ACIT CIRCLE 3(2)(1), MUMBAI, MUMBAI vs. THE NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT, MUMBAI

The appeal filed by the Revenue and the cross-objection filed by the assessee for Assessment Year (AY) 2023-24 arise out of the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter “Ld. CIT(A)”] dated 03.12.2025, passed under section 250 of the Income-tax Act, 1961 (hereinafter “the Act”), against the assessment order dated 27.03.2025 passed under section 143(3) read with section 144B of the Act. Since the appeal and cross-objection arise out of the same order, they are disposed of by this common order.

The grounds of appeal raised by the Revenue are reproduced as under:

Briefly stated, the assessee is a statutory body constituted under the National Bank for Agriculture and Rural Development Act, 1981 (“NABARD Act”) for providing and regulating credit and other facilities for the promotion and development of agriculture and allied activities and for securing integrated rural development. The assessee filed its return of income on 18.10.2023 declaring total income of Rs.60,57,69,85,584/-. The Assessing Officer (“AO”) completed the assessment at a total income of Rs.63,73,47,51,813/-, inter alia, after disallowing interest credited to specified development funds and expenditure incurred on promotional activities. The Ld. CIT(A) deleted both the disallowances. Aggrieved, the Revenue is in appeal before us.

Ground No.1 relates to the deletion of disallowance of Rs.1,78,79,19,983/- in respect of interest credited to the Watershed Development Fund (“WDF”), Tribal Development Fund (“TDF”), Financial Inclusion Fund (“FIF”) and Producers’ Organisation Development Fund (“PODF”). The AO observed that the amount debited to the profit and loss account as interest had been credited to these funds and had not actually been paid. He, therefore, disallowed the claim. The Ld. CIT(A), accepting the assessee’s contention that the relevant funds were held on behalf of the Government of India (“GOI”)/Reserve Bank of India (“RBI”) in a fiduciary capacity, deleted the disallowance.

The learned Departmental Representative (“Ld. DR”) submitted that the amount of Rs.178.79 crore had not actually been paid during the year. It had merely been debited to the profit and loss account and credited to the specified funds. He submitted that the Ld. CIT(A) was not justified in allowing the claim without appreciating this fact and supported the disallowance made by the AO.

The learned Authorised Representative (“Ld. AR”) submitted that the issue was considered by the Tribunal in the assessee’s own case in the consolidated order in ITA No.4006/Mum/2018 and connected appeals dated 02.04.2024. Referring to the discussion in paragraph 10 of that order, he requested that similar directions be issued for the year under consideration. He submitted that the assessee held the funds on behalf of GOI/RBI and that income earned by investing the unutilised balances had also been included in its taxable income. As explained before the Ld. CIT(A), interest of Rs.1,78,79,19,783/- was credited to the funds at 3% on the average outstanding balances, whereas the corresponding investment income stated to have been offered to tax was Rs.2,80,10,74,327/-, worked out by applying an average yield of 4.70%. He submitted that, if the interest credited to the funds was not allowed as a deduction, the corresponding income attributable to those funds should also be excluded.

We have considered the rival submissions and perused the material available on record. The claim before us concerns interest credited on the unutilised balances of the development funds. The question, therefore, requires consideration of the income attributable to those balances as well as the corresponding debit claimed by the assessee. The non-payment of the amount, as emphasised by the Ld. DR, cannot be examined in isolation from the assessee’s contention that the funds and the income arising therefrom belong to GOI/RBI.

We find that, in paragraph 10 of the consolidated order dated 02.04.2024 in ITA No.4006/Mum/2018 and connected appeals, the co-ordinate Bench examined the treatment of income and expenditure relating to funds held in a fiduciary capacity. In paragraph 10.10, it stated: “In nutshell, the income as well as expenses incurred in respect of these funds should not affect the business profits of the assessee.” The principle emerging from the decision is that the income belonging to the funds and the expenditure chargeable to them must receive corresponding treatment while computing the assessee’s business income.

