ACIT CIRCLE 3, LUCKNOW vs. RAJDHANI NAGAR SAHKARI BANK LTD, LUCKNOW

It was submitted that when this amount has already been included in the business profit considered for assessment purposes, this amounted to a double addition. With regard to addition of Rs.41,00,431/- on account of late deposit of employees share of provident fund, it was submitted that the assessee had applied for registration with Provident Fund Commissioner on 05.08.2015 and after the registration with the Commissioner of Provident Fund, the entire amount of employees contribution had been transferred to the Provident Fund Commissioner on 29.11.2016. It was submitted that in view of the above, the deduction should be allowed and it was pointed out that ITAT ‘A’ Bench, Lucknow in ITA. 3 No.696/LKW/2015 in the A.Y. 2010-11, had allowed the deduction to the assessee. On the issue of not allowing of payment towards leave encashment, it was submitted that actual payment of Rs.2,05,225/- had been made to Mr M.K. Srivastava and Mr P.C. Joshi and the same should be allowed u/s 43B of the Act out of the total disallowance of Rs.20,00,000/-. In support of the same, copy of general ledger account was submitted. The Ld. CIT(A), after considering the issues, held that since the assessee had not furnished any revised return, there was no infirmity in the order of the AO in making addition of Rs.30,00,000/- on account of provision for income tax. Furthermore, regarding the addition made on account of failure to deposit employees contribution towards provident fund on time, the Ld. CIT(A) relying upon judgment of the Hon'ble Supreme Court in the case of Checkmate Services P. Ltd vs CIT (Civil Appeal No.2833 of 2016 dated 12.10.2022), rejected the appeal of the assessee. With regard to addition of Rs.2,05,225/- on account of addition of leave encashment already paid, the Ld. CIT(A) held that since the return had not been revised, therefore, there was no infirmity in the order of the AO.

We have duly considered the facts and circumstances of the case. It is observed that while the profit and loss account of income from business and profession as reflected in the profit and loss account was Rs.1,18,49,615.30, the total amount of profit gain of business and profession, as disclosed in the return of income of the assessee for the assessment year 2015-16 as per column A-36 of Schedule -BP was Rs.1,41,71,819/-. The Assessing Officer has taken this figure as the starting point for computation of the assessee’s income. This figure is inclusive of the provision for income tax of Rs.30,00,000/-. Accordingly, any further adding of the amount, would amount to a double addition and consequently double taxation of the same amount. Therefore, since the Assessing Officer had already adopted the higher figure as disclosed in the return for the purposes of computation and not the profit as reflected in the profit and loss account, there was no occasion for making any addition on this account. The addition is therefore, deleted and ground no. 1 is allowed. With regard to ground no. 2, we note that the payment on account of employees share of provident fund has admittedly not been made within the time lines specified under the relevant act. Accordingly, we are in agreement with the decision of the Ld. CIT(A) to confirm the disallowance by following the order of the Hon'ble Supreme Court in the case of Checkmate Services P. Ltd vs CIT (supra). However, the assessee has pointed out, that by mistake it submitted a wrong figure during the course of assessment, as a result of which total disallowance that has been made, was more than the actual amount of employees contribution debited in P&L account. Accordingly, we restore this matter back to the file of the Assessing Officer to determine the actual amount of disallowance with regard to expenditure claimed. Ground no. 2 is accordingly disallowed while ground no. 3 is 6 partly allowed as above. With regard to ground no. 4, we observe that if assessee submitted that it had paid a sum of Rs.2,05,225/- on account of leave encashment during the year, then the same would be allowable to it as per law. The Ld. CIT(A) was not correct in refusing the entertain the plea on the grounds that the revised return had not been filed, since there was no restriction on the powers of the appellate authority to entertain a fresh claim in terms of decision of the Hon'ble Supreme Court in the case of Goetze (India) Limited vs CIT reported in 284 ITR 323. As pointed out by the assessee, the Jurisdictional High Court in the case of Smt Rajrani Gulati vs CIT (supra) has pointed out that the aforesaid case does not place any restriction on the powers of the appellate authority, and therefore the ground should have been entertained for decision on merits. Accordingly, we restore the matter back to the file of the Assessing Officer to consider the evidence placed before him and take a decision on the merits. Ground no. 4, 5 & 6 are allowed for statistical purposes. Ground no. 7 is general in nature and does not require any adjudication. In the result, this appeal is partly allowed.

