DENA BANK,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX 2, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “D”, BENCH MUMBAI BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAVISH SOOD, JUDICIAL MEMBER ITA No.2159/Mum/2018 (Assessment Year: 2014-15) Dena Bank Vs. PCIT-2 Room No.344, 3rd Floor Accounts Department Dena Bank Building Aaykar Bhawan 2nd Floor M.K.Road 17/B, Horniman Circle Mumbai-400 020 Fort, Mumbai-400 023 PAN/GIR No.AAACD4249B Appellant) .. Respondent)

Revenue by Shri Manoj Kumar Singh & Shri Kumar Padmapani Bora, DR’s Assessee by Shri S.Ananthan, CA & Mrs. Lalitha Rameswaran, CA Date of Hearing 13/12/2019 Date of Pronouncement 23/01/2020 आदेश / O R D E R आदेश आदेश आदेश PER G.MANJUNATHA (A.M):

This appeal filed by the assessee is directed against order of the Ld. Principle Commissioner of Income Tax (PCIT)–02, Mumbai, dated 27/02/2018 u/s 263 of the I.T.Act, 1961 for the Assessment Year 2014-15.

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1.1. The appellants submit that the order of the AO is not erroneous and is not prejudicial to the interest of the Revenue. Your appellants therefore submit that the order of the Pr. CIT be quashed. 1.2. The learned Pr. CIT failed to appreciate the fact that in respect of all the issues, the learned Assessing Officer has adopted one of the possible views. 2. The learned Pr. CIT erred in holding that the amount of Rs. 402,26,72,141/- being the bad debts claim of the Appellant bank u/s 36(1)(vii) is not allowable. 2.1. The learned Pr. CIT failed to appreciate the fact that the 36(1)(viia)(a) is applicable only in respect of rural debts. 2.2. The learned Pr. CIT erred in not considering the binding decision of Hon'ble Supreme Court in the Catholic Syrian Bank [2012] 343 ITR 270 (SC). 2.3. Without prejudice to the above, the learned Pr. CIT erred in holding that the opening balance in the provision account as at 31-03-2013 is for rural advances only. 2.4. Without prejudice to the above, the learned Pr. CIT failed to appreciate the fact that the learned Assessing Officer allowed the deduction after verifying the submissions made by the Appellant bank. 3. The learned Pr. CIT erred in holding that amount of contribution of Rs. 54,00,00,000/-made in advance to Gratuity Fund is not an allowable deduction. 3.1. The learned Pr. CIT failed to appreciate the fact that the deduction in respect of Contribution to Gratuity Fund is eligible only on payment basis as per the provisions of section 43B. 3.2. The learned Pr. CIT erred in interpreting the word otherwise allowable to include advance payment. 4. The learned Pr. CIT erred in holding that amount of Rs. 2,00,00,000/- paid penalty is not an allowable deduction. 4.1. The learned Pr. CIT failed to appreciate the fact that the amount imposed by RBl is not towards violation of any law. 5. The learned Pr CIT erred in holding that amount of Rs, 96,00,00,000/- being the provision for Wage Arrears is not an allowable deduction. 5.1. The learned Pr. CIT failed to appreciate the fact that the wage arrears provision is towards ascertained liability. 5.2. The learned Pr. CIT erred in holding that the wage arrears provision is a contingent liability. 6. Your appellants further reserve the rights to add, amend or alter the aforesaid grounds of appeal as they may think fit by themselves or by their represent

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564,72,89,730/- under normal provisions of the I.T.Act, 1961. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the I.T.Act, 1961 on 29/12/2016, determining the total income at Rs. 669,39,34,675/- under normal provisions of the Act and book profit of Rs. 944,74,945,532/- u/s 115 JB of the I.T.Act, 1961, by making various additions, including additions towards disallowances of expenditure incurred in relation to exempt income, additions towards broken period interest, disallowances of depreciation on value of investments and re- computation of deduction claimed u/s 36(1)(viia) and 36(1)(viii), in respect of provisions of bad debts, as well as bad debt written off.

