UCO BANK,KOLKATA vs. D.C.I.T., CIRCLE - 5(1),, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, KOLKATA Before Shri Rajesh Kumar, Accountant Member and Shri Pradip Kumar Choubey, Judicial Member ITA No. 1658/KOL/2024 Assessment Year: 2019-20

UCO Bank..............................................................................................................Appellant 10, B.T.M. Sarani, BBD Bag, Kolkata- 700001. [PAN No. AAACU3561B] Vs. D.C.I.T., Circle – 5 (1),………..…………………....……................................….Respondent Aayakar Bhawan, 8th Floor, P-7, Chowringhee Square, Kolkata- 700069 Appearances by: Priyanka Salapuria, AR,appeared on behalf of the Appellant. Manas Mondal, Addl. CIT DR,appeared on behalf of the Respondent. Date of concluding the hearing : June 11 , 2026 Date of pronouncing the order : July 20 ,2026 ORDER Per Pradip Kumar Choubey, Judicial Member: The appeal filed by the assessee is directed against the order dated 10.06.2024 of the Office of the Commissioner of Income Tax Appeal, passed under Section 143(1) of the Assessment Year 2019-20 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). 2. The brief facts of the case of the assessee are that the assessee being a nationalized bank had filed its return of income declaring total income NIL. The return was processed u/s 143(1) and CPC made in addition of Rs. 148,151,821/-. The CPC in the course of processing besides other disallowances, made a disallowance of Rs. 5,00,00,000/- u/s 37 of the Income Tax Act under the head penalty paid to the RBI.

ITA No.1658/Kol/2024 Assessment Year- 2019-20 Aggrieved by the said order assessee preferred appeal before the CIT(A) wherein appeal of the assessee has been partly allowed as the CIT(A) confirmed the disallowance made by the AO u/s 37 of the Act by observing that penalty was levied by the RBI as the assessee did not follow the direction issued by the RBI therefore, held liable for levy of penalty. 3. Being aggrieved by and dissatisfied, the assessee preferred appeal before us. 4. The Ld. AR has challenged the very impugned order thereby submitting that Ld. CIT(A) erred in confirming the disallowance of the penalty other than infraction of law paid to RBI u/s 37 of the Act ignoring the law that disallowance of penalty paid to RBI is a debatable issue. The Ld. AR further submits that CIT(A) was not justified in upholding the disallowance made by the CPC on account of penalty other than infraction of law paid to RBI for not adhering to the guidelines and norms applicable to bank by not following the binding decision of the Hon’ble Apex Court passed in the case of CIT versus Dhan Laxmi Bank Limited reported in 279 ITR 439. The Ld. AR further submits that in the instant case, the issue of levy of penalty by RBI is a highly debatable one,i.e. whether the penalty is compensatory or regulatory in nature or it is penal for an offence has to be ascertained. The ld. AR further submits that decision of the Hon’ble Apex Court passed in case of Bank of India Finance Limited versus Custodian relied upon by the CIT(A) is not applicable to the facts of the present case. The Ld. AR has also filed a decision of Union Bank of India versus DCIT passed by the Tribunal in ITA No. 193/Hyderabad/2019 in which Tribunal has held that on plain reading of section 46(4) of the Banking Regulation Act, it is very clear that the penalty imposed by the RBI for not adhering to the guidelines or not following the Banking Regulation Act is compensatory in 2

ITA No.1658/Kol/2024 Assessment Year- 2019-20 natureand not penal in nature, because the provisions only recommend payment of fine but there was no provision for conviction etc. The Ld. AR further submits that in the present case the penalty levied by RBI is compensatory or regulatory in nature for incidence in banking business.The ld. AR further submits that procedural lapses for failure of the bank to adhere to the directions issued by RBI such as non-implementation of STP between CBS and Swift, non- segregation of users between CBS and Swift, absence of complete and independent reconciliation of Lord generated from swift and non- reconciliation of rostro (Nostro)on a real-time basis, non-exercising due diligence in detection and reporting the fraud in time, and wrongly collecting and crediting instruments in excess of Rs.50,000 in third- party accounts, the nature of the above-mentioned default that, though called as penalty, the amount was levied for procedural lapses, and therefore does not come under the head 'penalty', which is levied for infraction of law or carrying out any activity in the banking operations which the bank is prohibited from doing. Thus, the nature of the amount paid being compensatory or regulatory in nature, rather than penal for an offence, is allowable deduction to the bank in computing its income under the Income Tax Act 1961. The prayer of the AR is that penalty of Rs. 5,00,00,000/- levied by RBI be deleted. 5. Contrary to that Ld. DR supports the impugned order by submitting his written submission which is as below- The Hon’ble Supreme Court in Bank of India Finance Ltd. v. Custodian (1997) 10 SCC 488 held that directions of RBI are binding on the branch; such violations are punishable under the provisions of Banking Regulation Act, hence, any payment in violation of the RBI directions is not allowable as deduction u/s. 37(1) read with Explanation.

