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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI LAXMI PRASAD SAHU
Per N. V. Vasudevan, Vice President
This is an appeal by the assessee against the order dated 30.06.2022 of NFAC, Delhi, relating to Assessment Year 2016-17.
Ground No.1 is general in nature and calls for no adjudication. Ground No.2 raised by the assessee reads as follows:
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The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of Rs. 3,14,95,510/- being the CENVAT credit on capital goods. 2.1. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that as per the legal requirements. CENVAT credit cannot be capitalized and no depreciation on the same can be claimed. 2.2. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the Appellant bank charged off 50% of the CENVAT credit as per the provisions of the Finance Act. 1994.
The assessee is a nationalized bank in which majority of the shares are held by Central Government. The assessee had availed CENVAT credit of excise duty paid on capital goods. The CENVAT credit was availed based on the provisions of Finance Act, 1994. The total CENVAT credit availed by the assessee was a sum of Rs.1,08,87,453.50/-. As per the provisions of Finance Act, 1994 read with CENVAT Credit Rules, 2004, the assessee utilized 50% of the CENVAT credit against its output tax liability and the remaining 50% of the CENVAT credit was charged off to the Profit and Loss Account. It was the case of the assessee that as per the provision of Finance Act, 1994 and the CENVAT Credit Rules, 2004, no depreciation should be claimed on the amount of CENVAT credit availed. It was the plea of the assessee that it is because of this legal requirement that the assessee did not capitalize the aforesaid amount to the capital asset but charged the same in the Profit and Loss Account. This claim for deduction on the basis of write off of CENVAT credit to the profit and loss account
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was rejected by both the AO as well as the CIT(A). At the time of hearing, learned Counsel for the assessee submitted that identical issue came up for consideration in assessee’s own case in Assessment Year 2015-16 in ITA nos.1109 and 164/Bang/2019 and the Tribunal by its order dated 15.03.2022 upheld the order of the Revenue authorities observing as follows:
“15.6. We have heard the rival submissions and perused the materials on record. As submitted by the AR it is undisputed fact that CENVAT credit availed by the assessee is relating to capital goods. Therefore the issue to be decided here is whether the 50% of the CENVAT Credit paid is to be debited to the Profit & Loss account or should be added to the cost of the capital good. We will look into the provision of Explanation 9 to sec.43 of the Act in this regard which reads as follows:- Section 43 — Explanation - 9 "For the removal of doubts, it is hereby declared that where an asset is or has beer acquired on or after the 1st day of March, 1994 by an assessee, the actual cost of asset shall be reduced by the amount of duty of excise or the additional duty leviable under section 3 of the Customs Tariff Act, 1975 (51 of 1975) in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944." 15.7. We notice that the explanatory memorandum explain the provisions of the Finance Bill 1998 whereby the above explanation clearly stated that "Where duty leviable under the Customs Tariff Act 1975, and duty leviable under the Central Excise Rules 1944 has been paid and has been included in the actual cost of the asset acquired on or after 1st March 1994, such duty shall be excluded as and when any credit by way of MODVAT is
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allowed to the assessee under the Central Excise Rules 1944" 15.8. The plain reading of the explanation and the intention of the legislature from explanatory memorandum makes it very clear that the actual cost of the assets is to be reduced in respect of any CENVAT credit made and allowed under the Central Excise Rule 1994 where the duty paid has already been included in the cost of the asset. Therefore the contention of the assessee that as per the explanation 9 to section 43, there is a restriction to add the amount paid towards CENVAT credit to the cost of the asset is not correct. We will explain this with an example where a capital asset is purchased for 100 which includes 30 towards duty leviable (Original Cost 70 and Duty amount 30). The eligible CENVAT credit of excise duty of this purchase is 10. What the explanation to 9 envisages is if the asset is capitalized for an amount of Rs.100, the credit allowed subsequently i.e. Rs.10 need to be reduced from the cost of the asset. The actual cost in this case is Rs.90 (Rs.70 of original cost plus Rs.20 of duty not eligible for credit). The law thus, does not restrict the duty paid, for which no credit is allowed, as per the Central Excise Rules from being added to the cost of the asset but mandates that any credit availed should be reduced from the capitalized cost of the asset. In the given case assessee has paid an amount of Rs.1,28,01,784 being 50% of the CENVAT credit which not eligible to claim credit as per the Rule 63B of CENVAT credit Rules 2004 (Rs.20 in our example above). Hence the amount so paid and not eligible for credit should be added to the cost of the asset. Hence, we uphold the order of the CIT(A) in restricting the disallowance to the amount debited to the P&L account as said amount needs to be capitalized and not claimed as an expenditure as per the provisions of Explanation 9 to sec.43 of the Act.”
