DY..C.I.T., BANGALORE vs. M/S STATE BANK OF MYSORE, BANGALORE

The AO recomputed the deduction under section 36(1)(viia) on the ground that – (i) that the assessee while computing the average aggregate advances (AAA) under Rule 6ABA should have taken into account only the fresh advances made during the year and not the accumulate balance outstanding as on the last day of each month. (ii) that while computing the AAA under Rule 6ABA has taken into account even the advances made by certain Urban branches whereas only the advances made by Rural branches is to be considered.

As noted above, the Hon'ble Calcutta High Court, vide aforesaid decision, has affirmed the findings rendered by the Division Bench of the Tribunal in Uttar Banga Kshetriya Gramin Bank vs ACIT, in and 1745/Kol/2012, wherein the Division Bench of the Tribunal vide order dated 08/07/2015 held that for the purpose of section 36(1)(viia), to compute the aggregate monthly average advance made by the rural branch of scheduled Bank, the amount of advances by each rural branch as outstanding at the end of the last day of each month comprised in the previous year be taken into consideration. The Hon'ble Madras High Court, vide aforesaid decision, has concurred with the decision of the Hon'ble Calcutta High Court. Thus, once two Hon'ble High Courts of the country & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) have expressed their opinion in respect of the issue which arose before us, in absence of contradictory view by any other Hon'ble Court of equivalent or higher judicial hierarchy being brought to our notice, we as a matter of judicial propriety are bound to follow the view so expressed by the Hon'ble High Courts in decisions cited supra. In this regard, it is also relevant to note the following observations of the Hon'ble Supreme Court in ACCE vs Dunlop India Ltd., (1985) 154 ITR 172 (SC): "8. We desire to add and as was said in Cassell & Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that "in the hierarchical system of Courts" which exists in our country, "it is necessary for lower tier", including the High Court, "to accept loyally the decisions of the higher tiers", "It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate tribunal which do not attract the unamimous approval of all members of the Judiciary.... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted" (See observations of Lord Hailsham and Lord Diplock in Broome vs. Cassell). The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical Judicial system."

As regards the submission of the learned Departmental Representative that no substantial question of low was admitted by the Hon'ble Calcutta High Court, we are of the considered view that non-admission of a substantial question of law under section 260A of the Act by the Hon'ble High Court not render the decision of Hon'ble Court to be non-binding and the doctrine of merger would still be applicable in any case, we find that the Hon'ble Madras High Court in the aforesaid decision concurred with the legal proposition laid down by the Hon'ble Calcutta High Court after admitting the question of law as proposed by the Revenue in its appeal on this issue. Thus, we find no merits in this plea raised by the learned Departmental Representative.

Therefore, respectfully following the aforesaid decisions passed by Hon'ble Calcutta High Court and Hon'ble Madras High Court, we decide the question referred for our adjudication in favour of the assessee and held that the deduction under section 36(1) (viia) r/w Rule 6 ABA is to be allowed on the total outstanding advances at the end of each month considering the opening balances. Since other issues arising in the appeals are still pending adjudication, therefore, we send the matter back to the Division Bench for disposing of the appeals in the above terms."

We heard the parties and perused the material on record. As per the provisions of section 36(1)(viia) the assessee is entitled to claim the deduction towards provision for bad and doubtful debts subject to the limitation of total of 10% of average advances + 7.5% of total income. Rule 6ABA provides for the manner of arriving at the Average Aggregate Advances (AAA). The contention of the revenue is that the AAA should take into account only the fresh advances made during the year since for the purpose of arriving at the average the amount of advance is to be divided by the number of months outstanding which in the given case is considered as 12 months by the assessee. The revenue is further contending that if opening balance is considered then applying 12 months for arriving at average is not correct and therefore it is argued that opening balance cannot be included. The assessee however is contending that the language used in Rule 6ABA is that the amount of advance as outstanding at the end of the last day of each month which includes the opening balance accordingly the computation of the assessee is in accordance with what is provided in the Rule. We notice that the Hon'ble Madras High Court and the Hon'ble Calcutta High Court have considered the similar issue and have held that the AAA computed considering the opening balance is in accordance with Rule 6ABA. Respectfully following the above judicial proceedings, we hold that the deduction under section 36(1)(viia) r.w.s. 6ABA is to be allowed on the total outstanding advances at the end of each month including the opening balance. The ground raised by the assessee is allowed.

