DY. COMMISSIONER OF INCOME TAX CIRCLE-3(3)(1),MUMBAI, MUMBAI vs. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL“F” BENCH, MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER ITA No. 9170/MUM/2025 (AY: 2012-13) (PhysicalHearing) Small Industries Development Bank DCIT, Central Circle – 3(3)(2), of India, Swavalamban Bhawan, vs Mumbai, Aayakar Bhawan, C-11, G Block, Bandra Kurla M.K. Marg, New Marine Lines, Complex, Bandra East, Mumbai – 400020. Mumbai – 400051. [PAN: AABCS3480N] Appellant / Assessee Respondent / Revenue ITA No. 870/MUM/2026 (AY: 2012-13) DCIT, Central Circle – 3(3)(1), Small Industries Development Bank of Mumbai vs India, Swavalamban Bhawan, C-11, 522, 5th Floor, Aayakar Bhavan, G Block, Bandra Kurla Complex, Bandra M.K. Road, Mumbai – 400020. East, Mumbai – 400051. [PAN: AABCS3480N] Appellant / Revenue Respondent / Assessee Assessee by Shri Rakesh Joshi, AR Revenue by Shri Sajit V Nair, Sr. DR Date of Institution 26.12.2025 Date of hearing 17.06.2026 Date of pronouncement 07.09.2026 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of ld. CIT(A)/NFACdated 13.11.2025 for Assessment Year (AY) 2012-13. The assessee has raised following grounds of appeal: “1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in disallowing claim of Rs.60,79,783/-, being proportionate amortised amount of lease premium paid to Mumbai Metropolitan Regional Development Authority in respect of leasehold land and the reasons assigned for doing so are wrong and contrary to the facts and circumstances of the case, provisions of Income Tax Act, 1961, and Rules made thereunder.

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India 2. On the facts and circumstances of the case and in law, the Learned CIT(A) as well as the Learned Assessing Officer has erred in not appreciating that the lease premium paid was nothing but lease rent paid in advance as it is paid only for use of land during lease period and no capital asset would remain with the appellant at end of lease period and the reasons assigned for rejecting the claim are wrong and contrary to the facts and circumstances of the case, provisions of Income Tax Act, 1961, and Rules made thereunder.

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India 2. The Revenue in its cross appeal has raised following grounds of appeal: “Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in allowing deduction of bad debts written off under section 36(1)(vii) of the Income Tax Act, 1961 without first adjusting the opening credit balance in the provision for bad and doubtful debts created under section 36(1)(viia)(c), despite the express mandate of section 36(2)(v) and CBDT Instruction No. 17/2008, thereby resulting in double deduction to the assessee"

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India 3. Rival submissions of both the parties have been heard and the record perused. At the outset of hearing, the learned Authorised Representative (ld. AR) of the assessee submits that though the assessee has raised multiple grounds of appeal, however, the substantive grounds of appeal relate to the proportionate amount of amortised amountof lease premium paid to Mumbai Metropolitan Regional Development Authority (MMRDA). The learned AR of the assessee submits that similar disallowances made by the AO in earlier years, which were confirmed by the Tribunal. However, the assessee has filed further appeal before the Hon’ble High Court for AY 2004-05 vide ITA No. 792 of 2012. The same has been admitted by order dated 18.03.2013, which is to be heard with other years’ appeals of the assessee before the Hon’ble High Court. The learned AR of the assessee submits that the substantial question of law which has been admitted by the Hon’ble Jurisdictional High Court is identical to the grounds of appeal raised by the assessee in its appeal. The assessee has also filed an application in Form 8, which may be taken on record, and this appeal may be disposed of with the direction that the decision of the Hon’ble High Court on the similar issue/legal question of law may be followed for the year under consideration. A copy of the declaration in Form 8 has been provided to the office of the learned CIT –DR of the revenue to obtain the report of AO. 4. On the other hand, the learned Commissioner of Income Tax - Departmental Representative (CIT – DR) after going through the details in Form 8 along with the application under Section 158A and the order of the

