UNION BANK OF INDIA,MUMBAI vs. DCIT, LTU (2), MUMBAI

1 Aforesaid cross-appeals for Assessment Year (AY) 2010-11 assails the order of Ld. Commissioner of Income Tax (Appeals)-2, Mumbai [CIT(A)], Appeal No.CIT(A)-2/IT/10409/2018-19 dated 29/01/2019. The assessment for the year under consideration was framed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 147 on 29/12/2017. The original assessment was framed u/s 143(3) on 18/02/2013. Another assessment was framed u/s 143(3) r.w.s. 263 on 03/06/2015. The assessee is a nationalized bank carrying on the business of banking.

2 The grounds raised by the assessee read as under: - Reopening of Assessment

1 The CIT(A) failed to appreciate that, AO reopened the assessment after a period of 4 years from the end of the assessment year even when there was no failure on the part of appellant to fully and truly disclose all information required for completion of assessment. Recovery in respect of rural bad debts written off

1 The CIT(A) erred in holding that recovery from bad debts written off in respect of rural branches is chargeable to tax even when the bad debt written off was not allowed as deduction on the ground that deduction u/s 36(1)(viia) is allowed without appreciating that the bad debts written off is already reduced from the said provision instead of being claimed as deduction and taxing the recovery would amount to taxing the amount twice. Disallowance u/s 40 (a)(ia)

1 The CIT(A) erred in confirming the disallowance u/s 40(a)(ia) without appreciating that TDS is automatically deducted by system and unless there were specific reasons such as exemption certificate etc., question of non-deduction will not arise and the evidence to satisfaction of AO could not be given within a short period due to considerable lapse of time of more than 8 years.

We have carefully heard the rival submissions and perused relevant material on record including judicial pronouncement as relied upon during the course of hearing. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.

Briefly stated, the assessment for the year under consideration was reopened as per due process of law vide notice u/s 148 dated 29/03/2017. During the course of assessment proceedings, the reasons for reopening were duly supplied to the assessee, which has also been extracted in para-2 of the assessment order passed u/s 143(3) r.w.s.

It is evident that the reassessment proceedings were triggered upon receipt of information from TDS Wing, Nagpur that during the course of survey on one of the branches of the assessee, Tax at source (TDS) was not deducted in certain cases where interest credited / paid exceeded the basic exemption limit. The failure to do so would attract disallowance of interest expenditure u/s 40(a)(ia) as done in AY 2009-10. The other aspects which was to be examined during reassessment proceedings were- (i) Deduction of Rs.250.44 Lacs as claimed by assessee towards recovery in respect of accounts written-off of rural branches; (ii) Adjustment of Book Profits on account of revaluation of investment.

It was noted by Ld. AO that the assessee had not made any relevant submissions in these respects during scrutiny assessment proceeding u/s 143(3). After going through assessee’s submissions / explanations on these issues, certain additions / adjustments were made while framing the assessment. The following issues form subject matter of cross-appeals before us: -

1 Recovery of Bad Debts of Rural Branches The assessee claimed deduction towards recovery in respect of accounts written-off of rural branches. The reasoning was that bad debts written-off relating to rural branches were not claimed as deduction in the earlier years since the credit balance in the provision for bad and doubtful debts relating to rural branches had always been more than the bad debts written off relating to rural branches. The recovery made during the year in respect of bad debts written-off would be taxable u/s 41(4) only if a deduction was allowed u/s 36(1)(vii). Where no deduction was allowed u/s 36(1)(vii) in respect of bad debts written off, the question of taxing the recoveries made during the years in respect of such write- off will not arise. Since the recovery so made during the year was credited in Profit & Loss Account, it was claimed as deduction in the statement of total income. However, observing that assessee being a bank, 10% of aggregate average advances made by rural branches of such bank would be allowed as deduction every year under specific provisions of Sec.36(1)(viia) towards provision for bad and doubtful debts and thereby a reserve is created to set-off the bad debts in respect of rural branches. Wherever there is bad debts and written-off, it would be debited to provision for bad and doubtful debts created u/s 36(1)(viia) of the Act.

2 Disallowance u/s 40(a)(ia) During survey on one of the branches of the assessee, it was found that the assessee did not deduct TDS in certain cases where interest credited / paid exceeded basic exemption limit. The failure to do so would attract disallowance of interest expenditure u/s 40(a)(ia). Upon perusal of details furnished by the assessee, it was found that there was non-deduction of TDS on interest of Rs.7.72 Lacs and short deduction of TDS on interest of Rs.5.38 Lacs. Accordingly, this disallowance was worked out at Rs.13.10 Lacs.