ITA No.1658/Kol/2024 Assessment Year- 2019-20 The case of B.O.I Finance Ltd. v. Custodian And Others (supra) addressed critical issues related to securities transactions under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The appellant banks entered into ready-forward transactions with certain brokers before the enactment of the Special Court Act. These transactions, characterized by a ready leg (immediate purchase or sale of securities) and a forward leg (commitment to reverse the transaction at a later date), subsequently came under scrutiny following the introduction of the Act aimed at curbing financial malpractices. The primary controversy revolved around whether the entire ready-forward transaction was void due to infringements of regulatory circulars issued by the Reserve Bank of India (RBI), and if the severability principle applied to separate the valid and invalid components of the transaction. Summary of the Judgment

The Supreme Court examined whether the ready-forward transactions executed by the appellant banks were entirely void or could be severed into valid and invalid parts. The Special Court initially held that the entire transactions was illegal under RBI circulars and ordered the banks to return the securities. However, on appeal, the Supreme Court reversed this decision by concluded that the ready leg, which had been duly executed, remained valid establishing that the ready-forward transactions are severable. The court concluded that the ready leg, which had been duly executed, remained valid and independent of the forward leg, which was rendered illegal by subsequent regulatory directions. Consequently, the transfer of securities during the ready leg was upheld, and the banks were not required to return the securities to the Custodian.

ITA No.1658/Kol/2024 Assessment Year- 2019-20 Subsequently, in ICICI Bank Vs. official liquidator in 2010 SCC online Supreme Court 1102, the Apex Court held that guidelines/circulars are issued by Reserve Bank of India in exercise of various powers conferred under the Banking Regulation Act and they have force of law. Hence, any payment in violation of the RBI directions is not allowable as deduction under section 37. Explanation to section 37(1) makes it clear beyond doubt that any expenditure prohibited by law cannot be allowed as deduction under section 37. The Ld. DR has also placed a copy of the order dated September 30, 2010passed by the Hon'ble Apex Court in Civil Appeal No. 8393/2010 (Arising out of S.L.P. (C) No. 2240 of 2009) in ICICI Bank Vs. Official Liquidator of APS Star Entry Limited and Others. 6. We have heard the counsel of the respective parties and perused the impugned order and facts of the case. The sole issue for adjudication is regarding the disallowance of the penalty amount of Rs. 50,000,000/- u/s 37 of the Act. It is a fact that the assessee is a public sector bank and an amount of Rs. 50,000,000/- was paid to RBI as penalty for the following reasons: - 1. Not exercising due diligence in detection and reporting the fraud in time. 2. Wrongfully collecting and crediting instruments in excess of Rs. 50,000/- in third party account. 3. Non-implementation of STP between CBS and SWIFT. 4. Non-segregation of users between CBS and SWIFT. 5. Absence of complete and independent reconciliation of logs generated from SWIFT. 6. Non-reconciliation of Nostro on real time basis. It is pertinent to mention here that penalty of Rs. 2,00,00,000/-and penalty of Rs. 3,00,00,000/- were imposed by the RBI in exercise of