In the present case, the assessee has specifically contended that the investment income attributable to the unutilised balances was included in the income offered to tax. The Ld. CIT(A) deleted the disallowance by applying the principle of diversion of income at source, but the corresponding income and the debit relating to these balances require verification in the light of paragraph 10 of the aforesaid order. Respectfully following that decision, we set aside the order of the Ld. CIT(A) on this issue and restore the matter to the file of the AO. The AO shall verify the funds held by the assessee in a fiduciary capacity, ascertain the income actually attributable to such funds and included in the taxable income, and exclude that income along with the corresponding expenditure pertaining to those funds. The assessee shall furnish the fund-wise details, computation and supporting material. After affording adequate opportunity of being heard, the AO shall recompute the income in accordance with the above directions, ensuring that neither the income nor the expenditure belonging to these funds affects the assessee’s business profits and that no double relief is granted. Ground No.1 is allowed for statistical purposes.

Ground No.2 relates to the deletion of disallowance of expenditure of Rs.1,36,75,00,000/- incurred on promotional activities. The AO held that the expenditure was developmental in nature and had not been incurred wholly and exclusively for business purposes. He further observed that the relevant funds had been created out of the profit and loss appropriation account and, therefore, expenditure relating to those funds should be met from them instead of being debited to the profit and loss account. The Ld. CIT(A) deleted the disallowance, taking note of CBDT Notification No.25/2014 dated 29.04.2014 notifying the assessee for the purposes of section 36(1)(xii) of the Act.

The Ld. DR relied upon the assessment order and submitted that the disallowance made by the AO be restored.

The Ld. AR submitted that the issue was covered by the decision in the assessee’s own case in ITA No.4009/Mum/2018, forming part of the consolidated order dated 02.04.2024. He also relied upon CBDT Notification No.25/2014 dated 29.04.2014, under which NABARD was notified for the purposes of section 36(1)(xii) from AY 2013-14 onwards. He submitted that the promotional activities were undertaken in furtherance of the objects for which NABARD was constituted and were authorised by section 38 of the NABARD Act. Accordingly, the expenditure was allowable under section 36(1)(xii) of the Act.

We have considered the rival submissions and perused the material available on record. Section 36(1)(xii) provides for deduction of qualifying expenditure, other than capital expenditure, incurred by a notified corporation or body corporate for the objects and purposes authorised by the Act under which it is constituted or established. NABARD stands notified for this purpose by CBDT Notification No.25/2014 dated 29.04.2014 with effect from AY 2013- 14 onwards. The year under consideration is AY 2023-24. The assessee’s eligibility as a notified entity is, therefore, established. The promotional and developmental activities described in the assessment order fall within the purposes for which the assessee was constituted. Their developmental character, by itself, does not furnish a reason to deny the deduction under this specific provision.

In the consolidated order dated 02.04.2024, the co-ordinate Bench rejected the objection based merely on the developmental nature of promotional expenditure. In paragraph 5.9(b), it held that expenditure relating to funds created wholly from the assessee’s appropriated profits is deductible under section 36(1)(xii). Although the matter was restored for examination of the source of the funds in those years, the AO has expressly recorded in the present assessment order that the relevant funds originated from the appropriation of NABARD’s profits of earlier years and were exclusively managed by it. On that recorded factual basis, earmarking the assessee’s own profits under separate funds does not alter their ownership or require otherwise allowable expenditure to be excluded from the computation of taxable income. The AO has not identified any capital expenditure or any item outside the authorised objects as a basis for the impugned disallowance. Applying section 36(1)(xii), the notification and the principle laid down by the co-ordinate Bench to the facts recorded for this year, we find no infirmity in the deletion of the disallowance of Rs.1,36,75,00,000/-. Ground No.2 is dismissed.

Ground No.3 is general in nature and does not require a separate finding.

We now take up the assessee’s cross-objection. The assessee has filed an application seeking condonation of delay of 90 days in filing the cross- objection. The cross-objection concerns the treatment of income earned on the funds stated to be held by the assessee in a fiduciary capacity on behalf of GOI/RBI. In view of our directions in paragraph 9 above requiring the AO to give corresponding treatment to the income and expenditure pertaining to such funds, the cross-objection does not survive for separate consideration and is dismissed as infructuous. Consequently, the application for condonation of delay also requires no separate consideration.

In the result, the appeal filed by the Revenue is partly allowed for statistical purposes and the cross-objection filed by the assessee is dismissed as infructuous.