M/S CORPORATION BANK ,MANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2(1), MANGALORE

Per B.R Baskaran, Accountant Member These cross appeals by the assessee as well as Revenue are directed against the order dated 26.3.2018 passed by the CIT(A), Mangaluru for the assessment year 2013-14.

(i) Disallowance u/s 36(1)(vii) of the Act

(ii) Applicability of provisions of sec. 115JB of the Act

(iii) Specific additions to book profit as per sec. 115JB of the Act

(i) Disallowance u/s 14A of the Act

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 3 of 17 (ii) Disallowance u/s 40a(ia) of the Act

(iii) Disallowance u/s 36(1)(viia) of the Act

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 4 of 17 adjust the non-rural bad debts against the PBDD allowed u/s 36(1)(viia) of the Act. The assessee is challenging the above said view of the Ld CIT(A).

5.1 We notice that an identical issue has been examined by the co- ordinate Bench of this Tribunal in the case of M/s Canara Bank in ITA No.1884/Bang/2018 dated 27-12-2021 for the asst. year 2013-14, wherein It has been held that the view taken by the CIT(A) is not legally correct and the order passed by the CIT(A) was set aside with regard to his view that the Explanation 2 to sec.36(1)(vii), which requires adjustment of bad and doubtful debts against provision allowed u/s 36(1)(viia), would apply to non- rural bad debts also. The relevant observations made by the Tribunal are extracted below:-

6.3 The Ld CIT(A), however, proceeded to examine this aspect from another angle, i.e., he took the view that the AO has not examined the claim of write off ‘non-rural bad debts” of Rs.1258.47 crores in terms of the proviso to sec. 36(1)(vii) read with sec. 36(1)(viia) of the Act. Before Ld CIT(A), the assessee submitted that the provision allowed u/s 36(1)(via) of the Act is related to rural debts only and hence, only rural debts written off as bad should be adjusted against the provision allowed u/s 36(1)(via) of the Act. However, the Ld CIT(A) expressed the view that the PBDD allowed u/s 36(1)(viia) of the Act is applicable to both Rural and non-Rural debts. Accordingly, he held that the entire amount of bad debts written off (both rural and non- rural) should be first adjusted against the provision allowed u/s 36(1)(viia) of the Act and only the excess should be allowed as deduction. He expressed the view that the decision by Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012)(343 ITR 270)(SC) was rendered under the assumption that the banks would maintain separate PBDD a/c in respect of rural branches and non- rural branches and therefore it is possible to distinguish PBDD as one in respect of rural branches and non-rural branches. The Ld CIT(A) expressed the view that the claim of the bank that the provisions of sec. 36(1)(viia) are distinct and independent of sec. 36(1)(vii) is based on the old circular no. 258 dated 14.6.1979 issued in connection with old law. Accordingly the Ld CIT(A) held that the

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 5 of 17 provision allowed u/s 36(1)(viia) of the Act is for single account since introduction in 1985 for all types of advances including rural advances. Accordingly, the Ld CIT(A) held that the bad debts pertaining to non-rural advances should also be first adjusted against PBDD allowed u/s 36(1)(viia) of the Act. During the year under consideration, the opening credit balance in the PBDD account stood at Rs.4365.90 crores. Since it is more than the bad debts pertaining to non-rural branches of Rs.1258.47 crores, the Ld CIT(A) held that the bad debts claim of non-rural branches is not allowable as deduction u/s 36(1)(vii) of the Act. 6.4 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has expressed the view that the provision allowed u/s 36(1)(viia) of the Act would cover bad debts pertaining to non-rural advances also. An identical issue has been examined by Hyderabad bench of ITAT in the case of State Bank of Hyderabad vs. DCIT (ITA No.450/Hyd/2015, ITA No.498 and 499/Hyd/2015 dated August 14, 2015), wherein the Tribunal has not accepted the above said view expressed by Ld CIT(A). The relevant observations made by the Tribunal are extracted below:-

“19. We have considered the rival submissions and perused the materials on record as well as the orders of revenue authorities. As could be seen from the finding of AO as well as ld. CIT(A), only reason for which claim of deduction for Rs. 209,07,50,831 representing actual write off of bad debts relating to non-rural advances u/s 36(1)(vii) was denied is, assessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds the provision made u/s 36(1)(viia). If we examine the facts of the present case in the context of aforesaid statutory provision, it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the actual deduction claimed

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 6 of 17 u/s 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created u/s 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon'ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience.

"26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent this mischief. The contention of the Revenue, in our opinion, was rightly rejected by the Special Bench of the Tribunal and it correctly held that the Board itself had recognized the position that a bank would be entitled to both the deductions. Further, it concluded that the proviso had been introduced to protect the Revenue, but it would be meaningless to invoke the same where there was no threat of double deduction. 27. As per this proviso to cl. (vii), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances."

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 7 of 17 Concurring with the aforesaid majority view, Hon'ble CJI, S.H. Kapadia, as the then he was, held as under:

"2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation or taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(11(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 8 of 17 itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said 1 proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii)."

Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to non- rural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT (supra). Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to non-rural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A).”

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 9 of 17 5.2 We have heard both the parties and perused the materials on record. Following the decision rendered by the co-ordinate bench of this Tribunal in the case of M/s Canara Bank cited supra, we set aside the order passed by the ld.CIT(A) and direct the AO to delete the disallowance of Rs.707.83 crores.

6.1. In the return of income, the assessee did not compute book profit, as in the view of the assessee, the provisions of sec.115JB would not be applicable to it. However, the AO did not accept the contentions of the assessee and proceeded to compute the income u/s 115JB by holding that the provisions of the said section shall be applicable to the assessee. The Ld CIT(A) also confirmed the order of the AO on this issue.

6.2 Before us, the ld.AR reiterated that the provisions of sec.115JB will not apply to the assessee, since it is not formed under the Companies Act. He placed reliance on the decision rendered by the Kolkata Bench of the Tribunal in the case of Damodar Valley Corporation (2017(8) TMI 1363. On the contrary, the Ld. DR supported the order of Ld CIT(A).

6.3 We notice that an identical issue has been examined by the co- ordinate Bench of this Tribunal in the case of M/s Canara Bank in ITA No.1884/Bang/2018 dated 27/12/2021 for the asst. year 2013-14, wherein the identical issue has been sent back to the file of Ld CIT(A) with the following observations:-

7.1 Before Ld CIT(A) also, the assessee contended that the provisions of sec.115JB will not be applicable to it. It was submitted that the assessee falls under the category of “corresponding new bank” under BR Act. Accordingly it was contended before Ld CIT(A) by the assessee as under:-

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 10 of 17 (a) banking company is defined under BR Act as a “company” which transacts business of banking. (b) “Company” is defined as a company as defined in section 3 of the Companies Act and includes a foreign company within the meaning of sec. 591 of that Act. (c) Since the assessee falls under the category of Act of “corresponding new bank”, it was contended that it cannot fall under the definition of “banking Company”. (d) Clause (b) of sec.115JB(2) is applicable to a banking company, but the assessee is not a banking company as per the definition given in BR Act. Accordingly, it was contended that the assessee is not liable u/s 115JB of the Act.

7.2 The Ld CIT(A), however, did not accept the above said contentions. The view expressed by Ld CIT(A) has been summarised below:-

(a) Sec. 115JB(1) is the charging section and it overrides all other provisions of the Act. It provides that the provisions of this section are applicable in case of “every company”. It does not carve out any exception. (b) Sec. 2(17) defines the word “company”. According to this section company “means” any Indian Company. (c) Explanatory Note to Finance Act, 2012 has explained that Minimum Alternative Tax (MAT provisions u/s 115JB) shall apply to a banking company. (d) Assessee is a “company” as per the deeming provisions of sec.11 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, which reads as under:- “11. Corresponding new bank deemed to be an Indian Company:-

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 11 of 17 For the purposes of the Income tax Act 1961 (43 of 1961), every corresponding new bank shall be deemed to be an Indian Company and a company in which public are substantially interested.”

(e) The assessee itself is filing its return of income under the status of “company”. (f) The shares of assessee bank are listed in the Stock exchange and traded. (g) The assessee is a banking company under Banking Regulations Act, since the definition of the term “banking company” in BR Act is a functional definition. The assessee is following all the rules and regulations of the BR Act which are applicable to other private banks. The assessee bank is constitutionally defined as “corresponding new bank” in BR Act. However, the BR Act does not say that ‘corresponding new bank’ is not a Banking Company. (h) It is not the case of the assessee that being a ‘corresponding new bank’ and not registered under Companies Act, 1956, the assessee is not governed by BR Act. (i) It is highly unfortunate on the part of a reputed public sector bank to resort to such unwarranted, hyper technical, hair splitting of the definitions under various Acts only to avoid the payment of due taxes. (j) Assuming that the assessee is not a Banking Company, then the provisions of sec.115JB(2)(a) will be applicable to the assessee, as it is an Indian Company as per section 11 of the Banking Companies (Acquisition and Transfer of Undertaking) Act 1980. (k) Various decisions relied upon by the assessee relate to the period prior to the amendment made by Finance Act 2012.

7.3 Before us, the Ld A.R reiterated that the provisions of sec.115JB will not apply to the assessee, since it is not formed under Companies Act. He

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 12 of 17 placed his reliance on the decision rendered by Kolkata bench of Tribunal in the case of Damodar Valley Corporation (2017(8) TMI 1363). On the contrary, the Ld D.R supported the order passed by Ld CIT(A).

7.4 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has expressed the view that the assessee would fall under clause (a) of sec.115JB(2). However the case of the assessee is that clause (b) of sec.115JB(2) is made applicable to banking companies, since banking company is included in sec. 211 of the Companies Act. However, it is the contention of the assessee that it is not a ‘banking company”, i.e., it is a “corresponding new bank”. 7.5 We notice that the provisions of sec.51 of the Act specifically states that only certain provisions of BR Act are applicable to “Corresponding new bank”. We noticed earlier that the Ld CIT(A) has proceeded to decide this issue by observing that all provisions of BR Act are applicable to the Company. We notice that the Ld CIT(A) did not consider the effect of provisions of sec.51 of the BR Act upon the assessee. Hence the decision taken by him under the impression that all the provisions of BR Act are applicable to the assessee is faulted one. In our view the Ld CIT(A) should considered the effect of provisions of sec. 51 of BR Act and accordingly he should have appreciated the contentions of the assessee on the definition of “banking company”, provisions of sec.211(2) of the Companies Act etc. Since these aspects go to the root of the issue, in our view, this issue needs to be examined at the end of Ld CIT(A) afresh. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to his file for examining it afresh.” 6.4 We have heard both the parties and perused the materials on record. Following the decision rendered by the co-ordinate bench of this Tribunal in the case of M/s Canara Bank cited supra, we set aside the order passed by the Ld. CIT(A) on this issue and restore the same to his file for deciding it afresh in accordance with law.

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 13 of 17 otherwise of sec.115JB is restored to the file of Ld CIT(A), this issue is also restored to the file of Ld CIT(A) for examining it afresh.

8.1 The AO, however, proposed to apply provisions of Rule 8D. He also took the view that the assessee bank is not in a position to prove its claim that the own funds were used for earning the exempt income. The assessee contended that identical disallowance made in AY 2008-09 and 2009-10 has been deleted by the Tribunal. However, the AO expressed the view that the decision rendered by the Tribunal has been challenged in the appeal filed before the Hon’ble High Court. Accordingly, he computed the disallowance as per Rule 8D and accordingly arrived at a sum of Rs.108.81 crores as amount disallowable u/s 14A of the Act.

8.2 The CIT(A) considered the submissions of the assessee and noted that this issue has been decided in favour of the assessee by the decision of co-ordinate bench of this Tribunal rendered in the assessee’s own case in ITA No.1264 and 1352/Bang/2013 for the assessment year 2011-12 and ITA No.206/PAN/2016 for assessment year 2012-13. Before Ld CIT(A), the assessee contended that the AO has not recorded dissatisfaction over the disallowance made by the assessee. The Ld CIT(A) accepted the said contentions by taking support of the decision rendered by Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd Vs. DCIT (2017) (81 Taxmann 111) (SC). Accordingly, he observed that it is mandatory for the AO to record dissatisfaction over the claim of the

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 14 of 17 assessee before invoking the provisions of Rule 8D. Accordingly, the Ld CIT(A) deleted the disallowance holding that the AO has not recorded dissatisfaction.

8.3 We heard the parties on this issue and perused the record. A perusal of the observations made by the AO on this issue in the assessment order would show that the AO was not satisfied with the claim of the assessee, even though he has not expressly mentioned so. In our view, his dissatisfaction is discernible from the assessment order. However, the AO has not made any specific observation over the disallowance of Rs.2.74 crores made by the assessee out of administrative expenses. Further, it is the claim of the assessee that the interest free funds available with the assessee is more than the value of investments and hence interest disallowance is not called for as per the decision rendered by the jurisdictional Hon’ble Karnataka High Court in the case of Micro Labs (383 ITR 490)(Kar). This aspect has also not been examined by the AO. Further, it has been held in the case of Vireet Investment (165 ITD 27) by Delhi Special bench that only those investments, which has yielded dividend income should be considered for computing average value of investments. Before us, the Ld A.R also relied on certain decisions in order to contend that the provisions of sec.14A itself are not applicable to banks. Thus, we notice that various contentions are involved in this issue and hence we are of the view that this issue requires fresh examination at the end of AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh.

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 15 of 17 9.1 The assessee bank during the previous year relevant to the asst. year under appeal, incurred an amount of Rs.1.81 crores as charges towards using of ATM to other banks. The AO observed that these charges paid to the other banks are subject to TDS u/s 194H as Commission or brokerage. Since the assessee bank did not deduct any TDS, the AO disallowed the above said sum of Rs.1.81 crores u/s 40a(ia). The CIT(A) noticed that this issue is covered by the decision of this Tribunal in the assessee bank’s own case in ITA No.1264 and 1352/Bang/2013 for the asst. year 2011-12, wherein the disallowance was deleted by this Tribunal by holding that the payment made by the assessee company could not be considered as commission/brokerage liable for deduction of tax at source u/s 194H. The Ld CIT(A) has decided an identical issue in assessment year 2012-13 in the assessee bank’s own case itself in favour of the assessee bank and it was also upheld by this Tribunal. Accordingly, the Ld CIT(A) deleted the above said disallowance.

9.2 We have heard both the parties on this issue and perused the materials on record. Since the Ld CIT(A) has rendered his decision on this issue following the decision rendered the coordinate bench of this Tribunal, we do not find any reason to interfere with the order passed by the CIT(A) on this issue.

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 16 of 17 10.1 The Ld CIT(A) noticed that the ITAT, Bangalore benches in the case of Corporation Bank (ITA No.1264 & 1352 (B) 2013) relating to AY 2011-12 has decided this issue in favour of the assessee following the decision rendered by another co-ordinate bench in the case of ING Vysya Bank Ltd (2014)(149 ITD 611). The co-ordinate benches have expressed view that What has to be seen by the AO is as to whether PBDD is created (irrespective of whether it is in respect of rural or non-rural advances) by debiting the Profit & Loss a/c. To the extent PBDD is created, the assessee is entitled to deduction subject to upper limit of deduction laid down in Sec.36(1)(viia) of the Act. Accordingly, following the above said decision, the Ld CIT(A) held that the assessee is entitled for deduction u/s 36(1)(viia) of the Act and accordingly directed the AO to allow deduction as per the decision of ITAT.

10.2 We heard the parties and perused the record. We notice that the Ld CIT(A) has rendered his decision on this issue following the decision rendered by co-ordinate bench of ITAT on an identical issue. Accordingly, we do not find any reason to interfere with the decision rendered by Ld CIT(A) on this issue.

Order pronounced in court on 11th January, 2022. Sd/- Sd/- (BEENA PILLAI) (B.R BASKARAN) Judicial Member Accountant Member

Bangalore, Dated, 11th January, 2022 / VG/vms

ITA No.1678/Bang/2018 & ITA No.234/PAN/2018 Union Bank of India, Mumbai Page 17 of 17

Copy to:

Asst. Registrar, ITAT, Bangalore.