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India Hon’ble Jurisdictional High Court in ITA No. 792 of 2012 on a similar ground/legal question of law, would submit that the appeal of the assessee may be dismissed by following the order for the earlier years. He would obtain a report from the Assessing Officer and place the same on record. 5. We have considered the rival submissions of both the parties and have gone through the orders of both the authorities carefully. We find that the grounds of appeal raised by the assessee in its appeal have consistently been held against the assessee in the assessee’s own case for AY 2004-05. Admittedly, the appeal of the assessee against such orders have been admitted by Hon’ble Jurisdictional High Court by framing substantial question of law. We find that similar declaration under Form-8 was made by assessee in appeals for AY 2014-14 to 2018-19, wherein the similar issue is restored to the file of AO in order dated 10.10.2015, which is reported viz; (2025) 179 taxmann.com 348 (Mum). Thus, considering the declaration furnished by the assessee in Form 8 in the year under consideration as per Section 158A, the appeal of the assessee for AY 2012-13 is dismissed. However, the AO is directed that, in the event of a favourable order from the Hon’ble Jurisdictional High Court or the Hon’ble Supreme Court on the same issue, the same order may be followed for the year under consideration. 6. In the result, the appeal of assessee is dismissed subject to the aforesaid direction. 7. Now, adverting to the various grounds of appeal raised by the Revenue in its cross-appeal, Ground No. 1 in Revenue’s appeal relates to allowing

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India deduction of bad debts written off under Section 36(1)(vii).The learned AR of the assessee submits that the ground of appeal raised by the Revenue is covered in favour of the assessee by the decision of the Tribunal in the assessee’s own case for AY 2004-05 in ITA No. 7143/Mumbai/2008, which has been followed for AY 2014-15 to AY 2018-19, reported in (2025) 179 Taxman.com 348 (Mumbai) in ITA No. 2943, 2893, 2894, 2970, 2971, 3160 & 3173/Mum/2023 for A.Y. 2014-15 to 2018-19. 8. On the other hand, the learned CIT - DR for the Revenue submits that the Ld. CIT(A) erred in law and on facts in allowing deduction of bad debts written off under section 36(1)(vii) without first reducing the opening credit balance available in the provision for bad and doubtful debts account created and allowed under section. 36(1)(viia)(c). The proviso to section 36(1)(vii) specifically mandates that where an assessee is entitled to deduction under section 36(1)(viia), the deduction in respect of bad debts written off shall be restricted to the amount by which such debt exceeds the credit balance in the provision account. Further, section 36(2)(v) requires that the bad debt written off must first be adjusted against the provision created under section 36(1)(viia). The legislative intent is to prevent double deduction in respect of the same debt. The Assessing Officer, after examining the assessment records and the opening balance of provision already allowed in earlier years, correctly restricted the claim. The Ld. CIT(A), while granting relief, failed to appreciate the combined operation of sections 36(1)(vii), 36(1)(viia) (c) and 36(2)(v), thereby defeating the statutory scheme enacted to avoid duplication of deductions.

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India The addition made by the Assessing Officer therefore deserves to be restored. 9. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. we find that in the computation of total income the assessee claimed deduction of bed debts under section 36(1)(vii) rws section 36(2) of Rs. 91.26 Crore. In addition, the assessee also claimed deduction of Rs. 78.75 Crore being provision for bad and doubtful debts under section 36(1)(viia)(c) @ 5.00% of total income as per computation of income. On further perusal of record the AO noted that the assessee has been allowed deduction under section 36(1(viia)(c) of Rs. 60.36 Crore in AY 2011-12, thus, this much amount was available to the assessee as credit balance in provision of bad and doubtful debts. The AO held that deduction under section 36(1)(viia) of Rs. 60.36 allowed to the assessee in earlier year is to be reduced from bed debts in the year. Accordingly, Rs. 60.36 Crore was reduced from the claim of bed debts of the current year. The ld CIT(A) allowed relief to the assessee on the basis of decision of Tribunal in AY 2004-05 and recent decision of Tribunal in AY 2014-15 to 2018-19. We find that the assessee is consistently claiming similar deduction on account of bad debts written off. The Revenue is disallowing the same. However, on appeal before the learned CIT(A), the addition is deleted, and on further appeal before the Tribunal, the same is upheld. We find that in the assessee’s own case for AY 2014–15 to 2018– 19, similar relief was allowed by following the decision of the Tribunal in the earlier year, i.e., AY 2004–05, wherein the decision of the Hon’ble Apex