Next question raised pertains to assessee's claim for deduction of provision for bad debts in terms of Section 36(1)(viia) of the Income Tax Act. Here the only question raised is as to basis of classifying Branches of the Bank as Rural Branches and other Branches. Rural Branch is defined under Explanation (ia) to Section 36(1)(viia) as follows: "Rural branch" means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year." What is clear from the above is that classification between Rural and other Branches of a Bank is made based on the population in the place where the concerned Branch is located. While the assessee's case that found acceptance with the Tribunal is that "place" referred to in the above definition clause is the Ward of a Panchayat or Municipality, the Assessing Officer took the view that "place" contained in the definition clause should mean a Revenue Village. No doubt, "place" as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of "place" referred to in the Section. Standing counsel for the department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of "place" as referred to in the Census Report produced could be adopted for the purpose of this case. What is written in the Census Report 2001 is as follows: "The basic unit for rural areas is the revenue village with definite surveyed boundaries. The rural area is however taken as the residual portion excluding the urban area and for that no strict definition is followed."

The ld. AR submitted that the Co-ordinate Bench in assessee's own case for AY 2010-11 has considered an identical issue where it has been held that “12. On this issue, the assessee claimed depreciation under section 32 of the Act at 60% by treating the ATMs and the UPS as a part of the computer machinery. The Ld.AR stated that both ATM and UPS will not be functional without the help of computer. But the Ld.AO has treated these items in category of plant and machinery and rejected the assessee's claim of depreciation @60%. The Ld. AR stated that the issue is duly covered by the decision of the Hon'ble Karnataka High Court in the case of CIT vs NCR Corporation Pvt Ltd (2020) 117 taxmann.com 252 (Kar). The relevant paragraph 8 of the order of Hon'ble Karnataka High Court is extracted as below: - “8. This takes us to the second substantial question of law whether ATMs are computers and are eligible for 60% depreciation. It is pertinent to note that provisions of the Karnataka Sales Tax Act, 1957 and provisions of Income-tax Act, 1961 are not pari materia provisions. The classification of goods has been provided only for the purposes of sales tax whereas, the provisions of the income tax levy tax on income. It is pertinent to mention here that Appendix 1 to Income-tax Rules, the computer has been treated as plant and machinery. Therefore, the decision relied upon by the revenue in Diebold Systems (P) Ltd. supra has no application to the fact situation of the case. The tribunal by placing reliance on the decision of Bombay High Court in Dy, CIT v. Datacraft India Ltd. (2010) 40 SOT 295 (SB) has held that so long as functions of the computers are performed with other functions and other functions are dependent on the functions of the computer, ATMs are to be treated as computers and are entitled to higher rate of depreciation. It has further been held that computer is integral part of ATM machine and on the basis of information processed by the computer in ATM machine only, the mechanical function of the dispensation of cash or deposit of cash is done. Therefore, it was held that ATMs are computers and are entitled to higher rate of depreciation. The aforesaid finding of fact has been recorded on correct analysis of the material available on record and by placing reliance on decision of the Bombay High Court. 13. & 14.*** & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 15. After considering the rival submissions and material placed on record, we are of the considered view that the disallowances made by the Ld. AO in respect of excess depreciation on UPS and ATMs are not justified. Both issues are directly covered by the decisions of the Hon'ble Karnataka High Court in CIT v. NCR Corporation Pvt. Ltd. (supra) and the Hon'ble Jurisdictional High Court in Saraswat Infotech Ltd. (supra). Accordingly, following the said binding precedents, we hold that the assessee is entitled to claim depreciation at the higher rate as claimed in its return of income.”

The ld. DR on other hand argued that the depreciation rate of 60% is special deduction allowed for computers and therefore classification of an asset as computer should be strictly interpreted. The ld. DR further submitted that the assessee while claiming that the ATM is a computer has expanded the definition stating that the functioning of ATM is fully dependent on computers which is not acceptable. The ld. DR also argued that in that case every asset which is working based on a computer should be classified as a computer which is not the intention.

We heard the parties and perused the material on record. The Hon'ble Karnataka High Court in the case of NCR Corporation Pvt. Ltd. (supra) has held that the ATM functioning is fully dependent on computer and therefore ATMs are entitled for higher depreciation at 60%. We in this regard notice that the Hon'ble Bombay High Court in the case of CIT vs. Saraswat Infotech Ltd. (ITA No. 1243 of 2012) has considered a similar issue to hold that the ATM cannot function without the help of computer and would be a part of computer used in the banking industries. We further notice that the Hon'ble High Court has drawn this analogy from UPS being considered as part of computer network which is eligible for depreciation at 60%. Respectfully following above decisions of the Hon'ble High Court and coordinate bench we direct the AO to allow depreciation on ATM at 60% and delete the disallowance made in this regard.