3 Loss on revaluation of investment It was observed by Ld. AO that while preparing Profit & Loss Account as per Schedule-VI of the Companies Act, the assessee credited an amount of Rs.718.64 Crores on account of ‘excess provision for depreciation on investment reversed’ and debited the Profit & Loss Account with an amount of Rs.601.30 Crores on account of ‘revaluation of investment. However, the Book Profits were reduced by Rs.718.64 Crores as against the fact that the net profit was actually credited by Rs.117.34 Crores only i.e. the differential of Rs.718.64 Crores & Rs.601.30 Crores. Therefore, Book Profits u/s 115JB was required to be increased by the extent of Union Bank of India Assessment Year: 2010-11 differential of Rs.601.30 Crores. Accordingly, Book Profits were recomputed and increased to the extent of Rs.601.30 Crores. Proceedings before Ld. CIT(A) & our adjudication

Aggrieved as aforesaid, the assessee assailed the assessment so framed with partial success before Ld. CIT(A) vide impugned order dated 29/01/2019. On the legal issue of reopening, Ld.CIT(A) rejected assessee’s plea by observing that the reassessment proceedings were reopened pursuant to receipt of specific information from TDS wing regarding non-deduction of TDS in certain cases. Based on this information, the case was reopened and examined in AY 2009-10 and disallowance was made u/s 40(a)(ia). Thus, it was a clear case of receipt of tangible information which established that there was failure on the part of assessee to make true and full disclosure of all material facts necessary for assessment. Once reopening was done on a valid ground, other issues which show underassessment or escapement of income could also be considered by Ld. AO and therefore the other grounds of reopening the case, as recorded in the reasons, were also held to be valid. Before us, the Ld. AR has also raised similar grounds and challenged the validity of juri iction acquired by Ld. AO for reopening the case. It has been submitted that the assessment was opened after 4 years from the end of relevant assessment year and there was no failure on the part of the assessee to fully and truly disclose all information required for completion of assessment. However, we find that TDS survey carried out by the department against the assessee was subsequent development. The survey findings revealed certain TDS default on the part of the Union Bank of India Assessment Year: 2010-11 assessee which would require disallowance u/s 40(a)(ia). At the stage of formation of belief, nothing more was required. In our opinion, sufficiency of reason was not a sine-qua-non to reopen assessee’s case rather prima-facie opinion of escapement or underassessment of income was required to be formed at this stage. There was no requirement under law to establish that income, in fact, escaped assessment before triggering reassessment proceedings against the assessee as held by Hon’ble Supreme Court in Raymond Woollen Mills Ltd. v. ITO [236 ITR 34]. In the present case, specific tangible information came into the possession of Ld. AO which revealed possible escapement of income in the hands of the assessee. Nothing more, in our opinion, was required at this stage. Undisputedly, once the case was reopened, the other issues of underassessment or escapement of income could also be examined by Ld. AO. The Ld. AR has also pleaded that objections filed by the assessee were not disposed-off. However, the said plea has also no substance since the assessee, in response to notice u/.s 148, vide letter dated 04/09/2017, merely submitted that it had fully & truly disclosed all the particulars required for the assessment at the time of filing of return of income and at the time of various hearings for assessment u/s 143(3) whereas it is notable that case has been reopened on the basis of subsequent receipt of tangible information. Therefore, we concur with the view of Ld. CIT(A), in this regard and dismiss ground no.1 raised by the assessee.

On the issue of recovery of bad-debts of rural branches, the assessee placed reliance on the decision of Bangalore Tribunal in State Bank of Mysore (33 SOT 7). However, the said decision was Union Bank of India Assessment Year: 2010-11 distinguished by Ld. CIT(A) on the ground that the effect of Section 36(2)(v) was not considered in the stated decision. Regarding assessee’s reliance on appellate order in its own case for AY 2014-15, it was observed that though the issue was decided in assessee’s favor but with a direction to the Ld. AO to verify certain facts in terms of cited decision of State Bank of Mysore (33 SOT 7). Since the said decision was held to be not applicable in this year, the reasoning of Ld. AO in making the impugned additions was upheld. Aggrieved, the assessee is in further appeal before us by way of ground no.