The grounds of appeal preferred by the Revenue in are as under: - “(1) The Ld. CIT(A), NFAC has erred in law and on facts in deleting the addition of Rs. 2,23,54,660/- claimed by the assessee as exempt income u/s 10(15) of the IT Act on the basis of audited profit and loss account, balance sheet and income tax return.”

The facts of the case are that the Assessing Officer noted that the assessee had claimed the following exempt income (i) Dividend on investment (exempt u/s 10(35) of Rs.30,09.485) (ii) Dividend on investment (exempt u/s 10(34) Rs.15,300/-) and (iii) Profit on sale of GOI bonds (exempt u/s 10(38) Rs.3,55,000/-). He accordingly issued a show cause notice to the assessee asking why disallowances should not be made on account of Section 14A of the Act. In response, the assessee submitted that the investment in shares was made out of its own fund. The assessee had sufficient reserves and surplus of Rs.15,99,55,165/-. The dividend income of Rs.96,370/- was received on account of old shares and no expenses had been incurred in the collection of dividend income. The Ld. AO considered the reply of the assessee but did not find the same to be tenable. On perusing the balance-sheet and the profit and loss account, he noted that the assessee had earned income of Rs.33,79,785/- which did not form part of the total income in the relevant assessment year and assessee had invested a sum of Rs.13,75,00,000/- in non SLR investment during the course of year, which was not a part of total income for taxable income purposes. The assessee had not apportioned his indirect expenses between taxable and non taxable income of his business. The Assessing Officer observed that even if the assessee had not incurred any direct expenses in relation to the income which did not form a part of total income for taxable purposes, yet the assessee was liable to fall under the ambit of provisions of Section 14A of the Act as it had not apportioned its indirect expenses between taxable and non-taxable income. He therefore recorded his satisfaction that the provisions of Section 14A of the Act shall apply. The Ld. AO further pointed out that the provision of Section 14A(3) of the Act make it clear that the provision of Section 14A(2) of the Act shall apply even in cases where an assessee claims that no expenditure, has been incurred by him in relation to income which does not form part of the total income under this Act and Rule 8D(2) provided the methodology to determine the amount of expenditure in relation to income not includable in total income. Therefore, he determined the disallowable expenditure as per the provisions of Rule 8D(2)(ii) at Rs.58,09,459/-. Thereafter, relying upon the circular of the CBDT and the decision of the Hon'ble ITAT Amritsar Bench in the case of M/s. Lally Motors Pvt Ltd in the Ld. AO made an addition of Rs.58,09,459/- on this account. Going further into the computation of income and profit and loss account, the AO found the assessee had claimed amount of Rs.2,23,54,660/- as exempt on account of interest on GOI Bonds u/s 10(15). He, therefore, asked the assessee to submit necessary evidences in support of claim. In response, the assessee revised its computation of income by reversing the exemption claimed and therefore the Assessing Officer disallowed this claim and added back a sum of Rs.2,23,54,660/-.