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violation of KYC norms and provision for wage arrears amounting to Rs. 96 Lacs. In response, the assesee vide its letter, dated 09/02/2018, filed a detailed written submissions on the issues questioned by the Ld.AO and argued that the assessment order passed by the Ld. AO is neither erroneous, nor prejudicial to the interest of the revenue, because the Ld. AO, at the time of assessment proceedings has examined all four issues questioned in show-cause notice issued u/s 263, for which the assessee has filed a detailed reply and explained, how deductions claimed for bad debts is allowable under the provision of section 36(1)(vii) of the I.T.Act, 1961. The assesse, further submitted that in respect of other issues, like payment of gratuity funds, penalty payment to RBI for violation of KYC norms and provisions for wage arrears has been thoroughly examined by the Ld. AO, at the time of assessment proceedings, which is evident from the fact that the assessee has annexed a detailed note, in respect of all four items, which is part of statement of total income filed along with return of income. The Ld. AO after being satisfied with explanation furnished by the assessee has chosen to accept the claim of the assessee, insofar as, payment of contribution to gratuity fund, penalty payment to RBI for violation of KYC norms and provision for wage arrears. As regards deduction claimed for bad debt written off, in respect of non-rural advances, the Ld. AO has discussed the issue in para ‘’7’’ of his assessment order and computed eligible deduction in Tabular form. Therefore, it is incorrect to say that the assessment order passed by the Ld. AO is erroneous, insofar as it is prejudicial to the interest of the revenue.

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36(1)(vii) and newly inserted proviso thereto, held that the assessment order passed by the Ld. AO is erroneous, insofar as it is prejudicial to the interest of the revenue, in respect of deduction allowed towards bad debit written off, in respect of non-rural advances. The Ld.PCIT, further noted that as per the proviso provided to section 36(1) (viia) & 36(1)(vii) deductions towards bad debt written off is allowed over and above, the amount of provision for bad debts in books of accounts, as on the first date of financial year. In this case, if the total amount available under the head provision of bad and doubtful debts account is considered, then the bad debt written off, in respect of rural, as well as non-rural advances is less. Therefore, the entire amount of Rs. 478,85,05,054/- on account of bad debt written off was required to be debited to provisions for bad and doubtful debt accounts. Therefore, he opined that the allowances of bad debt of Rs. 402,26,72,141/- is not in accordance with the provision of Clause (vii) of sub section (1) of section 36 and Explanation 2 thereto. The aforesaid allowances has rendered the assessment order erroneous, insofar as it is prejudicial to the interest of the revenue as by excess allowance, the loss occurred to the revenue. Similarly, the Ld.PCIT, further noted that insofar as, advances payment of contribution to gratuity fund, although, the assessee has debited a sum of Rs. 5.94 crores into the profit and loss account, but deductions has been claimed towards total amount paid towards gratuity funds of Rs. 54 Crores, as per the provisions of section 43B of the I.T.Act, 1961. But, fact remains that if you go through the provisions of section 43B, it’s start with the clause not withstanding anything contained in any other provision of this Act, a deduction allowable otherwise under this Act. It means deductions on account of payment is allowable

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u/s 43B, only when the same is otherwise allowable under the provision of the Act. Since, the assesee is maintaining its account on mercantile basis, the advance payment which does not pertain to the assessment year under consideration, is not allowable in view of matching principles. The Ld. AO without considering these aspects has simply allowed deductions claimed towards amount paid to gratuity fund, even though, the same is not pertains to relevant assessment year, which rendered the assessment order erroneous, insofar as prejudicial to the interest of the revenue.

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The Ld. AO allowed the aforesaid provision without appreciating the facts and also, verifying the facts with regard to nature of liability, which rendered the assessment order erroneous, insofar as it is prejudicial to the interest of the revenue. Therefore, he opined that the assessment order passed by the Ld.AO u/s 143(3) of the I.T.Act, 1961, dated 29/12/2016 is erroneous, insofar as it is prejudicial to the interest of the revenue and accordingly, set aside the assessment order passed by the Ld. AO and direct the Ld. AO to disallow the aforesaid claims of deductions and recompute the total income in accordance with law. The Ld. AO may also initiate appropriate penalty proceedings for furnishing inaccurate particulars of income, as the patently wrong claim of deductions has been made by the assessee under clause (vii) of sub section (1) of section (36) of the I.T.Act, 1961. Aggrieved by the Ld.PCIT order, the assessee is in appeal before us.