ITA No.1658/Kol/2024 Assessment Year- 2019-20 power conferred u/s 47A(1)(C) read with section 46(4)(1) of the Banking Regulation Act. We have gone through the order passed by the Committee of the Executive Directors of the Reserve Bank of India regarding the penalty and find that in the penalty order dated 31.01.2019,the Executive Committee has discussed the issue at length and after hearing the assessee, has held that assessee has violated the RBI directions. It is important to mention here that RBI has passed an order u/s 35, 35A, 46 and 46A of the Banking Regulation Act after giving due opportunity to the assessee. The CIT(A) in his order has observed thus- It would be pertinent to mention that the Auditor of the appellant in column no. 21(a) of audit report has mentioned in clear terms that expenditure by way of penalty or fine for violation of any law for the time being force was incurred. He has mentioned this amount of Rs.50,000,000/- in the audit report. Therefore, it is also clear that the penalty is debited to the P&L account is for violation of law. The classification by Auditor is given in view of para 33.18 of guidance note issued by the ICAI. This classification by Auditor require to be relied upon. The appellant has relied on the decision of Hon'ble Supreme Court in case of CIT vs Dhanlakshmi Bank dated 15.05.2015 It is seen that the Hon'ble Supreme Court has declined to consider the issue on merits. However, in a recent decision in case of IDBI Bank Vs. ACIT (2022) 36 NYPTTJ 334 (Mumbai) dated 23.03.2022, the Hon'ble ITAT has considered the issue of allow ability of penalty levied by RBI. It is clearly mentioned that section 46 of banking regulation act provides for levying of penalty. The penalty levied u/s 46 of banking regulation act is levied for violating provisions of banking regulation act. Hence, in view of explanation section 37 makes it clear beyond doubt that expenditure prohibited by any law cannot be allowed as a deduction u/s 37. The ITAT Mumbai

ITA No.1658/Kol/2024 Assessment Year- 2019-20 has followed decision in case of ICCI Bank vs. Official Liquidator (2010) SSC online Supreme Court 1102. For the clarity the relevant part of decision is reproduced as under:

“Sec. 46 of the above Act provides for levy of penalty whenever the provisions of the banking regulation Act are violated. Therefore, it is apparent that above penalty is levied under a 46 of the banking regulation Act for violating provision of banking regulation Act. Hence, it is an offence committed by the assessee bank under the banking regulation Act for which penalty is levied and therefore same is covered by explanation to 37(1) of the Act. Coordinate bench in ANZ Grindlays Bank (2004) 88 ITD 53 (Delhi) has held that the RBI directions/guidelines are statutory and violation of the same are akin to violation of statutory provisions. The Supreme Court in the case of Bank of India Finance Lid. vs. Custodian (1997) 10 SCC 488, has also held that the directions of the RBI are binding on the banks, such violations are punishable under the provisions of the Banking regulation Act. Hence, any payment in violation of the RBI directions is not allowable as deduction under s. 37. Explanation to s. 37(1) makes it clear beyond doubt that any expenditure prohibited by law cannot be allowed as deduction under s. 37. We find that Hon'ble Supreme Court in ICCI Bank vs. Official Liquidator 2010 SCC online Supreme Court 1102 has also held that guideline issued by RBI in exercise of various powers conferred under the Banking Regulation Act and they have force of law. Therefore, in view of the above decision relied up on by the leamed Authorised Representative does not apply as none of those decisions have considered the decision of Honourable Supreme Court in case of ICICI Bank (supra). More so, we do not find that violation of the above provisions of the Banking Regulation Act is merely technical or venial in nature, in view of this, we confirm the action of the learned lower authorities in disallowing

ITA No.1658/Kol/2024 Assessment Year- 2019-20 the above sum of Rs. 5 lacs under a. 37(1) of the Act. Ground No. 5 of the appeal is dismissed.”

In case of appellant, it is seen that as per Hon'ble SC decision in the case of Bank of India Finance Ltd. vs. Custodian (1997) 10 SCC 488 that the directions issued by RBI are binding on banks and such violation are punishable under the provision of banking regulation act. It is seen that the RBI has levied penalty u/s 46 of banking regulation act. Therefore, the ground no. 1 & 2 are dismissed. The action of AO CPC disallowing penalty of Rs.50,000,000/-is confirmed. 7. The submission of the AR is that CIT(A) did not consider the order passed by the Apex Court in case of CIT vs Dhanlakshmi Bank Limited. We have gone through the Hon'ble Supreme Court’s decision in Dhanlakshmi case and find that Hon’ble Apex Court has not passed the order on merit rather they have dismissed the appeal by observing thus:-

Penalty of Rs. 10,61,698 imposed by the Reserve Bank of India for committing violation of provisions of the Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949 was claimed as business expenditure by the respondent-bank. The aforesaid amount was in respect of the asst. yrs 1984-85 to 1991-92 i.e. for 8 years.