Aggrieved by these additions, the assessee went in appeal before the Ld. CIT(A). It was submitted that due to some confusion and wrong understanding, the Ld. AO had stated in the body of the assessment order that the bank had claimed exempt income to the extent of Rs.33,79,785/-. However, it was submitted that they had not claimed any exempt income u/s 10(35), u/s 10(34) or u/s 10(38) of the Act 9 in the income tax return. In support of this contention, it submitted the audited balance-sheet and the profit and loss account and copy of income tax return filed through e-filing. It is also submitted the details of non SLR investment amounting to Rs.31,01,75,690.00 & copy of general ledger of the investment. It was submitted that as per this ledger account, the interest received was Rs.58,09,459/- and the same had been considered as taxable income under the head, “other income” in schedule – 14”. It was further submitted that the assessee had not received any dividend or exempt income on non SLR investment during A.Y. 2016-17 as all the Investment in Mutual Funds were interest Oriented and not Dividend Oriented and interest on these investments, which were shown at pages 41 to 44 of the P.B., were not covered in under provisions of section 14A of the Act. It was further submitted that the assessee had total interest fee fund of Rs.25,20,31,732/- and therefore, the investment made in non-SLR Investment of Rs.13,75,00,000/-, was entirely out of its own resources and therefore there was no reason for making disallowance in accordance with provisions of Section 14A read with Rule 8D(2)(i) or Rule 8D(2)(ii) of the Rules. Furthermore, it was submitted that it was settled principle that where the assessee bank had mixed funds and investments were made in mutual funds on which dividend exempted and assessee has much more interest free fund, then no disallowance could be made as per Rule 8D(ii) of the Rules relying upon the decision of the Hon'ble Supreme Court in the case of PCIT vs Sintex Industries Ltd (2018) 93 taxmann.com 24 (SC) for this preposition. Reliance was also placed upon the decisions of the Hon'ble Delhi High Court in the case of CIT vs Taikisha Engineering India Ltd (2015) 54 taxmann.com 109 (Delhi), the Hon'ble Bombay High Court in the case of HDFC Bank Ltd vs DCIT 67 taxmann.com 42 the decision of ITAT Delhi Bench in the case of ACIT vs NHPC Ltd (2015) 53 taxmann.com 301, M/s. Hero Fin Corp Ltd vs DCIT, Circle-12(1) (Delhi Trib) and M/s. Ceat Limited vs ACIT, Range- 6(2) in support of this preposition. The Ld. CIT(A) considered the submissions of the assessee but did not find the same to be acceptable. He said that sub-clause (2) of Section 14A clearly stated that if the Assessing Officer was not satisfied with 10 correctness of the claim of the assessee, he could determine the expenditure with regard to earning of exempt income as per method prescribed by the notification dated 24.02.2018 by the CBDT and that the assessee had not be able to offer any cogent reason for non disallowance of the expenditure u/s 14A of the Act. Therefore, he held that the decision of the Ld. AO was in accordance with law and he confirmed the addition made by him. With regard to addition of Rs.2,23,54,660/-, the assessee submitted that in the audited profit and loss account and in the return of income, it had not claimed exemption u/s 2(15) of the Act in respect of GOI Bonds of Rs.2,23,54,660/-. The Ld. AO had incorrectly held that the said deduction had been claimed in the return as well as the balance-sheet. However the assessee submitted the return and the balance-sheet to the Ld. CIT(A) to demonstrate that it had not claimed the deductions. The Ld. CIT(A) observed that there was merits in the contention of the assessee as he could neither find any claims of expenditure of Rs.2,23,54,660/- under the head exemption on account of interest income on Government of India Bond nor could he find it deducted from income declared from profit and gain of the business and profession, which was computed at a loss of Rs.1,24,81,747/-. Accordingly, he granted relief to the assessee in this regard.

Both the assessee and Revenue are aggrieved with this order of the Ld. CIT(A). The assessee submitted that the Ld. CIT(A) had erred in fact in upholding the disallowance of Rs.58,09,459/- u/s 14A of the Act without appreciating that the assessee had not shown any exempt income in the return and without appreciating that the investments made in non SLR investment had been made out of the assessee’s own funds. It was further submitted that it had been judicially held, that in the absence of exempt income, the CBDT circular cannot override the express provisions of Section 14A of the Act and therefore the disallowance upheld solely on the basis of the said circular, was not valid as per law. It was submitted that authorities below had failed to appreciate, that the assessee had not claimed any exempt income in the income tax return. It was also submitted that the assessee had not made investments on which dividend income was earned. Thus, in the absence 11 Section 14A of the Act were not applicable. It was submitted that the total investment as on 31.03.2016 as per the balance-sheet were Rs.46,79,70,619/-. This included GOI Bonds of Rs.33,175,690/-, on which interest was received, Uttar Bharat Nagariya Sahkari Bank of Rs.2,55,000/-, on which interest was received and investment in non SLR on which also interest was received. In support of its contentions, it had submitted copy of ledger account of interest on non SLR Investment. Since the assessee did not have any dividend income and all the interest income had been offered to tax in audited profit and loss account under the head “interest earned” and under the heading “other income”, as business income there was no question of any disallowance u/s 14A of the Act. The assessee relied upon a number of decisions made by various Courts as under: - 1 (2019) 112 taxmann.com 322 PCIT-2 vs Caraf Builders & Contructions (P.) Ltd 2 (2019) 106 taxmann.com 181 (SC) PCIT vs GVK Project and Technical Services Ltd 3 (2018) 95 taxmann.com 250 (SC) CIT (Central) 1 vs Chettinad Logistics (P.) Ltd