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the amount of bad debt written off for the year. The Ld. AO after carefully considered the facts of the case, in light of provisions of section 36(1)(vii) & 36(1)(viia) has allowed deductions towards bad debt written off, in respect of non-rural advances by taking opening balance available in provision for bad and doubtful debt account, in respect of non rural advances. Further, the ld. AO had adopted one of the possible views and as such the Ld. PCIT was erred in invoking his jurisdictions u/s 263 of the I.T.Act, 1961. He, further submitted that as regards, other issues questioned by the Ld.PCIT, like payment towards contribution to gratuity fund, amount paid to RBI towards penalty for violation of KYC norms and provisions for wage arrears are all subject matter of discussions by the Ld. AO, which is evident from the fact that the assessee has annexed a detailed note to statement of total income, where each and every issue has been discussed and explained, how the deduction was permissible under respective provisions of the Act. The statement of total income is very much part of financial statement filed along with return of income. The Ld. AO after being satisfied with the explanation furnished by the assessee has chose to complete the assessment without making any additions towards those issues and hence, the Ld.PCIT was incorrect in coming to the conclusion that the Ld. AO has not carried out required enquiries to be conducted, in light of a provision of section 263, more particularly Explanation (2) inserted by the Finance Act, 2013. The Ld. AR for the assessee has filed a detailed written submissions, which has been reproduced as under:-

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the same the Government vide Finance Act, 2015 inserted Explanation '2 To section 263, in which it has been declared when an order shall be deemed to be erroneous The said Explanation contains 4 clauses (a) to (d) to determine whether the impugned order is erroneous in the opinion of the Principal Commissioner / Commissioner.

Based on the facts of the present case, it can be said that it is only clause (a) & (b) are relevant and the other 2 clauses are not relevant Clause (a) deals with circumstances where in the order has been passed without making enquiries or verification which should have been made. In this case, from the facts it can be seen that there was an enquiry by the learned Assessing Officer and the Appellant bank had also furnished a detailed reply Therefore, this clause is not applicable in this case. Clause (b) of the Explanation deals with circumstances where in the order has been passed allowing any relief without enquiring into the claim. In this case, from the facts it can be seen that the relief has been allowed only after making enquiries. Therefore, this clause is also not applicable ill this case.

Since the conditions to invoke the powers u/s 263 are not satisfied, the passing of the impugned order u/s 263 is beyond the scope of the provisions of 263 and is not tenable.

Reliance in this regard is placed on the following decisions: Case Law relied upon Citation Reference No

Para Page

CASA BUILDERS PVT. LTD. 201 9 (2) TMI 987 - ITAT 11, 14 11&14 MUMBAI

SHRI ANIL L. TODARWAL 2018(1) TMI 660 -ITAT 8 20 MUMBAI

OM FOREGOING & 2017(12) TMI 1000 -ITAT 26 31-32 ENGINEERING (P) LTD. KOLKATA

TORRENT 201 8(8) TMI 754 -ITAT 9.3 59 PHARMACEUTICALS LTD AHMEDABAD

SHRI NARAYANA TATU 2016 (5) TMI 11 62 -ITAT 20 71 RANE MUMBAI

Without prejudice lo the above, The other condition which is to be satisfied for invoking the provisions of 263 is that the order should be prejudicial to the interest of the Revenue. In respect of the following 3 items, there is no prejudice to the interest of the Revenue: a) Bad Debts of Rs. 402,26,72 141/-written off in respect of non rural advances and allowed u/s 36(i)(viii);