In view of the aforesaid order of the Tribunal holding that unutilized CENVAT credit has to be capitalized to the cost of the Asset in relation to which the CENVAT credit became available to the assessee, the Revenue authorities were justified in rejecting the claim of the assessee for deduction on account of unutilized CENVAT credit
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which was claimed as deduction in computing income from business of the assessee. Consequently, ground No.2 raised by the assessee is dismissed.
Ground No.3 raised by the assessee reads as follows: 3. The learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of Rs. 3,82,69,960/- paid to Corporation Bank Economic Development Foundation u/s 37. 3.1. The learned Commissioner of Income Tax (Appeals) erred in holding that this is not a Business expenditure.
The AO noticed that in the computation of total income, assessee had disallowed a sum of Rs.3,82,69,960/- which was paid as donations. However, in the course of assessment proceedings, the assessee made a claim that the aforesaid sum which was disallowed should be allowed as a deduction, as the aforesaid sum was paid for the purpose of the business of the assessee and was an allowable expenditure under section 37(1) of the Act and that inadvertently the said sum was added back to the taxable income.
The AO, on examination of the details, noticed that the aforesaid sum was paid by the assessee to M/s. Corporation Bank Economic Development Foundation. The AO found that the aforesaid donations to the aforesaid institutions was eligible for deduction under section 80G of the Act (50% of the donations only). The AO, therefore, came to the conclusion that these payments are not wholly and exclusively
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for the purpose of business and were in the nature of donation eligible for deduction under section 80G of the Act. The AO also observed that since as per the return of income, there was no taxable income, the assessee did not make a claim for deduction under section 80G of the Act but has chosen to claim the same as deduction in computing business income under section 37(1) of the Act. The AO, however, further observed that as per the Order of Assessment, the income of the assessee resulted in a positive income and therefore 50% of the aforesaid sum was to be allowed as a deduction under section 80G of the Act. Accordingly, 50% of the sum given as donation was disallowed by the AO.
On appeal by the assessee, the CIT(A) upheld the order of the AO on the ground that the assessee’s income would be negative and hence deduction under Chapter VIA of the Act i.e., Sec.80G cannot be allowed. The CIT(A) did not adjudicate the claim of the assessee with regard to eligibility of claim for deduction u/s.37(1) of the Act. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. The learned Counsel for the assessee drew our attention to guidelines for ‘Rural Self Employment Training Institutes’ (RSETIs) issued by Government of India, Ministry of Rural Development, New Delhi. In the aforesaid circular, the Government after explaining the intention of the government in providing sustainable income to rural BPL families and the setting up of rural development and self employment training institute in Dharmasthala in
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Karnataka, has also observed that these institutions will be bank led institutions and will be managed and run by public sector / private sector banks with active co-operation from the State Government. Learned Counsel for the assessee submitted that it was only in pursuance to the aforesaid directions of the Government that the payment in question was made to M/s. Corporation Bank Economic Development Foundation. Copy of the trust deed dated 26.02.1992 was also filed before us to show the objects of the trust. It was submitted that similar payments have been considered as wholly and exclusively for the purpose of business. It was submitted that the Hon’ble Karnataka High Court in the case of CIT Vs. Infosys Technologies Ltd., 360 ITR 714 (Karnataka) has examined the question whether a payment which is covered by deduction under section 80G of the Act would stand excluded for being considered as allowable deduction under section 37(1) of the Act. The Assessee donated a sum of Rs.7,37,720 for installing traffic signal near its office. The said donation was eligible for deduction u/s.80G but only to the extent of 50% of the donation. The Assessee claimed the entire donation as deduction u/s.37(1) of the Act. The Hon’ble Karnataka High Court held that the basic requirements for invoking sections 37(1) and 80G, are quite different, but none the less. the two sections are not mutually exclusive. If the contribution by an assessee is in the form of donations of the category specified under section 80G, but if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as
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allowance under section 37(1) cannot be denied. But such money must be "laid out or expended wholly and exclusively for the purpose of business". The word "wholly' refers to the quantum of expenditure and the word "exclusive" refers to the move, object or purpose of the expenditure. The expenditure claimed therein need not be "necessarily" spent by the assessee. It might be incurred "voluntarily" and without any "necessity", but it must for promoting the business. In other words, if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act. The Hon’ble Court in coming to the above conclusion followed the decision of the Hon’ble Supreme Court in the case of Sasoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261(SC).
Learned Counsel accordingly submitted that the expenditure in question was for the purpose of business of the assessee and for promoting its business interest. Learned Counsel also placed reliance on the decision of the Calcutta High Court in the case of PCIT Vs. Eastern Coalfields Ltd., GA2/2022 dated 16.11.2022 wherein it was held that where Government of India framed guidelines on corporate social responsibility for central public sector enterprises, such public sector is bound to formulate a policy in terms of the said guidelines and if an obligation springs from complying with the said guidelines, it has to be regarded as expenditure incurred on grounds of commercial expediency and allowed as a deduction. Our attention was also drawn
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to decision of the ITAT, Hyderabad Bench in the case of Andhra Bank Vs. DCIT ITA No.42/Hyd/2015 and ITA No.31/Hyd/2015 order dated 24.04.2015. In the aforesaid decision, the Tribunal on identical facts where Andhra Bank made contribution to Andhra Bank Rural Development Trust for training of unemployed rural youth and claimed the said sum as deduction under section 37(1) of the Act. The Tribunal examined the issue and held following the decision of the Hon’ble Karnataka High Court in the case of Infosys Technologies Ltd., (supra) that the expenditure was incurred by the assessee in discharge of its social responsibilities which also facilitated the business of the assessee and hence allowable as deduction under section 37(1) of the Act. Reference was also made to decision of ITAT Raipur Bench in the case of ACIT Vs. Jindal Power Ltd., (2016) 70 taxmann.com 389 (Raipur Tribunal). In this decision, the Tribunal held as follows: “………This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play. but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also. as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling
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provision of Explanation 2 to Section 37(1) does not apply on the facts of this case"
Learned DR relied on the orders of the CIT(A) and submitted that cases cited by the learned Counsel for the assessee are distinguishable on facts.
The assessee is a public sector bank governed by the provisions of the Banking Regulation Act, 1949. Factually the contribution has been made by the assessee to Corporation Bank Economic Development Foundation which has its objects to set up training centre for educating and training people with a view to creating awareness, developing local leadership among the community, development through self help, utilization of local resources and talents. The Trust came into existence by virtue of a deed of declaration of trust dated 26.1.1992 with the object of taking up developmental activities particularly for the upliftment of the economically weaker sections of the society. The trust also played catalyst role in the process of social economic development. The Government of India, Ministry of Rural Development has instructed public sector banks to be lead institutions in managing and running such institutes. It is in this context that the assessee has contributed a sum of Rs.3,82,69,960/-. The Revenue authorities took the view that this was in the nature of donation which can be claimed as a deduction only under section 80G of the Act. The decision of the Hon’ble Karnataka High Court on this point is very
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clear and is to the effect that provisions of section 37(1) and 80G of the Act are not mutually exclusive if the contribution by the assessee in the form of donation of the category specified in section 80G of the Act but if it could be termed as an expenditure of the category falling under section 37(1) of the Act, then the right of the assessee to claim the whole of it as allowance under section 37(1) of the Act cannot be denied but such money must be laid out wholly or exclusively for the purpose of business. The decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Eastern Coalfields Ltd., (supra) where Government of India framed guidelines on corporate social responsibility for central public sector enterprises, such public sector is bound to formulate a policy in terms of the said guidelines and if an obligation springs from complying with the said guidelines, it has to be regarded as expenditure incurred on grounds of commercial expediency and allowed as a deduction. Therefore the expenditure in question, on the facts of the present case, satisfies the requirements of Sec.37(1) of the Act. In view of the facts and circumstances of the given case, we are of the view that the deduction claimed by the assessee should be allowed in full. We hold and direct accordingly and allow ground No.3 raised by the assessee.
Ground No.4 raised by the assessee reads as follows: 4. The learned Commissioner of Income Tax (Appeals) erred in dismissing the ground relating to additional claim made by the Appellant Bank u/s 36(1)(vii) & 36(1)(viia) at the time of
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Assessment proceedings by holding that it is an alternate ground. 4.1. The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that the same is not alternate ground, but a substantial ground.
In so far as ground No.4 raised by the assessee is concerned, the assessee raised the following grounds before the CIT(A) in so far as deduction under section 36(1)(vii) of the Act on account of Bad Debts written off. 4. The learned Deputy Commissioner erred in disallowing a sum of Rs. 5440,64,27,837 claimed as deduction by the appellant bank u/s 36(1) vii). 4.1 The learned Deputy Commissioner erred in holding that the appellant bank had not written off bad debts in the books. 4.2 The learned Deputy Commissioner failed to appreciate the fact that the appellant bank had written off bad debts in the books. 4.3 The learned Deputy Commissioner erred in not following the Honorable Supreme Court decision in the case of Vijaya Bank. 4.4 The learned Deputy Commissioner erred in placing the reliance on decisions, the facts of which are different from that of the appellant bank. 4.5 The learned Deputy Commissioner failed to appreciate the fact that in respect of Rs. 5440,64,27,837 amount of bad debts, no deduction was claimed u/s 36(1) (viia). 4.6 The learned Deputy Commissioner erred in disallowing the deduction u/s 36(1) (vii) based on surmises and conjunctures. 4.7 The learned Deputy Commissioner erred in holding that the claim amounts to double deduction.
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4.8 The learned Deputy Commissioner erred in holding that the Appellant bank resorted to write off of bad debts much later to the conduct of Annual General Meeting and approval and finalization of accounts. 4.9 The learned Deputy Commissioner failed to appreciate the fact that the bad debts were written off before the accounts were finalized for the relevant previous year. 4.10 The learned Deputy Commission erred in holding that the bad debts should be adjusted against the provision allowed under section 36(1)(viia). 4.11 The learned Deputy Commissioner erred in wrongly interpreting the Explanation 2 to section 36(1)(vii). 4 12 Without prejudice to the above, the learned Deputy Commissioner failed to appreciate the fact that the closing balance in the 36(1) (viia) account upto 31.03.2013 was only for Rural Advances and no non rural write off can be adjusted against that provision. 4.13Without prejudice to the above, the learned Deputy Commissioner erred in taxing an amount of Rs. 106,45,47, 126 being recovery in written off accounts in respect of which deduction under section 36(1) (vii) was not allowed in earlier years. 14. The assessee also raised ground No.5 before the CIT(A). 5. Without prejudice to the above two grounds, the learned Deputy Commissioner erred in not considering the revised claims under section 36(1)(vii) and 36(1)(viia) made during the Assessment proceedings.
The CIT(A) considered ground No.5 raised by the assessee as an alternative ground whereas it was a ground in which the assessee made an additional claim for deduction under sections 36(1)(vii) and
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36(1)(viia) of the Act. The observations of the CIT(A) on ground No.5 were as follows: Ground no. 3 challenges the addition of Rs. 647,44,16,108 on account of disallow-ance u/s 36(1) (viia).Ground no. 4 challenges the addition of Rs. 5440,64,27,837 on account of disallowance u/s 36(1)(vii). Ground No 5, as an alternate ground challenges action of Ld. A.O. in not considering revised claims u/s 36(1)(vii) and 36(1) (viia). Since, the 2 related substantive grounds.
Since the CIT(A) has not rendered any decision on ground No.5, the parties prayed that the issue may be set aside to the CIT(A) for fresh adjudication. Accordingly, ground No.4 in this appeal is set aside to CIT(A) for consideration afresh after giving due opportunity of being heard to the parties.
In the result, appeal is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (LAXMI PRASAD SAHU) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 06.12.2022. /NS/*
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Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.