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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 651/Mum/2022 (A.Y. 2017-18) Kokan Mercantile Co-operative Bank Ltd. Harbour Crest, 1st Floor, Mazagaon, Mumbai-400010. PAN: AAAAK2527P ...... Appellant Vs. ACIT, Circle-20(2), Room No. 217, 2nd Floor, Piramal Chambers, Lalbaug, Parel, Mumbai-400012 ..... Respondent Appellant by : Sh. M. Subramanian, Adv. Respondent by : Sh. Tejinder Pal Singh, Sr.DR Date of hearing : 12/07/2022 Date of pronouncement : 04/10/2022 ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of National Faceless Appeal Centre, Delhi [hereinafter referred to as [‘NFAC’] dated 21.12.2021 passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as [‘the Act’] for the Assessment Year (AY) 2017-18. The assessee has raised the following grounds of appeal:
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Grounds of appeal Tax effect relating to each Ground of appeal (see note below) 1. On the facts and in the circumstance of the case and in law, the learned CIT(A) erred in dismissing the appeal and that too without appreciating fully and properly, the facts of the case. 2. On the facts and in the circumstance of the case and in law, the learned CIT (A) erred in dismissing the appeal and thereby confirming the disallowance made of Rs. 50, 00,000/- on the ground that the claim is not in accordance with law as per condition set out u/s 36(1) (viia) although the claim was made u/s 36(1) (viii) of the act. 3. On the facts and in the circumstance of the case and in law, the interest charged of Rs.31, 598/- u/s 234B of the act is invalid and bad in law. 4. On the facts and in the circumstance of the case and in law, the interest charged of Rs. 4, 91,670/- u/s. 234C of the act is invalid and bad in law. 5. The appellant craves leave to add, alter, amend or delete any or all the grounds of appeal at any time. Total tax effect (see note below) 15,00,000/-
Brief facts of the case are that the assessee filed its return of income declaring total income at Rs. 13,52,15,990/-. The case was selected for limited scrutiny under CASS. The assessee is a cooperative bank engaged into the business of banking and finance and derives income from business operations. A show cause was issued to the assessee as under “It is seen that you have debited
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an amount of Rs. 50, 00,000/- as "Reserve for Standard Asset" in P&L account and the amount was taken to Balance sheet under the head "contingent provisions for standard assets". However, it is seen that in the computation on income this contingent provision is not added back to the total income as the provision for standard assets is nothing but provision for bad and doubtful debts. Observations of the AO and the Ld. CIT (A) are as under: Observations of the AO are “Return of income for AY 2017-18 was e-filed on 28.10.2017 declaring total income at Rs. 13,52,15,990/-. The case was selected for limited scrutiny under CASS Statutory notice u/s 143(2) and notice u/s 142(1) were issued and duly served upon the assessee through online electronically in E-Processing. In response to the above statutory notices, the assessee e-filed the details called for through e-filing portal. The proceedings were conducted electronically. The documents submitted were perused upon. The assessee is a cooperative bank, engaged into the business of banking & finance and derives income from business income. Subsequently, notice u/s 142(1) dated 24, 12 2019 issued to the assessee read as under:- "It is seen that you have debited an amount of Rs. 50, 00,000/- as "Reserve for Standard Asset in P&L account and the amount was taken to Balance sheet under the head contingent provisions for standard assets However, it is seen that in the computation on income this contingent provisions is not added back to the total income as the provision for standard assets is nothing but provision for bad and doubtful debts In view of the above, you are requested to explain why the same should not be added back to the total income being a contingent liability." In response to the above notice, the assessee filed his submission online on 27.12.2019 as under:- "In response to your above referred notice and in reply thereon we have to state as under: In your said notice you intend to say that the Provision for Standard Assets is nothing but a provision for Bad and Doubtful debts and you intend to disallow the same. Here we would like to say that the Provision for standard Assets is not a provision for Bad and Doubtful Debts. All the banks
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are governed by the directives of the Reserve Bank of India. They have to abide by the circulars issued by it from time to time. Thus according to a circular issued by the RBI from time to time to all Banks should provide for all its standard Assets as follows: From the year ending 31.03 2000, the banks should make a general provision of a minimum of 0.25 percent on standard assets on global loan portfolio basis. The provisions on standard assets should not be reckoned for arriving at net NPAS. The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under ‘Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet. Thus the RBI circular clearly states that Provision for Standard Assets is not provision for NPAS. A Standard Asset is always considered recoverable, in the sense, bank has no doubt of its recoverability. When the Bank itself has treated such Assets as good and recoverable, any provision made on them cannot be considered to be as provision for Bad and Doubtful &Assets. This debt itself being good, a provision made on good debt cannot be considered as provision for Bad and Doubtful Debts. May be, the RBI has made a regulation for provision for standard assets also a prudential norm. This can however be considered as a measure prescribed in abundant caution, to deal with a situation where banks are not to suffer shock of sudden delinquency that could happen in future. There is always a possibility that an asset, which is fully recoverable, may not be so at future date. Nevertheless, possibility of happening of such a contingency cannot be a sufficient reason to consider a provision made on standard assets also as a provision for bad and doubtful debts. Therefore, claim that the provision for standard assets also has to be considered for applying the condition set out under Section 36(1) (viia) is not in accordance with law. This is clearly decided in the case of Bharat Overseas Bank Ltd. Vs CIT IT APPEAL No. 1191 Of ITAT Chennai Branch.” 3. Observations of the Ld. CIT (A) in his order passed under section 250 of the Act are as under: “Ground Nos. 1 to 4:- These grounds of appeal pertain to addition of Rs.50,00,000/- on account of provision on standard assets as per provisions of
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section 36(1)(viia) of the Act. The fact of the case that the AO noticed that the assessee has debited an amount of Rs.50, 00,000/- as reserve for standard assets in P&L account and the amount was taken to balance sheet under the head 'Contingent provisions for standard assets, however, in the computation on income this contingent provisions is not added back to the total income as the provision for standard assets is nothing but provision for bad and doubtful debts. Not satisfied with the reply of the assessee, the AO concluded that the reserve for standard assets claimed by assessee is not in accordance with law as per condition set out under section 36(1)(viia) of the Act. During the appellate proceedings, the appellant was provided many opportunities as enumerated above. The appellant, for the reasons best known to him has remained non-compliant. No material fact has been brought on record to controvert the finding of the AO. The appellant failed to explain how provisions for standard assets is allowable when the AO has given categorical finding that the reserve for standard assets claimed by assessee is not in accordance with law as per condition set out under section 36(1)(viia) of the Act. Even in the appellate proceedings no effort is made by the assessee to rebut the finding of the AO. I have no reason to interfere with the finding of the Assessing Officer. The addition of Rs.50, 00,000/- is, therefore, confirmed. Accordingly, these grounds of appeal are dismissed.” 4. Assessee made this claim under chapter IV, sec 36(1) (viii) for sake of clarity about the provisions with reference to claim made by the assessee we are reproducing herein below the provisions of sec.36 (1) (viii) in respect of any special reserve created and maintained by a specified entity, an amount 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: Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital
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and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess. Explanation. —In this clause, — (a) "Specified entity" means, — (i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956); (ii) a financial corporation which is a public sector company. (iii) a banking company. (iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. (v) a housing finance company; and (vi) any other financial corporationincluding a public company. (b) "Eligible business" means, — [(i) in respect of the specified entity referred to in sub-clause (i) or sub- clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), 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;] (ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
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(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India. (c) "Banking company" means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act. (d) "Co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P. (e) "Housing finance company" means a public company formed or 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. (f) "Public company" shall have the meaning assigned to it in section 385 of the Companies Act, 1956 (1 of 1956); (g) "Infrastructure facility" means— (i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed.
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(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and (iii) an undertaking referred to in sub-section (10) of section 80-IB; (h) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;]s 5. We have gone the order of AO and that of Ld. CIT (A), we found that assessee co-operative bank is falling in the category of “a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank” and involved 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. Further, this is not under challenge that assessee is a scheduled bank duly licensed and governed by the provisions and norms of R.B.I announced from time to time. 6. Assessee claimed deduction under section 36(1) (viii) and AO treated this claim under section 36(1) (viia). Both are distinct sections, and both can operate simultaneously. Once it is proved that assessee is an eligible entity and involved in eligible business, assessee’s claim under 36(1) (viii) can’t be neither denied nor the character of the claim can be interchanged from section 36(1) (viii) to section 36(1) (viia) of the Act.
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In support of our view, we relied on following judicial pronouncements as under: [2019] 104 taxmann.com 205 (Madras) Infrastructure Development Finance Co. Ltd. v. Assistant Commissioner of Income-tax Company Circle 11(3), Chennai The assessee was a public limited company incorporated with the main object of providing long-term finance to enterprises engaged in developing, maintaining and operating infrastructure projects and facilities. The assessee claimed deductions under section 36(1) (viia)(c) as also under section 36(1)(viii) in respect of provisions made for bad and doubtful debts.The Assessing Officer held that the claim for deduction under section 36(1)(viia)(c) can be allowed only after reducing from the assessee income, the deduction allowable under section 36(1)(viii) and that deductions cannot be granted independent of each provision.The Commissioner (Appeals) affirmed the decision of the Assessing Officer.On appeal, the Tribunal upheld the order of the Commissioner (Appeals).On appeal to the High Court, Held as under: “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'.In the Explanation, eligible business had been stated to be business in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub- clause (iv) of clause (a), namely, the business of providing long-term finance for, industrial or agricultural development; development of infrastructure facility in India; or development of housing in India.It is an admitted fact that the assessee comes within the definition of a 'specified entity' and is carrying on 'eligible business' as provided under section 36(1)(viii).It is the contention by the revenue 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 place 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 per cent of the profits derived out of business and not 40 per cent of the total income. This was a significant shift in the method of computation. This interpretation is borne out by the Memorandum explaining the provisions in the Finance Bill 1995 whereunder the amendment was introduced.The above must be given harmonious and purposive
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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.A provision had been made for deduction of provisions for bad and doubtful debts under section 36(1)(vii)(c) independent of section 36(1)(viii) which provide for deduction upto 40 per cent 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 5-9-2003 for the assessment year 2000-01, and the order dated 19-1-2004 for the assessment year 2001-02 and followed the same principles. However, the appeals against the said orders had been allowed by 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 (i) sub-section (1) of section 36, the assessee cannot be deprived of the benefit of the other clauses. This is how the provisions have been arrayed. The computation of amount of deduction under section 36(1)(viii) and section 36(1)(viia) has to be independently made without reducing the total income by deduction under clause (viii) of section 36.”
We have gone through the order of AO, Ld. CIT (A) and facts of the case applicable. On the given facts of the case, we are of the considered opinion that assessee is entitled for deduction as prescribed in section 36(1) (viii) of the Act, subject to the limits prescribed in the section itself, i.e. Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess. In the result we set aside the orders of authorities below and direct to allow the deduction u/s. 36(1) (viii) as claimed by the assessee, however subject to the factual verification by the AO. In the result Ground no. 1 raised by the assessee is allowed, Ground No. 2 is consequential in nature and
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no separate adjudication is required, Ground No. 3 of the assessee is allowed as interest charged on returned income can’t be disturbed based on any further addition or disallowance made during the assessment proceedings. 9. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 4th day of October, 2022.
Sd/- Sd/- (KULDIP SINGH) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, िदनांक/Dated: 04/10/2022 SK, Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकर आयु�(अ)/The CIT(A)- 4. आयकर आयु� CIT 5. िवभागीय �ितिनिध, आय.अपी.अिध., मुबंई/DR, ITAT, Mumbai 6. गाड� फाइल/Guard file. BY ORDER, //True Copy// (Dy. /Asstt.Registrar) ITAT, Mumbai