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b) Payment of Rs. 54,00,00,000/- made towards contribution to Gratuity Fund, out of which an amount of Rs. 48.06 Cr being an advance payment be disallowed as per the provisions of Section 43 c) Provision for Wage arrears amounting to Rs 96,00,00,000/- In all the above cases, there is no Revenue loss. Any recovery made in respect of bad debts allowed ad deduction us/ 36(1)(vii), has to be offered to tax u/s 41(4) in the year of recovery. The bank has also offered to tax the subsequent recoveries made in respect of the bad debts Therefore] even if it is allowed m one year, it is taxed in the subsequent years based on the recovery. Therefore, the allowance is not prejudicial to the interest of the Revenue. Likewise, The contribution to the Gratuity Fund will have to be allowed in the year of accrual. Even the Department accepts the same Therefore, there is no Revenue loss in this case also. The provisions for Wage Arrears also, if not allowed in this year, will have to be allowed in the subsequent wears, when the actual payment is made. In this case also, the bank has made payment of the wage arrears in the subsequent year. Therefore, there is no Revenue Loss. The Tax rates for Corporate has been 30% only in all these years. Therefore, technically, there is no Revenue loss. Since there is no loss to The Revenue, the order allowing these deductions can not be treated as prejudicial to the interest of the Revenue. In view of this also. The powers u/s 263 cannot be invoked. 2. Ground No. - 2 - Deduction u/s 36(1)(vii): The Appellant bank had claimed the non rural debts written off u/s 36(1)(vii). The learned Commissioner has held that the non rural write off should have been adjusted against the Credit Balance in the provision a/c made u/s 36(1)(viia) To arrive at this conclusion, learned Commissioner has relied on the Explanation 2 to section 36{1)(vii)L The order of the learned Commissioner is against the Law and the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank [2012] 343 ITR 270 (SC).

It is our submission that the purpose behind the introduction of the Proviso to section 36(1)(vii) is that to avoid double deduction. It is a settled accounting principle that in respect of a bad debt, first provision is made in the accounts and subsequently, the debt is written off. Therefore, the allowance of a provision precedes the write off. Under this circumstance, in respect of a debt, if any deduction is allowed at the time of provision u/s 30(1Hvii#), then, when such debt is written off subsequently, deduction allowable u/s 36(1}(viI) is the amount write off which exceeds the amount allowed u/s 36(1)(viia). This can be explained with the following Example:; Amount (Rs.) Particulars Scenario - 1 Scenario - 2

Amount of debt outstanding in the 200 200 books

Provision allowed u/s 36(1)(viia) 100 100

Actual write off 50 150

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Deduction allowable u/s 36{1}(vii) — 50

Department also does not dispute the fact that the Proviso is to avoid double deduction Even at the time of hearing and in the subsequent written submission, there is no rebuttal to our submission that the intention of the proviso is to avoid double deduction] It is therefore an accepted fact that the proviso is to avoid double deduction. IT is under this context, the proviso has to be interpreted along with the Explanation - 2 inserted by the Finance Act, 2013. From the reading of the proviso, it can be seen that, it comes into play only when a provision for doubtful debts is made under clause (viia). The provision for doubtful debts is made u/s clause (viid) only when a deduction is allowed under clause (viia)r Therefore, if for a debt, a deduction s allowed under clause (viia), then the provision account gets created and subsequently, when the debt is written off, the conditions as required by the proviso has to be complied with. In other words, if for a debt, no deduction is allowed u/s 36{1) (viia), then at the time of write off, the proviso does not apply to such debt and it will be allowed as a deduction as per the main part of section 36(1)(viia). This construction is also based on the fact That the proviso uses the term 'any such debt1 in two places The term 'such debt' used in the proviso denotes the debt for which The deduction is allowed at the provision stage u/s 36(1)(viia) The Legislative intent behind the introduction of the proviso and the interpretation thereof has been clearly brought out in commentary of 'Chaturvedi & Pithisaria's Income Tax Law' at page no. 3258 volume 36lh edition Further, this argument gel supported by the decision of the Hon'ble Rajasthan High Court in the case of CIT vs Bank of Rajasthan Ltd -[2002] 255 ITR 599 (RAJ) It is also pertinent to note that the term 'such debt' carries significance. The Hon'ble Supreme Court in the case of Intercontinental Consultants Technocrats (p) Ltd [20181 91 taxmann.com 67 (SC), noted the significance of the Term 'such' occurring in section 67 of the Finance Act, 1994. In that case, the issue was whether the reimbursement of expenses received by the Assessee for providing a service has to be included in the value of service The dispute arose on account of The fact that the section 67 of the Finance Act, 1994 used the term 'the value of any taxable service shall be the gross amount charged by the service provider for such services provided .....,.' The Department contended that the reimbursement of expenses should also be included in the value of taxable service. However, The Assessee contended that the reimbursement should not be included in the value of taxable service since it is not for provision of such services. In this context, the Hon'ble Supreme Court had To deal with the significance of the term 'such' In para 24 of the judgment, the Court held as follows”. "24. In this hue. The expression 'such' occurring in Section 67 of the Act assumes importance In other words, valuation of taxable services for charging service tax, the authorities are To find what is the gross amount charged for providing 'such' Taxable serviced. As a fortiori, any other amount which is calculated not for providing such Taxable service cannot a part of that valuation as that amount is not calculated for providing such 'taxable service'. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i e , prior to May 01, 2006) or after its amendment, with effect from