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India Court in Catholic Syrian Bank Limited vs. CIT, 343 ITR 270 (Supreme Court), was followed. The completeness of this order, the relevant part of the order dated 10-10-2025 passed in AY 2014–15 to 2018–19 is extracted below: “8. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in assessee's own case for AY 2004-05 Dy. CIT v. Small Industries Development Bank of India [IT Appeal No. 7143(Mum)2008 dated 15-02-2012] has considered the identical issue where it has been held that

"28. Even on merits of the claim of the Assessee, we are of the view that the same deserves to be accepted. The relevant provisions under which the deduction has been claimed by the Assessee are as follows:

(vii) subject to the provisions of sub section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

Provided that in the case of a bank to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause;

(viia) in respect of any provision for bad and doubtful debts made by-faj a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled an amount not exceeding five per cent, of the total income (computed before making any deduction under this clause and Chapter (VIA) and an amount not exceeding ten per cent, of the aggregate average advances mode by the rural branches of such bank computed in the prescribed manner:

From a reading of the aforesaid provisions, it would be clear that the Assessee is thus entitled to claim deduction both under Sec. 36(1)(vii) and Sec, 36(1) (viia) of the Act. The only limitation is that the amount of deduction shall not exceed the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account. In the present case there is no dispute that provisions of Sec.

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India 36(1)(viia) applies to the Assessee and also the fact the amount of deduction relating to bad debts written off is limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account. In the case of the Assessee there is no dispute that there was no credit balance in the provision account and therefore whole of the bad debts written off would in effect be in excess of the credit balance (which is nil) in provisions account. Therefore, the whole of the bad debts written off would be deductible u/s.36(1) (vii) of the Act. The fact that this sum has been omitted to be claimed in the return of income has been amply demonstrated by the Assessee. Even in the reassessment proceedings the AO has no answer to the claim of the Assessee in this regard and has merely observed in his order that there is no evidence produced by the Assessee. The book entries and the return of income before the AO are enough evidence to come to the conclusion that the amount in question was not claimed in the return of income though the Assessee could have claimed it legitimately. In the given circumstances, we are of the view that there is no merit in the ground raised by the Revenue. Consequently, the ground of appeal of the revenue is dismissed and the order of CIT(A) in this regard is upheld."

"Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under Section

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso applies only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii)" 10. From the above observations of the Hon'ble Supreme Court, it is clear that the assessee is entitled to claim of deductions under both the sections Le. section 36(1)(vii) and section 36(1)(viia). However, the legislature wanted to restrict the claim of deduction towards bad-debts so that it does not exceed the provision made towards bad and doubtful debts and the same is achieved by the proviso to section 36(1)(vii). It is relevant to notice that the restriction under the proviso is to be applied by comparing the actual bad-debts claimed under section 36(1)(vii) with the provision made and claimed under section 36(1)(viia)(c) so that there is no double deduction claimed by the assessee in an AY. In assessee's case from the perusal of the table containing details of bad debts under section 36(1)(vii) and provision for bad and doubtful debts under section 36(1)(viia)(c) claimed in various

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India AYs including the year under consideration (refer table extracted in the earlier part of this order), we see merit in the claim of the assessee that the deduction claimed under section 36(1)(vii) is not in excess of the credit balance in the provision account. Further in assessee's case from the perusal of the table above it is clear that there is no duplication of claim between deduction under section 36(1)(vii) and section 36(1)(viia) and this fact has been consistently confirmed by the orders of the coordinate bench in assessee's case. Accordingly, we hold that there is no infirmity in the decision of the CIT(A) in allowing the issue in favour of the assessee by following the decision of the Co-ordinate Bench in assessee’s own case for earlier years.” 10. Considering the consistent decision of the Tribunal on identical grounds of appeal on a similar set of facts and respectfully following the same, we do not find any merit in the ground of appeal raised by the assessee. Before us, the ld CIT-DR for the revenue failed to demonstrate that there was duplication or excess claim beyond the provision of account balance. In the result, the ground No. 1 of appeal raised by the Revenue is dismissed. 11. Ground Nos. 2 and 3 relate to disallowance under Section 14A and adding the same to book profit under Section 115JB.The learned AR of the assessee supported the order of the learned CIT(A). The learned AR of the assessee submits that the assessee has made disallowance on a pro rata basis, which has not been specifically rejected by the Assessing Officer. No specific finding on such rejection is given by the AO. The learned CIT(A), while allowing relief to the assessee, followed orders the earlier years.Similarly, the disallowance under Section 14A cannot be resorted to for computing book profit, as has been held by various High Courts, including the decision of Special Bench of the Delhi Tribunal in ACIT Vs Vireet Investment Pvt. Ltd. (2018) 82 taxmann.com 415 (Delhi). 12. On the other hand, the learned CIT-DR for the Revenue supported the order of the AO. The learned CIT(DR) submits that during the year, the