The facts for the year under consideration being identical, we remand the issue for the year under consideration also back to the AO with a direction to examine the bills and invoices pertaining to the claim of depreciation on additions to computers and software expenses and allow the claim in accordance with law. The assessee is directed to file the relevant documents and evidences as may be called for and cooperate with the assessment proceedings. It is ordered accordingly.

The ld. AR in this regard placed reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2008-09 where it has been held that “34. We noted that Section 43B(f) of the Act seeks to allow on cash basis any sum payable by an assessee as an employer in lieu of any leave at the credit of his employee i.e. it covers a provision for leave salary which is only encashable by the employees. Hence, we are of the view that the provision for leave can be discharged in two manners i.e. one by availing the leave and other by way of encashment. In so far as availment of leave is concerned, the salary paid to the employee is known as leave with pay and it does not amounts to salary paid in lieu of leave and, hence, the provisions of section 43B(f) of the Act to that extent do not apply. Leave fare concession/Leave travel concession is in respect of actual payment made to the employees for the travel cost incurred by them on availment of the leave entitled to employees. The same is not towards any leave encashment, and hence it cannot be considered as a sum payable in lieu of any leave to which alone section 43B(f) of the Act applies. As stated above, the provision in respect of unavailed casual leave and sick leave is not encashable and, hence, is not & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) covered by section 43B(f) of the Act. Reliance in this regard is placed by the assessee on the decision of the Bangalore Bench of the Tribunal in the case of Robert Bosch Engineering & Business Solutions Ltd. v/s. DCIT [ITA No. 336/Bang/2014 dated 21.04.2017. Further, the provision made is for an ascertained liability based on an actuarial valuation and is to be allowed as a deduction under section 37(1) of the Act while computing the total income. It is provided towards an ascertained liability, based on actuarial valuation, on a scientific basis and is not contingent in nature. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee is allowable and hence, allowed. This issue of assessee's appeal is allowed and that of the revenue is dismissed.” ******* “121. We noted that this ground is similar to ground nos. 2.1 to 2.3 of the Assessee’s appeal. The Department has filed an appeal against the CIT(A)’s order wherein deduction has been allowed in respect of provision towards silver jubilee award, resettlement allowance and retirement award on the basis that the same are not covered under section 43B of the Act. Accordingly, the CIT(A) had allowed transition provision amounting to Rs. 61.39 crore and net provision of Rs. 3.90 crore (after considering write back of retirement award of Rs. 1.05 crore). Silver jubilee award is a benefit payable to the employees as per the employment guidelines on completion of 25 years of service with the assessee. Resettlement allowance is payable to the employees as per the employment terms in cases where the employees are posted from one jurisdiction to other. Retirement award is a benefit payable to the employees as per the employment guidelines on retirement. The provision towards these employee benefits is created on the basis of actuarial valuation and in accordance with the Accounting Standards.

The Revenue before the Tribunal emphasised that these expenses are contingent in nature and questioned the basis of quantification of these expenses.

Assessee argued that the department in its appeal has only contested that the said expenses are contingent in nature. It is not the case of the AO that the said provision is not on a reasonable basis. Therefore, the contentions raised by the Department Representative on the basis of quantification are not justified and cannot be accepted. These costs are part of employee cost and, hence, should be allowed as deduction as normal business expenditure. These costs are incurred based on the employee guidelines and have been quantified on a scientific basis as per actuarial valuation. As submitted in Assessee’s appeal ground 2.1 to 2.3, the said provision is an ascertained liability, determined based on reasonable & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) certainty and hence, clearly allowable. Reliance in this regard is placed on the decision of the Supreme Court in the case of Bharat Earth Movers Vs. CIT [2000] 245 ITR 428 (SC), wherein it is held that the liability is not a contingent one if the liability has been incurred during the accounting year and an estimate with reasonable certainty can be made, even if the liability is to be discharged at a future date. We accordingly, dismiss this issue of revenue’s appeal.”

The ld. DR on other hand submitted that the claim of the assessee towards provision is to be examined based on facts pertaining to that particular year and cannot be based on precedence. The ld. DR further submitted that a provision cannot be treated as an ascertained liability until the liability is crystallized and therefore argued that the issue cannot be held to be covered by the decision of the Co-ordinate Bench.