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May 01, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasized that Rule 5 of The Rules went much beyond the mandate of Section 67 We therefore, find that High Court was right in interpreting Sections 66 and 67 To say That in the valuation of taxable service. The value of taxable service shall be the gross amount charged by The service provider 'for such service' and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service”

It is our submission that The proviso m our case does not apply to non rural advances since on the facts of our case, the deduction u/s 36(1)(viia) is given for rural advances It is our submission that in the case of a bank with rural branches, the deduction u/s clause 36[1)(viia) (a) is applicable to rural advances. In this regard, reliance is placed on the decision if the Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra) (refer para 27). Since no deduction is allowed for non rural debts at the provision stage under clause (viia), the proviso to section 3G(1)(vii) dogs not come into play when the non rural debts are written off. Therefore, the non rural write off has to be allowed as deduct on under the main part of the section 3G(1)(vii). It is the submission of The Department that the Explanation 2 introduced by the Finance Act, 2013 has impliedly overruled the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra). This argument is fallacious and not based on the correct.

appreciation of law and fact The question of law decided by the Hon'ble Supreme Court is extracted in para 11 of its judgment. The first question, which was decided by the Hon’ble Supreme court in favour of the banks is extracted hereunder:

"Whether the Full Bench of the High Court has grossly erred in reversing the finding of the earlier division Bench that on a correct interpretation of the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) is only to deny the deduction to the extent of bad debts Written off in the books with respect to which provision was made under Clause (viia) of the Income-tax Act? (* emphasis applied)

While deciding the above question, the Hon’ble Supreme Court laid down the following Statutory pronouncements: (a) Clause 36(1)(viia)(a) applies only to rural advances (para 27) (b) The scope of the proviso to clause (vii of section 36(1) only shows that a double benefit in respect of The same debt is not given to a Scheduled Bank, (para 30) (c) The provisions of section 36(1)(vii) & 36(1)(viia) are distinct and independent items of deductions and operate in their respective fields (para 41) (d) The bad debts written off, other Than those for which the provision is made under clause (viia), will be covered under the main part of section 36(1)(vii). (para 41)

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(e) The proviso to section 36(1 )(vu) will relate to cases covered u/s 3G(1)(viia) and haste be read with section 36(2)(v) of the Act. (para 41) is respectfully submitted That all the above authoritative pronouncement of the Hon'ble Supreme (court are declaration of law as envisaged under Article 141 of The Constitution. In a recent decision, the Larger Bench of the Supreme Court in the case of Khoday Distilleries Ltd reported in [2019] 1Q4taxmann com 25 (SC) upheld the principle laid down by the Hon'ble Supreme Court in the case of Kunhayammed reported in [2000] 245 ITR 360 (SC) about the binding precedence of the Law declared by the Hon'ble Supreme Court. In para 24 of Khoday's judgment the Court extracted the principles laid down in the Kunhayammeti judgment The relevant extract is as follows” ....Where the order rejecting an SLP is a speaking order, that is, where reasons Have been assigned by this Court for rejecting the petition for special leave and are stated in the order still the order remains the one rejecting prayer for the grant of leave to appeal The petitioner has been turned away at the threshed without having been allowed to enter in the appellate jurisdiction of this Court. Here also the doctrine of merger would not apply. law stated or declared by this Court in its order shall attract applicability of Article the Constitution. The reasons assigned by this Court in its order expressing its adjudication (expressly or by necessary implication) on point offset or law shall take away the juridiction of any other court, tribunal or authority to express any opinion in conflict in departure from the view taken by this Court because permitting to do so would be subversive of judicial discipline and an affront to the order of this Court.........."