It was further submitted that the Ld. CIT(A) had erred in confirming the addition without appreciating that the CBDT Circular No. 5 of 2014 had been examined by Hon'ble Delhi High Court and Hon'ble High Court held that in the absence of exempted income, CBDT Circular cannot override the express provisions of Section 14A of the Act r.w.r. 8D of the Rules. Reliance was placed on the decision in the case of PCIT vs Amadeus India (P.) Ltd (2022) 145 taxmann.com 311 and PCIT vs IL & FS Energy Development Company Ltd (2017) 84 taxmann.com 186 (Delhi). With regard to ground no. 3, it was submitted that the said deduction of Rs.16,43,987/- being fall in value of securities computed as per RBI Rule and allowable as per CBDT instruction No. 17 dated 26.11.2008, had not been claimed before the AO but was claimed for the first time before the Ld. CIT(A). It was submitted that the failure to claim the said deduction was a mistake and was unintentional. Reliance was placed on Circular No. 14 (XL-35) of 1955, dated 12 11.04.1955 wherein tax authorities were enjoined to help the assessee’s claiming and securing reliefs which were allowable. It was submitted that the Hon'ble Allahabad High Court in the case of Smt Rajrani Gulati vs CIT reported in 346 ITR 543 (All) had held that restriction imposed by the Hon'ble Supreme Court in the case of Goetze (India) Ltd (supra) did not apply to the appellate authorities. Reliance was also placed on the judgment of the High Court of Bombay in the case of Sesa Goa Ltd vs JCIT (2020) 117 taxmann.com 96 (Bom) and it was prayed that the deduction may kindly be allowed to it. It was submitted that the provision for fall in value of securities was actually the amortization of premium paid on the investment, as they were purchased at a price more than its face value. Therefore, the premium paid, had to be amortized over the period held to maturity of the investment. The assessee quoted from the CBDT Instruction No. 17, dated 26.11.2008 para no. (vii) and placed reliance on the decision of Hon'ble Karnataka High Court in the case of CIT & anr vs ING VYSYA Bank Limited 186 DTR 193. Other cases, on which reliance were placed were the decisions of the Bangalore Tribunal in the case of Canara Bank vs CIT (2016) 68 Taxmann.com 128 (Bang Trib) and Capital Local Area Bank Ltd vs ACIT (2017) 82 taxmann.com 387 (Amritsar Trib). On the deletion of Rs.2,23,54,660/- by the Ld. CIT(A), which had been raised by the Revenue in it was submitted that the assessee bank had never claimed exemption u/s 2(15) of the Act and the only adjustment made to the profit and loss account, while preparing the return of income, was on account depreciation. The net taxable income was Rs. 76,15,298/-. Since no such claim of expenditure had been made, it could not be disallowed by the AO. Hence, the Ld. CIT(A) was justified in deleting the same.

On the other hand, Shri Sanjeev Krishna Sharma, Ld. Departmental Representative on behalf of the Revenue submitted that the AO had passed a reasoned and speaking order and relying upon the CBDT Circular and the decision of the Hon'ble Amritsar Bench in the case of M/s. Lally Motors Pvt Ltd in to hold that the disallowance u/s 14A of the Act was required to 13 be made. Since the assessee clearly had exempt income and had been making investments in bonds that would be exempt income, the provision of the Circular applied and the disallowance should be confirmed. With regard to the claim of deduction on account of fall in value securities it was submitted that the same was only a provision and therefore should not be allowed. Furthermore, it had not been claimed by the assessee, by way of a revised return. On the issue of disallowance of Rs.2,23,54,660/-, it was submitted that the Assessing Officer had recorded that assessee had claimed the same amount as exempt interest on GOI Bonds u/s 10(15) and the assessee had revised its computation of income by reversing of exemption claimed. Hence, since the claim of the assessee was not in accordance with law, it had been disallowed. The Ld. Sr. DR prayed that the Ld. CIT(A) should not have deleted the said addition.