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India assessee earned substantial exempt income and admittedly incurred administrative and managerial expenditure for maintaining and monitoring the investments yielding such exempt income. The Assessing Officer, after recording dissatisfaction regarding the correctness of the assessee's working, invoked section 14A(2) and computed disallowance as per Rule 8D. Once the conditions prescribed under section 14A(2) are satisfied, application of Rule 8D becomes mandatory and the Assessing Officer has no discretion to adopt any alternative method. The assessee failed to maintain separate accounts demonstrating that only the expenditure voluntarily disallowed by it was attributable to exempt income. The Ld. CIT(A), while granting relief, overlooked the mandatory nature of Rule 8D and substituted the statutory computation mechanism with an ad hoc determination. The order of the Assessing Officer being in conformity with section 14A and Rule 8D deserves to be upheld. 13. We have considered the rival submissions of both the parties. We find that during the year under consideration; the assessee has shown dividend income of Rs. 17.01 Crore and interest on tax free bonds of Rs. 1.25 Crore. The assessee made suo motu disallowance of Rs. 91,33,192/- and provided the working thereof with justification that the said amount was disallowed on pro rata basis out of establishment and administrative expenses. The AO invoked the provisions of Rule 8D and worked out disallowance of Rs. 3.24 crore and after allowing setoff or suo moto disallowances worked out figure of net disallowance under section 14A of Rs.2.33 Crore.The learned CIT(A) allowed relief to the assessee on the basis of the decision for AY 2014–15

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India to AY 2018–19 and restricted the disallowance to the amount suo motu offered by the assessee. 14. On careful perusal of the order of lower authorities and the order of Tribunal in AY 2014-15 to 2018-19 (supra), we find that this ground of appeal is also covered in favour of the assessee in the assessee’s own case for AY 2014–15 to 2018–19 supra, wherein, on a similar set of facts and on identical grounds of appeal, the Coordinate Bench has followed the order: “15. We heard the parties and perused the material on record. During the course of hearing the ld. AR drew our attention to the workings of the suo- motu disallowance done by the assessee as extracted below: Computation of disallowance u/s 14A of the Income Tax Act, 1961 No. of employees in Investment Department 5 Total no of employees 1060 Establishment expenditure 2,10,12,55,994 Prorata establishment expenditure in respect of exempt income 99,11,585 Direct Expenditure on TCO 63,677 Proportionate administrative expenditure (disallowed) 17,00,019 Expenses disallowed under section 14A of Income Tax Act, 1961 1,16,75,281 16. We notice that the AO has rejected the above workings of the assessee by holding that 33. The assessee, in the instant case, has not maintained any separate account relevant for exempt income investments and other activities to support its claim that they have incurred an expenditure of 1,16,75,281 only attributable to earning of the exempt income. The assessee is under obligation to establish the extent of expenditure out of all the accounts debited to the Profit and Loss Account as such assessee would not make investment in isolation. The assessee however has not established with the help of its books of account that working of expenses attributable to earning of exempt income and/or holding of its investments are correct and not mere estimation. 34 In view of the above discussions, it is held that the Prorata working of disallowance u/s. 14A of the Act furnished by the assessee is not satisfactory and as a result provisions of section 14A(3) of the Income Tax Act, 1961 are invoked in this case..". 17. From the above observations of the AO, we notice that the basis for rejecting the suo-motu disallowance is that it is based on estimation and not on actual. However, it is noticed that the AO while rejecting the suo-motu disallowance has not given any specific finding with regard to the books of accounts based on which the assessee has arrived at the disallowance. The