Therefore the decision of the Hon'ble Supreme Court on all The above points are binding on all Courts/ Tribunals /Authorities unless overruled by a specific enactment. The Explanation 2 introduced by the Finance Act, 2013 does not overrule any of pronouncements. The Explanation was introduced only to nullify a confusion that may arise out of the order of the Hon'ble Supreme Court that the proviso does not apply to non rural debts, Based on the facts of the case before the Hon'ble Supreme Court, in which all the banks were having both rural and non rural branches, The Court held That the proviso does not control non rural debts. The decision was rendered based on the facts of the case before the Court However, it could be interpreted & argued that the proviso is riot applicable even in the case of other Assessee, who are covered by the other sub clauses of section 35(1)(viia), and for whom deduction u's 36(va) is given only for non rural debts. It is to avoid this unintended mischief The Explanation was introduced to state that the proviso covers non rural debt also The Explanation therefore, has to be read in the context of the Legislative intent behind the introduction of the proviso and the unintended hardship created by the Hon’ble Supreme Court In the case of Catholic Syrian Bank (supra). Even after the Introduction of the Explanation 2, the Legislative intent behind the introduction of the proviso is Unchanged. The proviso is to avoid double deduction is an accepted fact. Further, the fact that, the proviso will come into play only when an account is made under clause (viia) in respect of a debt by allowing the deduction at the provision stage is also not altered by the Explanation. Had the intention of the Legislature is to completely overrule the

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decision of the Hon'ble Supreme Court, they would have amended the proviso itself, or alternatively, amended the clause 36(1}[viia)(a). There is no amendment either to the proviso or to clause (viia)(a). Therefore, the authoritative pronouncement of the Hon'ble Supreme Court in the interpretation o the applicability of 36(1)(vitta)(a) to rural advances and the intention of the proviso is to avoid double deduction are all not overruled. Therefore, the Explanation cannot be read into in a manner that will defeat the clear Legislative intent behind the proviso to section The harmonious way of interpreting the Explanation is by considering the purpose behind the introduction of the proviso and the effect of the Hon'ble Supreme Court decision Even the Government itself accepts the fact That the sub clause (a) of section 36(1 )(viia) refers to rural advances. From The Memorandum it can be understood that the Legislative intent behind The proviso has not been changed. Therefore, the purpose of The Explanation is only to avoid the mischief that by placing reliance on the Hon'ble Supreme Court decision, no Assessee should contend that The proviso does not cover non rural advances in those cases where The deduction u/s 36(1 )(viia) has been given for non rural advances Therefore, The harmonious say of reading the Explanation is only to the effect that the proviso is applicable to those debts for which a deduction is allowed u/s 36(1)(viia) at the provision stage whether it is rural or non rural. If the deduction is allowed for rural debt, then, the proviso attracts for such rural debts. On the other hand, if the deduction is given for a non rural debt, then the proviso is applicable to such non rural debts. Therefore, irrespective of the fact whether the debt is rural/non rural, once a deduction is allowed for such debt at the provision stage u/s 36(1)(viia), Then, such debt shall be adjusted against The provision a/c whether it is rural / non rural. This is the harmonious way of reading the Explanation. The reading of the Explanation by the learned Commissioner in such a way That even in respect of a non rural debt for which no deduction is allowed u/s 36(1)(viia) is covered by the proviso is totally against the spirit of The proviso and the Explanation and it also runs counter to the decision rendered by the Hon'ble Supreme Court Such a reading makes the applicability of the Explanation beyond its scope.

It is a settled principle of Law that an Explanation cannot override the section. In fact the proviso itself does not override the section. It only creates an exception to The main section. The argument of The Department in the interpretation of Explanation 2 is in such a way that it goes beyond the proviso and the section itself. This argument is fallacious and against the settled principles of law, As submitted earlier, the proviso shall itself be attracted only when the deduction for a debt is allowed u/s 36(1)(viia). It is clearly established that in respect of non rural advances, no deduction is allowed u/s 36(1)(viia) at the provision stage. Therefore, these debts are not even covered by the proviso. Even in view of this matter, on the facts of the case, the introduction of the Explanation 2 by the Finance Act, 2013 has not altered this position.

