INDUSIND BANK LTD,MUMBAI vs. THE DCIT-2(3)(1), MUMBAI

The assessee was incorporated in 1994 under the Companies Act, 1956 and is licence by Reserve Bank of India to operate as the Commercial Bank under the Banking Regulations Act, 1949. The assessee is publicly held and provides a wide range of banking product and financial services to corporate and retail clients besides undertaking treasury operations. The assessee filed the return of income for AY 2018-19 declaring total income of Rs. 52,38,02,42,740/- on 30.11.2018. The assessee filed the revised return on 06.02.2020 declaring total income of Rs. 52,95,57,55,900/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) called on the assessee to furnish various details from time to time. The AO after perusing the details filed by the assessee made the following disallowance while completing the assessment under section 143(3) of the Act.

Aggrieved, the assessee filed further appeal before the CIT(A). Before the CIT(A) the assessee made a claim that for the purpose of allowing deduction under section 36(1)(via) the rural advances given by Bharat Financial Inclusion Ltd. (BFIL) an NBFC which got amalgamated with the assessee company from the appointed date 01.01.2018 should be included. The CIT(A) gave partial relief to the assessee with regard to the various disallowances made by the AO. With regard to fresh claim made towards deduction under section 36(1)(viia) the CIT(A) rejected the claim of the assessee. Both the assessee and the revenue are in appeal before the Tribunal against the order of the CIT(A).

The ld. AR during the course of hearing fairly conceded that the issue is covered against the assessee in terms of the decision of the Special Bench in the case of DCIT vs Total Oil India (P) Ltd ([2023] 149 taxmann.com 332 (Mumbai - Trib.) (SB)). Accordingly respectfully following the decision of the Special Bench, we dismiss the ground raised by the assessee in this regard.

BFIL was a listed micro finance NBFC whose primary lending was in rural area. BFIL amalgamated with the assessee from the appointed date 01.01.2018 vide the scheme of amalgamation as approved by NCLT vide order dated 10.06.2019 with effective date 04.07.2019. The assessee submitted before the CIT(A) that while claiming the deduction under section 36(1)(viia) the assessee missed to include the rural advances given by BFIL from the appointed date till effective date. The assessee further submitted that as per the scheme of amalgamation as approved by NCLT, BFIL was carrying on the business in the fiduciary capacity on behalf of the assessee during the above referred period. The assessee accordingly claimed that the assessee is entitled to include the rural advances given by BFIL during the above period for the purpose of claiming deduction under section 36(1)(viia). The CIT(A) did not allow the claim of the assessee for the reason that BFIL was operating as an NBFC during the interim period and therefore the rural advances given by NBFCs are not eligible for deduction under section 36(1)(viia). The CIT(A) further held that bank and NBFC are different and the provisions of section 36(1)(viia) are applicable only to Bank. Accordingly, the CIT(A) did not allow the claim of the assessee to include the rural advances given by BFIL for the purpose of section 36(1)(viia). The CIT(A) also reduced the percentage of deduction claimed under section36(1)(viia) stating that NBFCs are allowed deduction upto 5% of the total income and directed the AO accordingly to restrict the deduction claimed by the assessee.

The ld. AR submitted that BFIL was merged with the assessee w.e.f. the appointed date 01.01.2018. The ld. AR drew our attention to the relevant clauses of the scheme of amalgamation as approved by the NCLT to submit that BFIL was carrying on the business from the appointed date till the effective date in its fiduciary capacity on behalf of the assessee. The ld. AR further submitted that the lending activity from 01.01.2018 till 31.03.2018 was carried on by BFIL on behalf of the assessee and w.e.f. 01.01.2018 as per the order of the NCLT, BFIL would not be in existence. The ld. AR also submitted that the assessee while filing the revised return of income has included the income from the rural advances extended by BFIL on behalf of the assessee and the revenue accepted the income offered. The ld. AR drew our attention to the fact that the income of NBFC is taxed at 25% (plus surcharge and cess) whereas the assessee paid tax at 30% (plus surcharge and cess) on the income earned between the appointed date and the effective date for the reason that the income though arising out of BFIL are earned on behalf of the assessee. The ld. AR relied on the decision of Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. vs. ITO [1996] 233 ITR 809 (SC). The ld. AR on the issue of percentage of deduction submitted that the total income of the assessee including income of BFIL are arising in the hands of the assessee only since BFIL ceases to exist from the appointed date and therefore 8.5% of the total income should be considered while allowing the deduction under section 36(1)(viia). The ld. AR submitted the working of deduction claimed under section 36(1)(viia) as given below:

The ld. DR on the other hand vehemently argued that the provisions of section 36(1)(viia) are very clear that the deduction is allowable only to Banks and not to NBFCs. The ld. DR further argued that BFIL continued its business till the effective date as an NBFC and therefore the lending activity carried on by BFIL cannot be considered as that of the Bank. Accordingly, the ld. AR argued that the rural advances extended by BFIL is not eligible for deduction under section 36(1)(viia). 8. We heard the parties and perused the material on record. Under the provisions of section 36(1)(viia) deduction shall allowed at the minimum of 8.5% of the total income plus 10% of the rural advances as compared to the actual provisions made in the books of accounts. The claim of the assessee before the CIT(A) was that the 10% of rural advances should include the rural advances given by the BFIL from the appointed date to 31.03.2018. The revenue's contention is that BFIL is an NBFC and not a Bank and hence the advances extended by BFIL cannot be considered for the purpose of deduction under section 36(1)(viia). In this regard it is relevant to consider the facts pertaining to the issue and the relevant clauses of the scheme of arrangement as approved by NCLT (page 130 to 165 of paper book). The composite scheme of arrangement whereby BFIL got amalgamated with the assessee was approved by NCLT vide order dated 10.06.2019 (page 166 to 197 of paper book). From the perusal of the said composite scheme of arrangement we notice that from the appointed date i.e.01.01.2018 BFIL is carrying on the business on behalf of the assessee and the assets and liabilities have become that of the assessee. We further notice that the assessee once the scheme is approved, has filed the revised return of income including the income from BFIL and the statement of accounts are also revised accordingly. We also notice that from the appointed date, the existence of BFIL ceases and any liability towards the outstanding loans have to be born by the assessee. Considering these facts we see merit in the argument of the ld AR that the business carried on by BFIL from 01.01.2018 to 31.03.2018 was on behalf of the assessee which is a bank. It is also relevant to mention here that the revenue has not disputed the income offered by the assessee which includes the income of BFIL from the appointed date on which the assessee has paid taxed at the rate which is applicable to Banks. It is also relevant here to consider the following observations of the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd (supra) where it is held that – 12. Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein does so provide, viz. 1-1-1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation/date of transfer. But where the Court does not prescribe any specific date but merely sanctions the scheme presented to it as has happened in this case it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as the transfer date. It cannot be otherwise, It must be remembered that before applying to the Court under section 391(1), a scheme has to be framed and such scheme has to contain a date of amalgamation/transfer. The proceedings before the Court may take some time, indeed, they are bound to take some time because several steps provided by sections 391 to 394A and the relevant Rules have to be followed and complied with. During the period, the proceedings are pending before the Court, both the amalgamating units, i.e. the transferor company and transferee company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, clause 6(6) does expressly provide that with effect from the transfer date, the transferor company (subsidiary company) shall be deemed to have carried on the business for and on behalf of the transferee company (holding company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued by the ITO (impugned in the writ petition) were not warranted in law. The business carried on by the transferor company (subsidiary company) should be deemed to have been carried on for and on behalf of the transferee company. This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the Court before the