Before us, it is admitted position that similar issue arose before Tribunal in assessee’s own case for AY 2008-09, ITA Nos.3644/Mum/2016 & 4563/Mum/2016 in recent order dated 03/02/2020 wherein the matter was decided in assessee’s favor subject to certain verification of by Ld. AO. The adjudication of coordinate bench read as under: -

We noted from the above arguments of both the sides and case law cited by the parties, that the issue is squarely covered by a decision of the Bangalore Bench of the Tribunal in the case of State Bank of Mysore Vs. DCIT [2009] 33 SOT 7 (Bangalore), now merged with assessee. We noted that the Tribunal in the case of State Bank of Mysore (supra) narrated the facts and the facts in the present case are exactly the same as in the case of State Bank of Mysore. In the case of State Bank of Mysore (supra), the assessee had claimed deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act. Accordingly, the Bangalore Tribunal has held that section 41(4) of the Act cannot be invoked. Sections 41(1), 41(2), 41(3) and 41(4) of the Act operate in different spheres. Each of the sub-sections to section 41 of the Act deals with different and distinct circumstances. Each of the sub-sections deals with different and distinct topics and one cannot read recoupment under one sub-section into another. We have considered the decision relied on in this regard of Supreme Court in the case of Nectar Beverages (P.) Ltd. vs. DCIT [2009] 314 ITR 314 (SC) wherein the Supreme Court has dealt with the specific section 41(2) of the Act for taxing balancing charge versus taxing the same under section 41(1) of the Act and has concluded that section 41(1) of the Act shall not be applicable.

As the aspects of bad and doubtful debts is dealt with specifically under section 41(4) of the Act, as laid down by the Supreme court in Nectar Beverages (supra), section 41(1) of the Act is not applicable in case of the assessee. Further, the primary condition to be satisfied for taxing an amount as deemed income under Union Bank of India Assessment Year: 2010-11 section 41(1) of the Act is that a deduction/allowance should have been claimed by the assessee in respect of a loss, expenditure or trading liability. A deduction under section 36(1)(viia) of the Act is not for a loss, expenditure or trading liability, but for a provision for bad and doubtful debts. We noted that the learned CIT Departmental Representative had raised a contention that the CIT(A) and AO have not perused the details and, hence, the matter may be restored back which was opposed. In relation to the above contention, without prejudice to the assessee’s objection in the event the matter is proposed to be remanded back to the AO, a direction may be given to the AO to delete the addition, if the recovery of the amount is in respect of a write off claimed and allowed as a deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act in the earlier years.

In view of the above discussion, we are of the view that principally the assessee is entitled for claim of deduction under section 36(1)(viia) of the Act, which has rightly been claimed. The assessee has not made any claim under section 36(1)(vii) of the Act in this regard. Hence, we allow the claim of the assessee but the matter is restored back to the file of the AO for verification purposes. The issue of assessee’s appeal is allowed for statistical purposes.

The disallowance u/s 40(a)(ia) was confirmed by Ld. CIT(A) since the assessee was not able to explain the reason for non-deduction of tax at source with proper evidences. Aggrieved, the assessee is in further appeal before us by way of ground no.

It has been submitted before us that evidence to the satisfaction of Ld. AO for reasons of non-deduction tax such as Form 15G/15H etc. could not be furnished since considerable period of time had lapsed. The Ld. AR submitted that tax was automatically deducted by the systems and hence the chances of non-deduction without adequate reasons were remote. Upon due consideration of factual matrix, the bench deem it fit to grant another opportunity to the assessee to furnish requisite evidences before

The sole subject matter of revenue’s appeal is applicability of Sec.115JB to the assessee Bank for the year under consideration. Regarding adjustment of Book Profits u/s 115JB, relying upon Tribunal decision in assessee’s own case for AY 2007-08 as well as in AY 2010- 11, Ld. CIT(A) held that the provisions of Section 115JB were not applicable to the assessee bank. Aggrieved, the revenue is in further appeal before us. We find that the issue of applicability of Section 115JB (prior to its amendment by virtue of Finance Act, 2012) to Banking Company governed by the provisions of Banking Regulation Act, 1949 is squarely covered in assessee’s favor by the decision of Hon’ble High Court of Bombay in assessee’s own case for AY 2005-06 which is reported at 105 Taxmann.com 253 dated 16/04/2019. A copy of the same is on record. The Ld. DR is unable to controvert the same. Therefore, no fault could be found in the impugned order, in this regard.

The revenue’s appeal stand dismissed. The assessee’s appeal stand partly allowed for statistical purposes.