We heard the parties and perused the material on record. On perusal of the above findings of the Tribunal, we notice that the claim towards provision for leave fare concession is allowed on the ground that section 43B(f) is not applicable and that provision made for an ascertained liability based on actuarial valuation is to be allowed under section 37(1) for the reason that the actuarial valuation is on a scientific basis and is not contingent in nature. We also notice that the deduction claimed towards provision for resettlement allowance and silver jubilee award for the same reason that it is based on the actuarial valuation and that the provision is an ascertained liability determined based on reasonable certainty. We also notice that the Co-ordinate Bench in this regard has placed reliance on the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT [200] 245 ITR 428 (SC). It is relevant to mention here that the CIT(A) while confirming the disallowance has relied on its own order for AY 2008-09 which substantiates the claim of the assessee that facts pertaining to the year under consideration is identical. In view of this discussion and respectfully following the judicial & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) precedence, we direct the AO to delete the disallowances made towards provision for leave fare concession, resettlement expenses and silver jubilee awards.

The AO disallowed the said claim on the ground that the assessee has not maintained separate set of books in respect of the eligible business and the manner in which the eligible profits was computed i.e. using turnover as allocation key is against the provisions of the Act. The CIT(A) upheld the disallowance on the ground that the gross interest revenue claimed from the eligible business as disclosed by the assessee is not evidence and is unsubstantiated.

The ld. DR submitted that the ground on which the disallowance is made is that the interest from eligible business which is the basis for computing the deduction under section 36(1)(viii) is not substantiated by the assessee. The ld. DR further submitted that the eligible business has been defined under the Act and therefore the income which is claimed by the assessee as derived from the eligible & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) business needs to be factually examined. Accordingly, the ld. DR supported the order of the lower authority.

We heard the parties and perused the material on record. The provisions of section 36(1)(viii) read as under:

From the plain reading of the above provision, it is clear that the assessee is entitled to claim deduction towards profits derived from the eligible business. The term eligible business with respect to assessee being a Banking Company is the business of providing long-term finance for industrial or agricultural development, development of infrastructure facility in India or development of housing in India. On perusal of the findings of the coordinate bench in assessee's own case for earlier years on the impugned issue we notice that this issue has been allowed on the ground that the principal of consistency should be followed and that the assessee's claim from AY 2008-09 following the same methodology has not been disputed by the revenue. Though we are in agreement with the findings of the Co- ordinate Bench that the principal of consistency as has been held by the Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) is to be followed, we are of the view that the interest in respect of eligible business which is the basis on which the assessee has applied to arrive at proportionate profit from eligible business for claiming deduction under section 36(1)(viii) needs factual examination. Therefore, we remit the issue back to the AO for the limited purpose & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) of verification of the interest from the eligible business declared by the assessee. The AO based on the verification allow the claim under section 36(1)(viii) in accordance with law keeping in mind the principal of consistency as has been laid down by the Co-ordinate Bench. The assessee is directed to provide the necessary details in support of the income from eligible business as declared and co-operate with the assessment proceedings. It is ordered accordingly.

The ld. AR submitted that extraordinary contribution to the annuity funds based on actuarial valuation should be allowed as a deduction even though it may exceed the prescribed threshold of 27% of salary laid down in Rule 87/88. In this regard, the ld. AR placed reliance on the decision of the Hon'ble Bombay High Court in the case of Galaxo Smithkline Pharmaceutical (ITA No. 2232 of 2011) and the decision of the Hon'ble Calcutta High Court in the case of Excide Industries Ltd. [2023] 146 taxmann.com 21 (Cal.). The ld. AR further submitted that the Co-ordinate Bench while considering the similar issue in the case of Bank of India Vs. CIT (ITA No. 1642/Mum/2020 dated 22.11.2021) has held that the contribution made to offset the shortage in the funds based on actuarial report is to & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) be allowed under section 36(1)(viii) of the Act. The ld. AR submitted that the lower authorities have not questioned the genuineness of the claim but has made the disallowance on the ground that the RBI Circular provides for deduction only to the extent of 1/5th and the assessee cannot circumvent the claim under the Act.

The ld. DR on the other hand argued that the assessee has made the claim of 1/5th of the expenditure in the books of account as per the RBI Circular and by claiming 100% in the computation of income, the sanctity of books of account is violated in the return of income. The ld. DR further argued that the assessee has not given any justification for the claim of 100% of the entire deduction in the return of income before the lower authorities. The ld. DR also argued that the assessee has not submitted the details as called for by the CIT(A) and accordingly supported the orders of the lower authorities.