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India AO has also mentioned that the assessee has not maintained separate set of books towards exempt income which in our view is not a requirement under the law. In view of this discussion, we see merit in the submission of the Id. AR that the findings of the Co-ordinate Bench in AY 2008-09 is applicable for the year under consideration also. Respectfully following the above decision of the Co-ordinate Bench, we direct the AO to restrict the disallowance under section14A to the suo-motu disallowance made by the assessee. The ground raised by the assessee is allowed and the ground raised by the revenue is dismissed. 15. We further find that disallowance under Section 14A cannot be added to book profit under Section 115JB, as has been held by the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investment Pvt. Ltd. (supra). Thus, following the consistent decision of the Tribunal in the assessee’s own case, which has been followed by the learned CIT(A), we do not find any reason to interfere with the finding of the learned CIT(A). In the result, Ground Nos. 2 and 3 of the Revenue’s appeal are dismissed. 16. Ground No. 4 relates to deleting disallowance of deduction under Section 36(1)(vii), which includes the claim of deduction under Section 36(1)(vii)(a), as well. The learned AR of the assessee submits that this ground of appeal is also covered by the decision of the Tribunal in AY 2004–05 in ITA No. 4045/Mumbai/2021, which has been followed in a recent decision of the Tribunal for AY 2014–15 to 2018–19. 17. On the other hand, the learned CIT(DR) submits that Ld. CIT(A) erred in directing the Assessing Officer to allow deduction under section 36(1)(viii) without considering the effect of deduction allowable under section 36(1)(viia)(c). Deduction under section 36(1)(viii) is linked to profits derived from eligible long-term financing business and such profits have to be determined in accordance with the provisions of the Act. While arriving

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India at eligible profits, all deductions having a direct impact on business profits are required to be considered. The interpretation adopted by the Ld. CIT(A) results in inflation of eligible profits and consequently allows a larger deduction than what is contemplated under the statute. The Assessing Officer correctly interpreted the scheme of section 36 and computed the deduction in a manner that prevents excessive allowance. Therefore, the order of the Ld. CIT(A) deserves to be set aside. 18. We have considered the rival submissions of both the parties and have gone through the orders of the lower authorities carefully.We find that the AO discussed this issue in para- 45 to 50 of his order. The AO noted that the assessee has claimed deduction of Rs. 80.00 crore under section 36(1)(viii) on account of profit from financing activity. The computation of deduction under section 36(1)(viii) is extracted in para 46 of his order. The AO was of the view that the assessee is not maintaining separate accounts nor filed requisite details, the AO reworked the deduction as per his working in para 52 of his order and restricted the same to the extent of Rs. 62.11 Crore, thereby made addition of Rs. 17.88 Crore to the income of assessee. We find that the ld CIT(A) in para -9.1 of his order recorded that AO erroneously reduced the claim of deduction under section 36(1)(viii) without appreciating the facts that such deduction is to be allowed on the basis of gross total income determined and thus, the same would not be reduced for determination of the deduction under section 36(1)(viii). The ld CIT(A) also relied on the order of Tribunal in AY 2004-05 to 2008-09. He also extracted order of Tribunal in AY 2004-05 in

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India his order. We find that, on a similar set of facts, in the appeal for AY 2014–15 to 2018–19, while following the order for AY 2004–05, co- ordinate Bench pass the following order: “18. The assessee in the computation has claimed deduction under section 36(1)(viii) to the extent of the least of 20% of profits derived from the eligible business and the amount transferred to the special reserve amounting to Rs.80,00,00,000. The AO during the course of assessment proceedings re-worked the claim of deduction under section 36(1)(viii) by the assessee for the reason that he has made changes to the claim of deduction under section 36(1)(viia) by the assessee in the computation. The AO recomputed the income of the assessee from the business of long-term financing activities to arrive at the deduction under section 36(1)(viii) and while doing so the AO reduced the revised deduction under section 36(1)(viia)(c) allowed. Accordingly, the AO arrived at an amount of Rs. 71,75,94,432/- and since the amount transferred to the special reserve was Rs. 80,00,00,000/-restricted the amount of deduction to Rs. 71,75,94,432/-. On further appeal the CIT(A) has held that the AO is not correct in reducing the deduction claimed under section 36(1)(viia)(c) while reworking the profit from the eligible business to allow deduction under section 36(1)(viii). In this regard the CIT(A) placed reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2004-05 (supra). 19. The Id. DR submitted that the deduction under section 36(1)(viia)(c) is calculated at 5% of the total income and the deduction under section 36(1)(viii) is calculated at 20% of the profits from the eligible business. The Id. DR further submitted that there is an overlapping between these two sections since the profits from eligible business are part of the total income and to this extent there may be a double deduction claimed by the assessee. The Id. DR therefore claimed that the AO is correct in reducing the deduction under section 36(1)(viia)(c) before computing the profits for the purpose of deduction under section 36(1)(viii). 20. The Id. AR submitted that both the sections are independent of each other since the wordings in both the sections use the phrase "computed before making any deduction under this clause" for the purpose of computing the deduction under the said clause. The Id. AR further submitted that the Co-ordinate Bench in assessee's own case for AY 2004-05 (supra) has considered similar issue and held that the revenue has been consistently accepting the claim and therefore cannot take a different view. The Id. AR also relied on the decision of the Hon'ble Madras High Court in the case of Infrastructure Development Finance Company ACIT [2019] 104 taxmann.com 205/262 Taxman 483/412 ITR 115 (Madras) where it has been held that:

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India "Question No. 2: Claim for deduction under Section 36(1)(viia)(c) after reducing from the appellant's income deduction under Section 36(1) (viii) of the Act:- 19. The issue which arises is whether deduction should be firstly allowed in terms of Section 36(1)(viii) for the application of the deduction under Section 36(1)(viia)(c). 20 Section 36(1)(viia)(c) is as follows:- "Section 36 deals with other deductions Section 36(viia) (c) deals with in respect of any provisions for bad and doubtful debts made by (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five percent of the total income (computed before making any deduction under this clause and Chapter VI-a)." 21. Section 36 is included in Chapter - IV of the Act relating to Computing of Business Income Chapter VI-A relates to "Deductions in respect of certain Payments" Section 36 (1)(viii) is as follows:- "in respect of any special reserve created and maintained by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development of development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head "profits and gains of business or profession" before making any deduction under this clause) carried to such reserve account." 22. In the explanation, eligible business had been stated to be business in respect of the specified entity referred to in sub-clause (1) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), namely the 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. 23. It is an admitted fact that the appellant comes within the definition of a 'specified entity and is carrying on 'eligible business as provided under Section 36(1)(viii) of the Act. 24. It is the contention of Mr. Karthik Ranganathan, learned Standing Counsel for the respondent that the deduction should be made only on the total income. However, before the amendment, introduced under the Finance Act 1995, the deduction to be allowed under Clause (vii)(a)(c) and Clause (viii) were placed on par. The amendment did not change the character of the deduction but changed the method of computation. By the amendment, an Assessee was permitted to compute deduction at 40% of the profits derived out of business and not 40% of the total income. This was a significant shift in the method of computation. This interpretation is borne

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India out by the Memorandum explaining the provisions in the Finance Bill 1995 whereunder the amendment was introduced. The relevant portions of the Memorandum reads as follows:- "Under Clause (viii) of sub-section (1) of Section 36 of the Income Tax Act, 1961, an approved financial corporation engaged in providing long-term finance for industrial or agricultural development in India, or an approved public company formed and registered in India with the main object of carrying on business of providing long-term finance for construction or purchase of residential houses, is entitled for a deduction of an amount not exceeding 40 per cent of its total income carried to a special reserve. The deduction is allowed on the "total income" and not with reference to the income from the activities specified in Section 36(1) (viii). These organisations have diversified their activities and are claiming deduction under this Section even in respect of their income from activities other than those specified in this section. There is no justification for allowing the deduction with reference to income from other activities or from sources other than business. It is, therefore, proposed to limit the deduction of 10 per cent only to the income derived from providing long-term finance for the activities specified in Section 36(1)(viii). It will thus take outside the purview of deduction, income arising from other business activities or from source other than business." 25. The above must be given harmonious and purposive interpretation that each one of the Clauses under sub-section (1) of Section 36 is independent in its operation and each one of them does not depend upon the other for the extension of the benefit. 26. The learned counsel for the respondent relied on CIT. H.P. Housing Board [2012] 18 taxmann.com 129/205 Taxman 1/340 ITR 388 (HP). The facts in that case are as follows:- "The Assessee-housing board had floated a self financing scheme for sale of houses/flats wherein the allottees were required to deposit some amount with the assessee and construction was to be carried out of these amounts. One of the conditions of the terms of allotment was that in case the possession of the house/flat was not given to the allottee within a particular time frame, then the assessee-board was liable to pay interest to the allottees on the money received by it. There was delay in construction of the houses and therefore, the Housing Board paid interest at the agreed rate to the allottees in terms of the letter of allotment. The ITO (TDS) held that the amount paid by the assessee to the allottees was in the nature of interest within the meaning of Section 2(28A) and in terms of Section 194A, tax had to be deducted at source. On appeal, the Commissioner (Appeals) allowed the same holding that the amount paid by the Board was not really interest within the meaning of Section 2(284) but actually compensation for the delay in construction of the house and handing over possession of the same to the allottees. The revenue filed an appeal against the said Judgement, which was dismissed." 27. The High Court of Himachal Pradesh held as follows:-

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India "8. In the case in hand it stands proved that in case the houses were ready within the stipulated period the Board would not be liable to pay interest. When construction of a house is delayed there can be escalation in the cost of construction. The allottee looses the right to use the house and is deprived of the rental income from such house. He is also deprived of the right of living in his own house. In these circumstances, the amount which is paid by the Board is not payment of interest but in our view is payment of damages to compensate the allottee for the delay in the construction of his house/flat and the harassment caused to him. It may be true that this compensation has been calculated in terms of interest but this is because the parties by mutual agreement agreed to find out a suitable and convenient system of calculating the damages which would be uniform across the Board for all the allottees. 10. In the present case the allottees had not given the money to the Board by way of deposit nor had the Board borrowed the amount from the allottees. The amount was paid under a self financing scheme for construction of the flat and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats. 28. The facts in the present case are distinguishable and different. A provision had been made for deduction of provisions for Bad and Doubtful debts under Section 36(1)(viia)(c) independent of Section 36(1)(vii) which provide for deduction upto 40% for special Reserve created by Assessee providing long term finance for development of infrastructure facility. The Tribunal in the present case had actually not applied its mind on this issue. They had simply reaffirmed the earlier order dated 05.09.2003 for the Assessment Year 2000-2001, and the order dated 19.01.2004 for the Assessment Year 2001-2002 and followed the same principles. However, as pointed out above, the appeals against the said orders had been allowed by a Coordinate Bench of this Court and the answer has been given in favour of the Assessee. If Section 36(1) is examined, it is clear that sub-section (1) gives the list of matters in respect of which deduction can be allowed while computing the income referred under Section 28. Clause (i) to (xi) of sub- section 1 of Section 36 do not imply that those deductions depend on one another. If an Assessee is entitled to the benefit under Clause (1) sub-section (1) of Section 36, the Assessee cannot be deprived of the benefit the other Clauses. This is how the provisions have been ayed. The computation of amount of deduction under both these clauses has to be independently made without reducing the total income by deduction under clause (viii) of Section 36 of the Act. 29. In view of the above reasons, we hold that this substantial question of law has to be answered in favour of the appellant and against the respondent."

(emphasis supplied) 21. We heard the parties and perused the material on record. The deduction under section 36(1)(viia) allows deduction not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA) and deduction under section 36(1)(viii) provides for deduction

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India not exceeding twenty per cent of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account. In other words, the deduction under section 36(1)(viia)(c) is restricted to a certain percentage on total income whereas the deduction under section 36(1)(viii) is restricted to a percentage on the Profits & Gains from the eligible business. If we are to interpret that deduction under section 36(1)(viii) is a subset of 36(1)(viia)(c) and vice versa then the claim of deduction under these two section may get into a loop and any change to one deduction will distort the other which would not be the intention of the legislature. Further the plain interpretation of the wordings used in both these sections Le "computed before making any deduction under this clause" in our view would mean not to consider the deduction under the respective clauses while computing the restriction applicable as a percentage of either total income or profits from the eligible business. Our view is strengthened by the ratio laid down by the Hon'ble Madras High Court in the above case where it is held that the deductions under various clauses to sub section (1) of section 36 are independent of each other and the deduction under a particular clause is to be claimed without reducing the total income by deduction under any other clause. Therefore, in our considered view that same corollary is applicable to the issue under consideration also where reverse situation is contended ie. whether deduction under section 36(1)(viia)(c) is to be reduced for the purpose of deduction under section 36(1)(viii). Further we notice that the coordinate bench in assessee's own case for earlier years has held the impugned issue in favour of the assessee on that ground that the revenue has accepted the deduction and the principle of consistency should be applied. In view of these discussions and considering the judicial precedence we hold that there is no infirmity in the decision of CIT(A). The ground raised by the revenue is dismissed. 19. Considering the fact that, on similar set of facts, the Coordinate Bench of the Tribunal has taken a consistent view in AY 2014-15 to 2018-19 and, respectfully following the same, we do not find any merit in the grounds of appeal raised by the Revenue. In the result, ground no.4 of the appeal is dismissed. 20. Ground Nos. 5 and 6 relate to deleting the addition under Section 36(1)(vii) of the Act, on profit including income from activities not constituting long-term capital financing, income from investment, other income, interest on housing loan to employees, interest on staff advances,