Further, there is a fallacy in the argument of the Department that the non rural debts for which no deduction is allowed u/s 36(1)(viia) is also covered by the proviso. This argument runs counter to the scheme of the Act itself. As per

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section 41 (4), any recovery from a bad debt which was allowed as a deduction u/s 36(1 )(vii), is liable to be taxed as deemed income. Only if a deduction is allowed u/s 3G(1)(vii), the subsequent recovery has to be offered to tax Therefore, for a non rural debt for which no deduction is allowed u/s 36(1)(viia) has to be adjusted against the provision allowed under that section in respect of some other debt will have the effect of not offering the subsequent recovery to tax. This kind of Interpretation is prejudicial to the interest of the Department. To sum up, > The provisions of sections 36(1)(vii) &36(1)(viia) are distinct and separate and operate in their respective fields. > The purpose of introduction of proviso to section 36(1)(vii) is to avoid double deduction in respect of a debt for which deduction u/s36(1)(viia) is allowed at the time of provision and a deduction is also allowed u/s 36{1)(vii) at the time of write off > The proviso controls only those debts for which a deduction was allowed u/s 36(1)(viia), be it rural f non rural. > In respect of a debt for which no deduction was allowed at the provision stage u/s 36(1)(viia), the deduction is allowed under the main part of section 36(1)(vii) and the proviso does not get attracted at all. > In respect of banks with rural branches, the deduction allowed u/s 36(1)(viia) is for rural debts and therefore, in respect of non rural debts for which no deduction was allowed u/s 36{1)(viia), the proviso is not attracted at all. > The Explanation introduced by the Finance Act, 2013 only explains that the proviso to section 36(1)(vii) is applicable to non rural debts for which deduction is allowed u/s 36(i)(viia) is allowed. > The Explanation does not overrule various ratios decided by the Hon'ble Supreme Court in the case of Catholic Syrian Bank. It only removes the unintended hardship of interpreting the proviso as applicable only to rural debts even if an Assessee is allowed deduction for non rural debts u/s 36(1)(viia) at the provision stage. > Reading the Explanation in such a manner that it controls even a non rural debt for which no deduction was allowed u/s 3G(l)(viia) goes beyond the intenment of the proviso and enhances the applicability of the proviso not intended for. This kind of interpretation is not tenable in law as it is a settled proposition of law that an Explanation cannot go beyond the proviso or section and create a new liability on the Assessee, not envisaged by the section or proviso. 2. Ground No. - 3 - Payment to Gratuity Fund:

The Appellant Bank made a contribution of Rs. 54 Cr to Gratuity Fund during the previous year relevant to the Assessment year under appeal and the same was claimed as deduction u/s 43B on payment basis However, the Appellant bank debited only an amount of Rs 5.94 Cr to the Profit & Loss Account The learned Commissioner in the impugned order held that the Assessee is following accrual system of accounting and only when the liability to pay the amount arises, the amount will be allowable deduction. He interpreted the words in section 43B that 'deduction otherwise allowable under the Act1 To reach his conclusion.

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It Is humbly submitted that the provisions of section 43B overrides other provisions of the Act. In respect of items covered by the section, the deduction is allowed only in the year of payment irrespective of the system of accounting followed by the Assessee The words 'deduction otherwise allowable under the Act' means only that it is not a disallowable expenditure such as Capital expenditure or any other expenditure specifically disallowed under the Act It is for that purpose, these words have been used in the section The intend behind the section is to allow the deductions only m the year of actual payment. This controversy has been settled by the Hon’ble Supreme Court in a latest decision in the case of CIT vs Modipon Ltd (refer page 142 to 146 of case law index). In para 11 of The said decision (refer page 145- 146), the Hon’ble Supreme Court clearly held that having regard to The object behind the enactment of section 43B, the Legislative intent would be achieved by giving benefit of deduction to an Assessee upon advance deposit of central excise duty notwithstanding the fact that adjustments from such deposits are made on subsequent dates.

The Hon'ble Allahabad High Court In the case of C L Gupta & Sons (refer page 147 to 151 of case law index) at page no 150, held that irrespective of the method of accounting employed by The Assesses, the deduction shall be allowed only in The previous year in which it was actually paid irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly followed by the Assessee. In fact, in that decision, the Assessee made the payment in an earlier year and claimed The deduction in the subsequent year The Tribunal allowed the deduction to The Assessee On further appeal by the Department in which it was contended that the deduction was allowable only in the year of payment, the High Court reversed the decision of the Tribunal by holding that the deduction cannot be claimed in the subsequent year on accrual basis.