ITA No.1658/Kol/2024 Assessment Year- 2019-20 2003, the same was dismissed by this Court on 4th April, 2005. Leaving the question of law open, the appeals are dismissed 7.1 Contrary to that judgment, we have gone through the order passed by the ITAT, Mumbai Bench in ITA No. 1339 in which the order ofthe Apex Court in ICICI Bank Limited versus Official Liquidator has been followed in which Hon’ble Apex Court has held that guidelines/circulars are issued by Reserve Bank of India in exercise of various powers confirmed under Banking Regulation Act and have a force of law and the Tribunal has held that any payment in violation of the RBI direction is not allowable as a deduction u/s 37. The relevant portion of the order passed by the Tribunal Mumbai in ITA No. 1339/2007 as hereby reproduced herein below: -

ITA No.1658/Kol/2024 Assessment Year- 2019-20 to have been incurred for the purpose of the business and should be disallowed. The assessee has violated the provisions of section 12 of the banking regulation Act, 1949 by allowing one person to hold the shares of the assessee company more than specified percentage. Section 46 of the above Act provides for levy of penalty whenever the provisions of the banking regulation Act are violated. Therefore, it is apparent that above penalty is levied under section 46 of the banking regulation Act for violating provision of banking regulation Act. Hence, it is an offence committed by the assessee bank under the banking regulation Act for which penalty is levied and therefore same is covered by explanation to 37(1) of the Act. Coordinate bench in ANZ Grindlays Bank (2004) 88 ITD 53 (Delhi) has held that the - RBI directions/guidelines are statutory and violation of the same are akin to violation of statutory provisions. The Supreme Court in the case of Bank of India Finance Ltd. v. Custodian [1997] 10 SCC 488, has also held that the directions of the RBI are binding on the banks; such violations are punishable under the provisions of the Banking Regulation Act. Hence, any payment in violation of the RBI directions is not allowable as deduction under section 37. Explanation to section 37(1) makes it clear beyond doubt that any expenditure prohibited by law cannot be allowed as deduction under section 37. We find that Hon'ble Supreme Court in ICCI Bank Vs. official liquidator in 2010 SCC online Supreme Court 1102 has also held that guideline issued by Reserve Bank of India in exercise of various powers conferred under the banking Regulation Act and they have force of law. Therefore, in view of the above decision relied up on by the learned Authorised Representative does not apply as none of those decisions have considered the decision of Honourable Supreme court in case of ICICI bank [ supra].More so, we do not find that violation

ITA No.1658/Kol/2024 Assessment Year- 2019-20 of the above provisions of the banking Regulation Act is merely technical or venial in nature. In view of this, we confirm the action of the learned lower authorities in disallowing the above sum of Rs. 5 lacs under section 37(1) of the Act. Ground no 5 of the appeal is dismissed. {emphasis supplied} 8. In the present case as discussed above, the sole ground relates to the disallowance of the penalty amount of Rs. 5,00,00,000/- and penalty has been imposed by the RBI as there was a violation of the rule 46 and 47 of the Banking Regulation Act. Thus, keeping in view the recent judgment of the Apex Court passed in the case of ICICI Bank Limited (Supra) in which Apex Court has held that guidelines issued by RBI have a statutory force of law, we find force in the arguments of the Revenue that the expenditure incurred as penalty imposed by RBI is not allowable as a deduction. Therefore, any violation of the guidelines of the RBI being punishable and the same being an expenditure incurred by the assessee for the purpose, which is an offence or which is prohibited by law, cannot be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure as per Explanation 1 to section 37 of the I.T. Act, 1961 and is thus not an allowable deduction u/s 37 of the Act. In the result appeal of the assessee is dismissed. Kolkata, the 20th July , 2026.

Sd/- Sd/- [Rajesh Kumar] [Pradip Kumar Choubey] Accountant Member Judicial Member DC Dated:. 20 .07.2026. 11

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Copy of the order forwarded to: 1. Appellant - 2. Respondent - 3. CIT(A)- 4. CIT- 5. CIT(DR)

//True copy// By order Assistant Registrar, Kolkata Benches

ITA No.1658/Kol/2024 Assessment Year- 2019-20