year 2010-11, the assesse had claimed an amount of Rs.1,73,33,833/- as deduction u/s.36(1)(viii) of the IT Act. However, while completing the assessment, the Assessing Officer restricted the same to Rs. 45,93,784/-. For restricting the deduction, the Assessing Officer held that the assesse is not entitled for deduction in respect of the loans for hospital construction, educational institutions, industrial purposes, small scale projects. According to the Assessing Officer, only the loans under the

I.T.A. Nos.215&219/Coch/2018 category of housing loans is eligible for deduction and accordingly restricted the claim of deduction to the interest income earned from housing loans.

9.1 On appeal, the CIT(A) read as follows:-

"8.5 Further, as per the provisions of Section 36(1)(viii), eligible business means business of providing long term finance for industrial or agricultural development, development of infrastructure facility in India and development of housing in India. The break up of the long term finance was also furnished by the appellant, as below:-

Description Interest (Rs.) Income purposes

Long Term A/on 11,19,104 Housing Loan housing loan Agri.

Agri. Loan 37,89,067 Agri. Purposes

Mithra SHG/NHG 12,59,494 Carry bag mfg. units loans (Industrial purposes)

Term loans 64, 17 ,383 For establishment of new Industries and allied activities societies and expansion of existing industries

Housing Loans 42,85,34,630 Housing

Project loans 2,32,48,158 Small Scale industrial projects etc.

Other Long Term 4,54,60,679 For purchase of property loans housing (construction of flats/purchase of property for construction of house/flats

Total 50,98,18,515

8.6. From the above discussions, it is clear that the said loans falls under the eligible business of providing long term finance for industrial or agricultural development, development of infrastructure facility in India 10

I.T.A. Nos.215&219/Coch/2018 and development of housing in India and hence is eligible for deduction u/s.36(1)(viii). Accordingly, deduction of Rs.1, 56,78,943 is allowed to the assessee.

9.2 Aggrieved by the order of the CIT(A), the revenue is in appeal before us. The Id. DR strongly supported the order of the Assessing Officer and contended that the new order of the CIT(A) is a non-speaking order and the same needs to be quashed. The Ld. Counsel for the assessee, on the other hand, reiterated the submission made before the Income Tax Authorities.

Joint Director of Income tax {TS-7866-IT AT-2017 (Cochin)-O}

9.3 We have heard the rival submissions and perused the material on record. As per provisions of section 36(1)(viii) of the IT Act, the eligible business means business of providing long term finance for industrial or agricultural development, development of infrastructure facility in India and development of housing in India. In our view, industrial purposes includes all types of industries both manufacturing as well as service industry. Admittedly, these are loans advanced by the assesse for long term finance and the details of the purpose for which the loans are advanced are enumerated in para 8.5 of the impugned order of the CIT(A). The CIT(A), after examining the purpose for which the loans were advanced had categorically held that the interest income, out of loans enumerated, clearly falls within the definition uf 'eligible business' under section 36(1)(viii) of the Act. This factual finding of the CIT(A) was not dispelled by the revenue by any contrary material on record. Moreover, on identical facts, the claim u/s. 36(1)(viii) of the Act for earlier assessment years namely A.Y.2008-09 and 2009-10 were disallowed by the CIT(A) and department had accepted the same. It is well settled that department having accepted the CIT(A)'s order for earlier years cannot agitate the issue for the current assessment years, unless department is able to prove that for earlier years CIT(A) orders were accepted on account of low tax effect. Therefore, we are of the view that the order of the CIT(A) is correct and in accordance with law on this issue and no interference is called for. It is ordered accordingly.

10.2 Accordingly, the CIT(A) observed that the assessee is entitled to deduction

in accordance with Section 36(1)(viii) for the income generated from advancing to

(A) industrial or agricultural development and (B) development of infrastructure

I.T.A. Nos.215&219/Coch/2018 facility in India. Therefore, this ground was partially allowed. However, the CIT(A)

found that the assessee had adopted a new methodology for claiming deduction u/s

36(1)(viii) of IT Act which is more objective and had resulted in reduction of

assessee’s claim. Thus, while allowing deduction u/s 36(1)(viii) of IT Act, the CIT(A)

directed the assessing officer to allow such deduction as per the new computation.

10.3 In view of the above order of the Tribunal in the case of Ernakulam District

Co-op. Bank Ltd. vs. Joint Director Income-tax (supra), we do not find any infirmity

in the order of the CIT(A) in granting relief to the assessee u/s. 36(1)(viii) of the

Act with regard to providing long term finance for industrial or agricultural

development or development of infrastructure facility in India and the same is

confirmed. Thus, this ground of appeals of both the assessee as well as the

Revenue are dismissed.

regard to addition of interest charged u/s 234B of the Income-tax Act, 1961. On

this issue also, the CIT(A) has upheld the view of the AO in charging interest u/s

234B, by following the decision of the Hon’ble jurisdictional High Court in assessee's

own case in ITA No. 189 of 2011, for assessment year 2005-2006.

11.1 We have heard both the parties and perused the record. We find that a

similar issue had come up for consideration in assessee’s own case in ITA

No.29/Coch/2017 dated 13/12/2017 wherein it was held as under:

I.T.A. Nos.215&219/Coch/2018 10. After hearing both the parties and perusing the relevant material on record, we find that the learned CIT(A) has rightly confirmed the charging of interest u/s 234B by following the decision of the Hon’ble jurisdictional High Court in assessee's own case in the preceding assessment year, i.e. A.Y. 2005- 2006. The relevant part of the High Court order is reproduced as under. -

"It was contended by the assessee that the charging of interest under Section 234B is erroneous as the assessee cannot anticipate the conditions likely to be made by the assessing officer in regular assessment on a future date. Section 234B provides that short falls has to be taxed under Section 43(3). The matter is covered by the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. Anjum M.H. Ghaswala . (252 ITR 1) and

It was held that interest contemplated under Sections 234A, 2348 and 234C is mandatory in nature. In view of the fact that the appellate authorities have considered the matter based on "the judgment of the Supreme Court, this issue is also answered against the appellant".

11.2 In view of the above order of the tribunal, we are inclined to dismiss this

ground of appeal of the assessee.

to deletion of addition of Rs.1,16,00,57,121/- on account of depreciation claimed on

‘Held to Maturity’ category investments.

similar issue had come up for consideration before the Tribunal in assessee’s own

I.T.A. Nos.215&219/Coch/2018 case in ITA Nos. 503 & 504/Coch/2016 dated 01/12/2017 wherein it was held as

under:

13.1 In view of the above order of the tribunal, we are inclined to dismiss this

ground of appeal of the Revenue.

by the Revenue are dismissed. Order pronounced in the open Court on this 22nd March, 2019

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER 14

I.T.A. Nos.215&219/Coch/2018

Place: Kochi Dated: 22nd March, 2019 GJ Copy to: 1. South Indian Bank Ltd., SIB House, Mission Quarters, Thrissur. 2. The Assistant Commissioner of Income-tax, Circle-1(1), Thrissur. 3. The Commissioner of Income-tax(Appeals), Thrissur. 4. The Pr. Commissioner of Income-tax, Thrissur. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin