BANK OF INDIA,MUMBAI vs. THE PR. CIT-2,, MUMBAI

Brief facts of the case are, the assessee filed its return of income for assessment year 2016-17 on 30.11.2016 declaring total income of Rs.844.77 crores. Thereafter, the assessee filed revised return of income on 31.03.2016 declaring loss of Rs.505.48 crores. The assessment u/s 143(3) of the Income Tax Act, 1961 (in short ‘Act’) was completed on 14.03.2019 determining total income at Rs.6532.98 crores.

In response, the AR of the assessee attended the proceedings and made the following submissions on allowability of contribution to approved superannuation fund and provision for leave encashment: “2.1 The Assessee Bank makes an annual contribution to an approved superannuation fund under a "defined benefit scheme" determined at the close of the year at the present value of the amount payable under the actuarial valuation technique. During the FY 2015-16, the Assessee Bank made a contribution to approved superannuation fund (pension tuna) of R 1833,10,67,361 which includes an additional amount on account of change in mortality table to IALM 2006-08 from LIC1994-96 in the course of actuarial valuation as per Accounting Standard 15 (AS-15) on Employee Benefits. A note to this effect was provided under Para 6.2(b) of the Notes to Accounts contained in the Annual Report for FY 2015-16. 2.2 Section 36(1) (iv) of the Act provides that any sum paid as an employer by way of contribution to an approved superannuation fund subject to limits prescribed for approving the said fund shall be allowed as a deduction while computing income under the head Profits & Gains from Business/Profession (Business Income") 2.3 As per Rule 87, the ordinary annual contribution by an employer to a fund in respect of any particular employee shall not exceed 27% of his salary for the year as reduced by employer's contribution to any provident fund in respect of the same employee for that year. 2.4 From a combined reading of Rule 87 and the definition of contribution, it may be inferred that Rule 87 seeks to limit only those contributions which are determined on an individual employee basis and credited to the individual account of each particular employee. 2.5 The Assessee Bank manages 2 types of schemes for the benefit of its employees: defined contribution scheme and defined benefit scheme. The contributions made by the Assessee Bank to employees who have opted for recognized provident fund (RPF) and national Pension Scheme (NPS) are under a defined contribution scheme" where the Bank makes a contribution of a defined % of the salary to the individual PF and/or NP'S accounts of the concerned employee. In such case, the quantum is certain and absolute. The approved superannuation fund managed by the Assessee bank is under a "defined benefit scheme". 2.6 ... Thus, the Assessee Bank submits that the contribution to approved superannuation fund is credited to the account of the Fund and not to the individual account of the employee. As such, the Assessee Bank submits that provisions of Rule 87 limiting the ordinary annual contribution to the approved superannuation fund to the extent of 27% of salary of each employee does not apply in respect of contributions made by the Assessee Bank of India 4 Bank to its approved superannuation fund determined based on an actuarial valuation. On the issue of allowability of provision for leave encashment: 3.6 In the instant case, the provision for leave salary is based on actuarial valuation, which is a scientific method of computing estimated liability towards leave encashment that the employees would be eligible to in future by considering various yardsticks. Since, this global provision is not "such sum payable in lieu of any leave at the credit of the employee" during the previous year, Section 43B(f) is not applicable in respect of such provision.”

After considering the submissions of the assessee, the Pr. CIT rejected the contentions of the assessee by observing as under : “8. The brief facts of the issue are that the assessee bank, in FY 2015-16 (AY 2016-17) contributed Rs. 1833 Crs. to its approved superannuation fund (Pension fund). It is submitted that this amount is arrived at on the basis of an actuarial valuation of pension liability as at 31.03.2016 and is as per Accounting Standard 15 (AS-15) on employee benefits. The mortality table used in such actuarial valuation was changed from LIC 94-96 to IALM 2006-08 resulting in an increase in the pension liability for the year. It is further submitted that this is a defined benefit obligation and is based upon actuarial valuation governed by AS-15. The assessee bank has charged this amount to the profit and loss account and indicated the same in notes to account at note no. 6.2 (b) as under : The Bank has decided to adopt IALM 2006-08 table instead of LIC 1994-96 which was followed till last year in respect of employees benefits. The impact of such change in accounting estimates to the extent of actuarial gain or loss, due to change in mortality table, has resulted in increase in operating expenses by Rs. 1391.25 with consequential increase in net loss by Rs.909.77 (net of tax impact for the year.

In the submissions filed by the assessee it is submitted that the claim of assessee is as per AS-15 and is allowable. Assessee has claimed that provisions of section 36(1) (iv) of the Act and Rule 87 of the Income Tax Rules are not applicable to them.

The assessee bank has submitted that provisions of section 36(1)(iv) and Rule 87 of the Act place restrictive limitations on the ordinary annual contributions to the individual accounts of the employees and do not apply to defined benefit schemes. It has placed reliance on the judgement of Hon'ble Bombay High Court in the case of CIT vs. Glaxo Smithkline Pharmaceuticals Ltd. (ITA No.2232/2011 dated 06.03.2013) as well as decision of TAT Hyderabad in the case of Andhra Bank (ITA No. 601 and 781). The submissions filed on behalf of the assessee along with the case laws relied upon are considered carefully. The facts about the issue are Bank of India 5 narrated in the paras above. The assessee is required to prepare its books of account as per the applicable Accounting Standards and accordingly it has applied AS-15 to these transactions and worked out the amount to be charged to profit and loss account. However, the deductibility of different expenses is not determined as per Accounting Standards but as per the provisions of the income Tax Act, 1961. The section 36(1) (iv) of the Act read with Rule 87 of Income Tax Rules prescribe certain conditions for claim of deductions on account of contributions to the Approved Superannuation Fund. The provisions of Rule 87 are reproduced as under: 87. The ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed 19/twenty-seven] per cent of his salary for each year as reduced by the employer's contribution, if any, to any provident fund (whether recognized or not) in respect of the same employee for that year.

However, the contributions made by the assessee to the approved superannuation funds have exceeded this limit by about ₹ 1421,52,71,424/- as pointed out by the Auditor in Tax Audit Report in form 3CD referred above. The qualifying remarks of the Auditor in the Audit Report are reproduced as under "In the absence of employee-wise data on contribution, the amount in excess of 27% has been worked out on overall salary and contribution to pension fund for all the employees including employees who have already superannuated which works out to R$.1421,52,71,424/- In the opinion of the management no disallowance is called for on the basis of the decision of Hon'ble Bombay High Court in the case of CIT vs. Glaxo Smithkline Pharmaceuticals Ltd. (ITA No. 2232/2011 dated 06.03.2013) as well as decision of ITAT Hyderabad in the case of Andhra Bank (ITA No. 601 and 781).

The assessee has submitted that it is not possible for it to allocate the contributions to the individual account of each of the employee and the Assessee Bank instead deposits the lump sum contribution to the approved superannuation fund. And the assessee has relied on the actuarial valuation to determine the amount of such contribution. Having held that the taxable income has to be computed as per the provisions of the Income Tax Act and Accounting Standards do not override the provisions of the Income Tax Act, it is again observed that actuarial valuation has served the purpose of determining the quantum of deposits to be made and not the amount to be claimed as deduction or not.

As per the remarks of the Auditor reproduced above, the Assessee Bank is claiming deduction principally on account of the judgement of Hon'ble Bombay High Court and decision of ITAT Hyderabad in the cases cited supra. The facts about the case of CIT vs. Glaxo Smithkline Pharmaceuticals Ltd are different from the facts of the case of the assessee. In the case cited, the Hon'ble Bombay High Court gave the decision in Bank of India 6 favour of the assessee chiefly relying on and following their own decision in the case of CIT Vs Western India Paper and paperboard Private Limited (189 IT 309). In the latter case the facts are that the company paid contributions to the provident fund of the directors and claimed it as deduction u/s 36(1) (iv) of the Act. On appeal at the stage of High Court, it was held to be not allowable by the Hon'ble Bombay High Court in the decision reported in 137 ITR 525. Thereafter, the Tribunal referred the question of law to the Hon'ble High Court as to whether the said expenditure, if not allowable u/s 36(1)(iv) of the Act is allowable u/s 37 of the Act. To this question, the Hon'ble High Court affirmed in the affirmative as below: 5. We are inclined to accept the assessee's contention that the assessee's claim under section 37 requires to be considered in view of the fact that the question was specifically left open by our Court in Western India Paper & Board Mills' case (supra) and in the judgment for the assessment year 1970-71 this question was not brought to the notice of the Court. We need hardly mention that so far as the question of allowance of the claim under section 36(1)(iv) is concerned, our Court's judgment in Western India Paper & Board's case (supra) is binding on us, following which we hold that the assessee's claim under section 36(1) (iv) was rightly rejected. However, so far as the claim under section 37 is concerned, we find ourselves in agreement with the Tribunal that if the assessee's contribution towards provident fund in respect of salaries paid to the managing directors is not to be treated as provident fund contributions, it has to be treated as some kind of payment in addition to the salaries paid to the managing directors. The pertinent question, therefore, would be whether such a payment which will include salaries as well as the contributions towards provident fund, is a business expenditure incurred by the assessee wholly and exclusively for the purposes of his business. In view of the Tribunal's observations broadly reproduced by us earlier, with which we are in agreement, we have no difficulty in holding that the payments made herein were exclusively for the purposes of the assessee's business and, therefore, represented an allowable deduction.

Thus, the Hon'ble Bombay High Court has allowed the said deduction claimed as contribution to provident fund as deduction on account of salary expenses. The facts in this case are clearly distinguishable from the ones in the case of assessee as below: i. The expenses in the case of Assessee Bank are determined as per actuarial valuation and in such valuation there is an element of uncertainty and guesswork and hence cannot be treated as salary expenses which is a very certain liability Bank of India 7 ii. In the case decided by Hon'ble High Court referred above, the amount was entirely claimed as deduction so this expenditure was not partly claimed u/s 36(1) (iv) and partly u/s 37 whereas the Assessee Bank is claiming the amount of Rs.1421.52 crores u/s 37 and rest of the amount u/s 36(1) (iv) of the Act. iii. In case of assessee the Auditor himself is qualifying the amount as not allowable. In view of this, reliance of the Assessee Bank on the judgement cited by them is not correct.

Further, such expenses are allowed as deductions u/s 37 of the Act, nature of which is NOT described in sections 30 to 36. The nature of expenditure of assessee viz. contribution to approved superannuation fund is specifically dealt with in section 36(1) (iv) of the Act and assessee is also claiming a part of it (i.e which is excessive of the limits in Rule 87 discussed above) as deduction under the said section.

The facts of the case in ITAT Hyderabad in the case of Andhra Bank (ITA No. 601 and 781 also differ from the case of the Assessee Bank in that those cases relate to the issue of Fringe Benefits Tax and not the deductions u/d 36(1) (iv) of tine Act.

In view of the observations made above, the submissions of the assessee on the merits of issues involved are not acceptable and the assessment is held to be erroneous in so far as it is prejudicial to the interests of revenue within the meaning of section 263 of the Act. Deduction of provision for leave encashment.

It is observed that the Tax Audit Report contained the observation that an amount of R 47,92,48,882/- on account of provision for Leave Encashment was not allowable u/s 43B. However, this amount was not found to be added to the business income of the assessee in the computation of income and the Assessing Officer also has not made any enquiries in this regard. During the proceedings of revision, the assessee submitted that such an amount is claimed as deductions after actuarial valuations and it is correctly claimed.

The deductions claimed by the assessee are squarely covered by section 43B(f) of the Act. The assessee has not made the payments of such amounts but claimed the same as provisions. Clause (f) of section 43B of the Act was challenged and the Hon'ble Calcutta High Court had struck off the said section in the case of Exide Industries Ltd. Vs Uol 292 TR 470. However, subsequently the decision of Calcutta High Court is stayed by the Hon'ble Supreme Court and the law as contained in section 43B (f) stands. Therefore, the Assessing Officer was required to carry out enquiries into this issue which he has not done and hence the assessment is rendered erroneous in so far as it is prejudicial to the interests of revenue.”

On the other hand, the Ld. DR relied on the order passed by the Pr. CIT u/s 263 of the Act.

We considered the rival submissions and material placed on record. While verifying assessment records, the Ld. Pr. CIT came through the audit objections raised by the statutory auditors of the company in which Bank of India 10 ITA No. 1642/M/2020 statutory auditors have flagged the expenditure claimed by the assessee on provisions of contribution to pension and provision of leave encashment. It is fact on record that the Assessing Officer has asked for several information through notice u/s 142(1) specifically on provision for pensions, the assessee has filed relevant information which was available on the published financial statement and assessee has specifically submitted a note on provision for pension explaining the necessity of creating the provisions based on the actuarial report. This has necessitated due to the fact that the assessee has moved from the existing LIC 94-96 mortality table to adopt IALM 2006-08 mortality table because of which the contribution to approved superannuation was short to the extent of Rs.1391.25 crores. Considering the fact on record, we observed that similar issue came up before Co-ordinate Bench of this Tribunal in Glaxo Smithkline Pharmaceuticals (supra) wherein, the Co-ordinate Bench held as under :