We have heard duly considered the facts of the case. With regard to the disallowance u/s 14A of the Act, we observe that the assessee has submitted that it did not have any exempt income or had not made any investment that had the potential to yield exempt income. All the income that was being generated out of the investments made by the assessee were on interest account and were being offered to tax as income either under “interest income” or under “other income”. The Assessing Officer had made the addition on a mistaken assumption of exempt income being earned by the assessee. We observe that this point had been brought to the knowledge of the Ld. CIT(A) and the Ld. CIT(A) has not considered this matter at all. He has simply confirmed the disallowance on account of the powers vested in the AO as per Section 14A(2) of the Act. However, the Ld. CIT(A) had never examined as to whether the satisfaction of the AO for invoking Section 14A and accordingly Rule 8D, was based upon the correct appreciation of the facts or not. Accordingly, the order of the Ld. CIT(A) is clearly bad in law and the fact of whether exempt income was earned or not in the form of dividend, is required to be verified by the Assessing Officer in the light of the assessee’s submissions that only interest income had been earned and offered for taxation. Accordingly, we restore this 14 Assessing Officer with a direction to re-examine the matter in the light of the submissions made by the assessee and accordingly ground nos. 1 & 2 are allowed for statistical purposes. Ground no. 3 of relates to deduction of Rs.16,43,987/- with regard to fall in value of securities. It is an allowable expenditure as per RBI Rules and as per CBDT Instruction No.17 dated 26.11.2008. A similar issue had already been decided by us in vide our order dated 30.04.2025, wherein in paragraph no. 6 of the said order we have allowed this deduction. However, we observe that this deduction had claimed for the first time before the Ld. CIT(A) and the Ld. CIT(A) in the said order does not appear to have discussed or decided the issue at all. In the circumstances, we deem it appropriate to restore this matter back to the file of the Assessing Officer, with a direction to the Ld. AO to consider the claim in the light of the CBDT Instruction No. 17 dated 26.11.2008 and the case laws cited by the assessee before us and thereafter pass a fresh assessment order in accordance with law. Ground No. 3 is accordingly allowed for statistical purposes. Ground No. 4 relates to the applicability of the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Limited (supra). As this is a matter already decided by various courts, a decision is not required in the same at our end. Similarly, ground no. 5 is general in nature and therefore does not require a decision. In the result, the appeal of the assessee is allowed for statistical purposes.

With regard to the Departmental Appeal, the Ld. Sr. DR has not pointed out how the deduction of Rs.2,23,54,660/- was claimed by the assessee. The Ld. CIT(A) has reproduced a copy of the return filed by the assessee in his order and pointed out his inability to see that any exemption had been claimed on this account. The Ld. DR has conceded that no exemption has been claimed on this amount u/s 2(15) of the Act. The Ld. Sr. DR has also not been able to point out how the amount has been claimed as a deduction. Accordingly, we confirm the order of the Ld. CIT(A) in this regard and dismiss the appeal of the Department. In the result, the appeal of the Revenue is dismissed. 15 relates to the A.Y. 2017-18. The grounds of appeal

We have heard duly considered the facts and circumstances of the case. As in we observe that the Ld. CIT(A) was presented with all the facts by assessee, that the assessee did not earn any exempt income and that all the investments that were made by assessee were of nature that yielded taxable income. The Ld. CIT(A) has decided the matter by pointing out that the AO had expressed his satisfaction of the need to invoke Rule 14A but has not considered whether this satisfaction of the AO was based upon the correct appreciation of the facts. Accordingly, we restore the matter of addition of Rs.61,78,920/- u/s 14A of Act, back to the file of the Ld. AO, so that the fact of whether the investments made by the assessee yielded taxable income or exempt income may be re-examined with reference to the submissions made by the assessee and the case laws cited by it before us. Accordingly, the ground no. 1 & 2 are allowed for statistical purposes. Similarly, it has already been pointed out in that amortization of expenses for the period remaining to maturity in respect of investments that were held to maturity are allowable as deduction as per RBI guidelines dated 16.10.2011 and CBDT Instruction No. 17 dated 26.11.2008 para (vii). We are observe that the Ld. AR has cited several case laws in support of its claim of deduction. However, the deduction has been claimed for the first time before the Ld. CIT(A), who has not examined the matter on the ground that the supporting evidence has not been furnished. It has been already observed by us in that the said expenditure, is in principle allowable to the assessee in terms of CBDT instruction and the case laws cited by the assessee. However, since the AO has not had occasion to examine the quantum of deduction claimed, we restore the matter back to the file of Ld. AO with a direction to the assessee to present necessary details before the AO, so that he may consider the same and pass a fresh order in accordance with law. Accordingly, ground no. 3 is also allowed for statistical purposes. With regard to ground no. 5, it is observed that the Ld. CIT(A) and the Ld. AO have failed to appreciate that the expenses paid to the clearing house by a bank for clearing are deductable expenses related to the business of banking. Accordingly, on consideration of the arguments furnished by the assessee, the disallowance of Rs.81,581/- is quashed. Ground no. 5 is accordingly allowed. We also observe that the depreciation of Rs.2,16,565/- have been denied to the assessee because it has not presented the necessary details before the Assessing Officer, even though, the additions stood reflected in its audit report. Those vouchers have now been presented before us in the paper book. As the Ld. AO has not had occasion to see them, we restore the matter back to the file of the Ld. AO for consideration and to thereafter allow the depreciation as per law. 20