We heard the parties and perused the material on record. The annual contribution made by the assessee towards Gratuity and Pension Fund increased due to the amendment in the Gratuity Act, 1972 as well as the Pension Regulations, 1995. The RBI vide Circular dated 09.02.2011 based on the request from various Banks gave the option to the Bank to amortized the lump sum contribution over a period of five years subject to minimum of 20% of the total contribution every year. The assessee while filing the return of income has claimed the entire amount as a deduction on the ground that the payment is allowable as per the provisions of section 36(1)(iv)/(v) r.w.s. 43B of the Act. From the perusal of the CIT(A)'s finding as extracted in the earlier part of the order, we notice that the CIT(A) has confirmed the disallowance on the ground that the assessee's contribution is a "lump sum contribution" and therefore the same should be tested as to whether conditions specified as per Notification dated 21.10.1965 have been fulfilled. The CIT(A) further held that since the assessee did not file any details in & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) this regard, the disallowance is confirmed. Accordingly the issue for our consideration is whether the incremental contribution made by the assessee is a "lump sum contribution" which subject to conditions specified by Notification dated 21.10.1965. On perusal of the Notification dated 21.10.1965, we notice that the conditions specified there in are not applicable to annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head 'Salaries' or to the contributions or to the number of members of the fund. In assessee's case impugned payments are part of the annual contribution made to these funds which had a sharp increase due to the amendments since the assessee has to pay additional amount towards offsetting the shortage that arose in the fund due to amendment. The liability of the assessee towards Gratuity and Pension for the existing employees got increased as a result of the amendments as per the actuarial valuation and the assessee had to contribute additional amount to offset the shortfall in balance in the existing funds maintained in this regard. Therefore in our considered view, the incremental contribution is part of the Annual Contribution and cannot be considered as a lump sum contribution. Therefore we see merit in the submission that the Notification is not applicable to the impugned payments. Be that as may be the Hon'ble Calcutta High Court in the case of Exide Industries Ltd. (supra) has considered the issue of allowability of extraordinary contribution to the annuity funds based on actuarial valuation and held that “4. We have carefully considered the submissions of either side and perused the materials on record. Section 36 of the Act deals with other deductions. Sub-section (1) of section 36 states that deduction provided for in the clause enumerated thereunder shall be allowed in respect of matters dealt with therein in computing the income referred to section 28. Clause (iv) is under section 36(1) would be relevant for our case which is quoted hereinbelow:

The ld. AR submitted that the State Bank of Mysore Retired Employees Medical Benefit Fund has been approved under section 10(23AAA) of the Act vide order dated 22.06.2011. The ld. AR further submitted that the assessee has actually contributed the sum of Rs. 1,50,00,000/- and therefore there is no ground for denying the deduction claimed by the assessee. The ld. AR also submitted that the accounting entries in the books cannot make a difference and the deduction if allowable under the provisions of the Act cannot be denied on the basis of entries made in the books of account.

The ld. DR on the other hand argued that the contribution is made for the benefit of the Retired Employees and therefore the claim that the expenditure is incurred wholly for the purpose of business is not correct. The ld. DR further submitted that there is no provision under the Act to claim a deduction towards contribution to the fund created for the benefit of Retired Employees and therefore the assessee's claim cannot be allowed. The ld. DR submitted that the decision of the Co-ordinate bench in earlier is based on the contention as to whether the provision for section 40A(9) is applicable to the impugned contribution whereas & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) irrespective the applicability of the said section, the assessee's claim cannot be allowed.

We heard the parties and perused the material on record. We notice that an identical issue has been considered by the Co-ordinate Bench in the case of State Bank of India vs. ACIT (ITA No. 3823 & 3824/Mum/2005 dated 29.04.2016) where it has been held that “9.2. Before us the AR relied upon the case of State Bank of Travancore (306FTR-AT128) and stated that it was a welfare measure. The DR supported the order of the FAA. We have heard the rival submissions and perused the materials before us, We find that in the case of State Bank of Travancore(supra), the AO had disallowed the claim of the Bank in respect of the contribution to medical benefit scheme, amounting to Rs.50.00 lakhs. The AD was of the opinion that the provision of section 40A(9) of the Act were applicable and the assessee was mot entitled to claim the expenditure as an allowable item. Matter travelled upto The Tribunal and it deliberated upon the provisions of Section 40A(9)of the Act at length. The Tribunal held that the basic intention of the legislature for insertion of sub section 9 of section 40A was to discourage the practice of creation of camouflage Trust funds, ostensibly for the welfare of the employees and transferring huge funds to such Trusts by way of contribution, that in those cases the investment of the trust corpus was also left to the complete discretion of the Trustees, that to avoid hardship in the case where Trust/Funds had been set up wholly and exclusively for the welfare of the employees prior to 1.4.1984 sub section (10) was also inserted to section 40A. The Tribunal was of the opinion that provisions of section 40A(9) should not make any harm to the expenditure incurred bonafide, that the contribution by the assessee bank was not disputed by the AO, stating that the same was not bonafide, that the funds were not controlled by the assessee banks, that the bonafide contribution made by the assessee as an employer was not hit by section 9 of section 40A of the Act. In the case under consideration, there is no doubt about genuineness of payment nor it is the case of the AO or FAA that Trust was not bonafide or the expenditure was not incurred wholly and exclusively for the employees. Considering these facts of the case and following the judgment of State Bank of Travancore (supra), Ground No.9 is decided in favour of the assessee.”