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India provision for investment, depreciation and premium on Government of India bonds, which is contrary to the expression “profit derived from eligible business”. The learned AR of the assessee submits that the assessing officer initially raised this issue in AYs 2005-06 and 2008-09. However, on appeal before the learned CIT(A), it was held that the assessee is not maintaining separate books of account for long-term financing activity. Thus, the methodology adopted by the assessee to work out proportionate income is incorrect. Accordingly, the decision of the learned CIT(A) was accepted by the Department. In subsequent years, except the year under consideration, no disallowance was made. Thus, for the sake of consistency and the regular method employed by the assessee, the grounds raised by the assessee should be rejected. The learned CIT(A), while allowing relief to the assessee, followed the orders of earlier years, i.e., AYs 2005-06 to 2008-09. 21. On the other hand, the learned Senior DR submits that Ld. CIT(A) erred in allowing deduction under section 36(1)(viii) on income which is not derived from the eligible business of long-term financing. The expression "profits derived from eligible business" used in section 36(1)(viii) requires a direct and proximate nexus between the income and the qualifying business activity. Income from investments, dividend income, interest on employee housing loans, interest on staff advances, premium on Government securities, investment-related receipts and other incidental incomes cannot be regarded as profits derived from the business of providing long-term finance. Such receipts arise from independent sources

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India and not from the eligible financing activity contemplated by the section. The Assessing Officer rightly excluded these receipts while determining eligible profits for deduction under section 36(1)(viii). The Ld. CIT(A), by directing inclusion of such income, enlarged the scope of the deduction beyond what is permissible under the Act. Accordingly, the relief granted deserves to be vacated. 22. We have considered the rival submissions of both the parties and have gone through the orders of the lower authorities carefully. We find that during assessment the AO in para-51 of his order noted that while computing profit from business the assessee has not reduced the deduction claimed under section 36(1)(vii). The AO further noted that from the details of income credited in the P & L account under groupings “Interest and discounts” and “other income” that some of the credits have neither direct nexus to the long-term financing activities nor to money lending business. The said credited related to the investment and other non-business activities. The same has been included in the business income as well as total revenue from operation. Certain other adjustment in computation of business income has to be made which are required to be reduced for the purpose of computation of deduction under section 36(1)(vii) of the Act. It was noted that the assessee has not maintained separate accounts nor furnished requisite details, hence the AO reworked the claim of assessee in para 52 of his order and restricted such deduction to the extent of Rs. 62.11 Crore against Rs. 80.00 Crore. The ld CIT(A) allowed relief to the assessee as per his finding in para-10.4 & 10.5 of his

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India order. The ld CIT(A) held that business income derived from long-term finance activities does not include any income from investment, other income, interest on housing loan to employee and interest on other advances to the staff accounts. Hence, the assessee has not claimed any deduction under section 36(1)(vii) in respect of said income, therefore, the question of reducing the same from business income will not arise. The assessee while working such deduction under section 36(1)(vii) included gross receipt in the total receipt (denominator) as well as business income computed under the head “business income” (numerator) of the assessee. The income from ling-term financing activities does not include the said income while working out prorate profit derived from such business eligible for deduction under this section. The ld CIT(A) also recorded the contention of the assessee that similar stand of the assessee has been accepted in earlier years from 2005-6 to 2008-09. On the basis of such observation, the ld CIT(A) allowed relief to the assessee. Thus, in view of the above factual discussions we do not find any reason to interfere with the findings of ld CIT(A), which we affirm. In the result, the ground No. 5 & 6 of the appeal is dismissed. 23. In the result, the appeal of the revenue is dismissed. Order was pronounced as per Rule 34 of income Tax (Appellate Tribunal) Rule-1963 on 07/09/2026.

Sd/- Sd/- MANOJ KUMAR AGGARWAL PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, Dated: 07/09/2026 Biswajit

ITA No.9170/Mum/2025 (AY: 2012-12)& ITA No. 870/Mum/2026 (AY: 2012-13) Small Industries Development Bank of India

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file.

By Order

Assistant Registrar ITAT, Mumbai