Question No. i arises out of the judgment of the Income Tax Appellate Tribunal in remanding the issue before the Assessing Officer for proper verification of facts. The record would suggest that the assessee, in view of its success before the Tribunal on the issue of disallowance of interest credited to Interest Suspense Account, had not pressed the ground of appeal

Sub-section (9) was inserted to Section 40A of the Act by Finance Act, 1984 with the retrospective effect from 1 April, 1985 and reads as under:- "(9) No deduction shall be allowed in respect any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) (or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force."

In plain terms, sub-section (9) of section 40A disallows deduction of any sum paid by an assessee as an employer towards setting up of or formation of or contribution to any fund, trust, company etc. except where such sum is paid for the purposes and to the extent provided under clauses (iv) or (iva) or (v) of sub- section (1) of Section 36 or as required by or under any other law for the time being in force. It is undoubted that the instance of the assessee does not fall in any of the above mentioned clauses of sub-section (1) of Section 36. However, the question remains whether the purpose of inserting sub-section (9) of section 40A of the Act was to discourage genuine expenditure by an employer for the welfare activities of the employees. This issue has been examined by this Court on multiple occasions. Before taking note of such decisions, we may notice that the explanatory notes on the provisions contained Finance Act, 1984, in the context of insertion of sub-section (9) to Section 40A of the Act records as under:- "(ix) Imposition of restrictions on contributions by employers to non- statutory funds.

The very purpose of insertion of sub-section (9) of section 40A thus was to restrict the claim of expenditure by the employers towards contribution to funds, trust, etc. which was wholly association of persons discretionary and did not impose any restriction or condition for expanding such funds which had possibility of misdirecting or misuse of such funds after the employer claimed benefit of deduction thereof. In plain terms, this provision was not meant to hit genuine expenditure by an employer for the welfare and the benefit of the employees.

In case of Commissioner of Income-tax-LTU Vs. Indian Petrochemicals Corporation Limited¹, Division Bench of Bombay High Court considered the case where the assessee-employer had contributed to various clubs meant for staff and family members and claimed such expenditure as deduction. Once again the revenue had resisted in the expenditure by citing section 40A(9) of the Act. This Court confirmed the view of the Tribunal and dismissed the revenue's appeal, in which the Tribunal had allowed the expenditure claimed by the assessee.

Once again in Commissioner of Income-Tax-14 Vs. case of The Corporation reported in Income Tax Appeal No. 1765 of 2016, revenue had raised such an issue when the assessee had spent certain amounts in either setting up or providing grant-in-aid made to Kendriya Vidyalaya Schools where the students of the assessee-Indian Oil Corporation would receive education. This Court referred to a judgment of Kerala High Court in case of P. Balakrishnan, Commissioner of Income-Tax Vs. Travancore Cochin Chemicals Ltd.¹ and of the decision of this Court in case of Bharat Petroleum Corporation Limited (supra) held that the Tribunal had correctly allowed the assessee's claim of expenditure. In view of this discussion, this question is not entertained.

Further we notice that the Co-ordinate Bench in assessee's own case for AY 2009-10 (ITA No. 3645/Mum/2016 dated 06.06.2023) has placed reliance on the above decisions and has held the issue in favour of the assessee. From the perusal of the above observations we notice that the assessee's claim towards contribution to retired employees medical benefit has been examined and allowed under the provisions of section 40A(9). Since no new facts have been brought on record, following the above judicial precedence we have no hesitation to hold that the & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) contributions made by the assessee towards retired employees medical benefit cannot be hit by the provisions of section 40A(9) of the Act.

Having said so, we will now address the contention of ld. DR as to whether the amount is otherwise allowable as a deduction under section 37(1) r.w.s 43B as claimed by the assessee for academic purpose. The contention of the revenue is that the contribution to the benefit of the retired employees cannot be considered as incurred for the purpose of business. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. We observe that the expression “for the purpose of the business” is of wider import than the phrase “for the purpose of earning profits.” Its scope extends beyond the routine operations of a business and includes activities such as rationalization of administration, modernization of machinery, and measures taken for preserving the business or safeguarding its assets from expropriation or adverse claims.

In assessee's case it is submitted that that the impugned fund is created by the assessee as part of the settlement between the Associate Bank Officer's Association and State Bank of India and its Subsidiary Banks and the fund is approved under section 10(23AAA) of the Act. It is also submitted that the assessee has actually made the payment towards the contribution to the Fund (page 629 of Paper book). As already stated the coordinate bench in earlier years has considered the impugned payment in the light of provisions of section 40A(9) which we have already held as applicable for the year under consideration also. Since the revenue in the present appeal has raised an additional contention that the impugned payments need to be examined under the provisions of section 37(1), we & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) are remitting the issue back to the AO for the limited purpose of examining whether the impugned payments is satisfying the test of "wholly and exclusively for the purpose of business" keeping in the legal position as explained above. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

The assessee submitted that the expenditure is incurred is towards extension of the existing undertaking since the assessee has opened 18 new branches as part of its expansion and the proceeds from the rights issue was utilized for setting up the new branches. The CIT(A) after considering the submissions of the assessee held that & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) “22.4 The nature of the above expenditure, prima facie, does not fall within clause (a) above. The legal charges envisaged in clause (b) are specifically for drafting of agreements between the assessee and any other person for a matter related to the business. The legal compliance expenses, drafting and printing as stated by the appellant in the details above were not backed up by any copy of legal agreements which had been drafted, even though the same was required to be furnished during appeal proceedings. The claim, therefore, of payment to Lead Managers, Legal Advisors and Auditors of Rs.31,04,983, Rs.13,62,608 and Rs.11,03,000 respectively for this purpose cannot be accepted. Sub clause (c) (iv) allows for expenditure related to drafting, typing, printing and advertisement of the prospectus only. In case, the appellant is able to produce evidence before the AO to substantiate that any of the drafting and printing expenses included in the payment to lead managers and Legal Advisors relates to the prospectus the same is directed to be verified and allowed. During appeal proceedings, the claims could not be substantiated with evidence of even primary details. 22.5 The appellant's claims as per the scan above includes advertising and publicity expenses of Rs.7,14,747 towards newspaper advertisement. If the assessee files evidence before the AO to establish that it related only to the prospectus, the claim is to be verified and allowed. The details and evidences had not been furnished before me. Even in respect of printing, postage, stationary expenses of Rs.20,57,367, only the printing expenses related to the prospectus, if furnished before the AO, are to be verified and allowed. The drafting, typing and printing expenses related to the share certificate of Rs.5,30,056 paid to the Registrar to the issue are not covered within the scope of clause (c) (iv) 22.6 Apart from the above, and save for the verification as directed, the other expenses are not allowable u/s. 35D. The grounds raised

The ld. DR on the other hand submitted that the assessee in the books of accounts has correctly treated the impugned expenses as capital in nature and circumventing the same by claiming a deduction in the return of income. The ld. DR further submitted that the assessee has not established the fact that the expenditure is incurred for the purpose of business before the lower authorities which fact is evident from the findings of the CIT(A). The ld. DR alternatively submitted that the issue may be remitted back to the AO to examine the claim of the assessee that the rights issue is for the purpose of expansion of business.

We heard the parties and perused the material on record. From the perusal of the findings of the CIT(A) as extracted in the earlier part of this order, we notice that the CIT(A) has remitted the issue with respect to the majority of expenses to the AO for verification and allow. We further noticed that the CIT(A) confirmed the disallowance for the reason that during the appellate proceeding the assessee could not substantiate the claim with any primary evidences. During the course of hearing the Bench directed the ld. AR to furnish the copy of the offer documents which was submitted by the ld. AR. On perusal of the offer document, we notice that the object of the issue is to meet the increase in Tier I Capital & Total Capital Adequacy Ratio with the implementation of Basel II Standards and to meet the & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) growth in assets primarily loan and investment portfolio. We further notice that the assessee during the year under consideration is claimed to have opened 18 new branches because of which there is a requirement to expand the asset base. The assessee is claiming the deduction under section 35D towards the impugned expenditure on two ground (i) that the expenditure would fall within the category of expansion of an existing undertaking and (ii) that the expenses are would fall within the list of expenses as provided in section 35D. It is therefore appropriate to examine the relevant provisions of section 35D in this regard – Amortisation of certain preliminary expenses. 835D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),— (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 9[***] undertaking or in connection with his setting up a new 9[***] unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the 9[***] undertaking is completed or the new 9[***] unit commences production or operation : 10[Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one- fifth of such expenditure for each of the five successive previous years" had been substituted.] (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :— (a) expenditure in connection with— (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assessee; (iv) engineering services relating to the business of the assessee :

From the plain reading of the above section it is clear that the expenditure incurred towards extension of an existing undertaking is also allowed under section 35D and that the nature expenditure need to fall within the categories of expenses listed therein. In the given case assessee is contending the part of the expenditure disallowed by the CIT(A) and the revenue is contending the admission by the CIT(A) that certain expenses would fall within the scope of section 35D. As already mentioned, the CIT(A) has disallowed certain expenditure and has remitted certain expenditure to the AO for the reason that the assessee could not substantiate the expenditure with proper supporting evidences. Further the CIT(A) has accepted the submission of the assessee that the expenses would fall within the category of expansion of existing undertaking without recording any factual finding for arriving at the said conclusion. The submission of the assessee that the & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) proceeds of the rights issue are mainly for the purpose establishing 18 new branches needs factual verification, In view of these discussions we are remitting the issue back to the AO to examine the contentions of the assessee and the revenue on merits and decide in accordance with law.

Ground No.1 is general and not warranting any separate adjudication. Ground No.2 and Ground No.4 have already been adjudicated while considering the assessee's appeal (refer findings in the earlier part of this order. Accordingly the only Ground pending is Ground No.3 which is adjudicated in the ensuing paragraphs.

The ld. DR argued that Janata Deposit Collector Gratuity is a provision which is contingent in nature and drew our attention to the Tax Audit Report (TAR) in which it is stated to be disallowed. The ld. DR further argued that the CIT(A) has not recorded any independent finding on the facts pertaining to the year under consideration but has simply relied on its own decision for AY 2006- & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 07. The ld. DR also argued that the important criteria for claiming the impugned expenditure i.e. existence of employee-employer relationship and therefore cannot be allowed as a deduction.

The ld. AR on the other hand submitted that Janata Deposit Collector Gratuity is awarded in accordance with the directions of the Hon'ble Supreme Court as per which the Gratuity equivalent to 15 days commission for each year of service is payable on cessation / termination of the agency. The ld. AR in this regard drew our attention to the letter from the Indian Bank's Association providing direction to all the Banks pursuant to the Supreme Court's Ruling (Page 671 of PB). The ld. AR further submitted that the assessee has made a provision based on actuarial valuation towards Gratuity and claimed the same as deduction under section 37(1) of the Act. The ld. also submitted that the Co-ordinate Bench in assessee's own case for AY 2006-07 (ITA No. 439,440/Bang/2013 dated 24.03.2017) while considering the issue in the appeal filed by the revenue against the order of the CIT(A) has remitted the issue back to the AO. The ld. AR further drew our attention to the decision of the Co-ordinate Bench in assessee's own case for AY 2010-11 has held the issue in favour of the assessee. Accordingly, the ld. AR prayed that the order of the CIT(A) be upheld.

We heard the parties and perused the material on record. The assessee as per the directions of the Hon'ble Supreme Court in an appeal filed by Janata Deposit Collector has made a provision towards Gratuity calculated @ 15 days commission for each year of service which is payable on cessation / termination of agency. The AO has disallowed the claim on the ground that the provisions of section 40A(7) cannot be applied since there is no employer-employee relationship between the assessee and Janata Deposit Collector. From the perusal of the letter of Indian & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) Bank's Association directing the assessee to make the provision towards Gratuity to Janata Deposit Collector, we notice that the provision is not made as per the payment of Gratuity Act, 1972 but is pursuant to the award granted by the Hon'ble Supreme Court in an appeal filed by Janata Deposit Collector. Therefore, in our considered view the provisions of section 40A(7) cannot be applied to the impugned deduction. Having said so, we need to consider the contention of the assessee that the amount should be allowed as a deduction under section 37(1). The Janata Deposit Collector work as Agent of the Bank to solicit deposits and are remunerated by way of commission. The Hon'ble Supreme Court has directed the Banks to pay Gratuity @ 15 days of commission for each year of service at the time of cessation / termination of the Agency. It is relevant to mention here that the Gratuity is to be paid irrespective of the years of service rendered by Janata Deposit Collector unlike the minimum qualifying service period under the payment of Gratuity Act. When we peruse these facts, we see merit in the contention of the assessee that the provision towards impugned payments is incurred wholly and exclusively for the purpose of the business of the assessee and accordingly is allowable under section 37(1). It is also submitted before us that the provision is made based on actuarial valuation and therefore is not a contingent liability and that the payments are made as and when there is a cessation / termination of Agency. In view of this discussion, we are inclined to agree with the claim of the assessee that the expenses should be allowed as a deduction as has been held in assessee's own case for AY 2010-11. The ground of the revenue is dismissed.