There are decisions of various other High Courts also to the same effect. It is therefore, submitted that the deduction is allowable on payment basis and the revision by the learned Commissioner is not tenable In any case, the view adopted by the learned Assessing Officer is one of the possible views and as such, no revision is possible. Further, it is also a case of no prejudice to the Department since the deduction in any case is allowable to the Assessee in the subsequent years. A. Ground No.-4-Penalty paid to RBI: During the previous relevant to the year under appeal, the Appellant bank paid an amount of Rs, 2 Cr as penalty to RBI for non compliance of KYC norms. The learned Commissioner in the impugned order held that the same is not allowable as a deduction u/s 37 since it is for violation of Law. It is submitted that the penalty paid to RBI is not for violation of any law. This issue is squarely covered by the following decisions of the Tribunal:

Case law relied upon Citation Reference No Para Page BAPUNAGAR MAHILA CO- 2015 (7) TIMI 472-ITAT 19-21 166-167 OP. BANK LTD. AHMEDABAD

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DBS BANK LIMITED 2018(6) TMI 757-ITAT 12-15 171-172 MUMBAI

Case Law relied upon Citation Reference No

Para Page

Erstwhile Raj Gramin Bank, 2017 (11) TMI 129-RAJASTHAN 4&7 178-1B1 Alwar C/o. Baroda Rajasthan HIGH COURT Kshetriaya Gramin ank, Ajmer

Bank of Baroda ITA no.2480 & 3081/Mum/2015 - 3-6 185-187 order dated 17-02-2017 for Assessment year 2009-10

In any case, the view adopted by the learned Assessing Officer is one of the possible views and as such, no revision is possible. Further, it is also a case of no prejudice to the Department since the deduction in any case is allowable to the Assessee in the subsequent years..

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section 36(1) (vii) and the memorandum explaining the Finance Bill submitted that it is very clear from the purpose behind insertion of Explanation (2) to section 36(1)(vii), as per which the legislature was very clear in their thought keeping in mind various judicial precedents, including the decision of Hon’ble Supreme court, in the case of Catholic Syrian Bank (supra) and had explained the position of law, in respect of deductions towards bad debt write off, more particularly, in the light of deductions allowed towards provision for bad debts u/s 36(1)(vii) and explained that in order to clarify the scope and applicability of provisions of clause (vii), (viia) of sub section (1) and sub section (2), it is proposed to insert an explanation in clause (vii) of section 36(1) stating that for the purpose of the proviso to section 36(1)(vii) and 36 (2)(v) only one account as referred to therein is made, in respect of provision for bad and doubtful debts u/s 36(1)(va) and such account relates to all types of advances, including advance made by the rural branches. Therefore, for an assessee to which clause (viia) of section 36(1) applies, the amount of deduction, in respect of the bad debts actually written off u/s 36(1)(vii) shall be limited to the amount by which such bad debts exceeds, the credit balance in the provision for bad and doubtful debt account made u/s 36(1)(viia), without any distinction between rural advances and other advances. Although, the submissions were called, in respect of claim of bad debts during the assessment proceedings, the Ld. AO has computed the bad debts claimed to be allowed in the assessment order without considering newly inserted Explanation (2) to section 36(1)(vii), which comes into effect for AY 2014-15. The Ld. DR, further submitted that although, the assessee has cited at length various case laws, including the Hon’ble Apex Court in the case of Catholic Syrian Bank, but, fact

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remains that the interpretation canvassed by the assessee is complete misinterpretation, because the memorandum clearly spells out, the mischief sought to be curbed and the judicial decisions and interpretations rendered inoperative. There is no doubt that the view expressed earlier decisions on the subject including the Hon’ble Apex court decisions in the case of Catholic Syrian Bank (supra) stands overridden by express explanation of intention of the legislature of insertion Explanation (2) to section 36(1)(vii). Therefore, there is no merit in the arguments of the assesee, in light of the decisions of Hon’ble Supreme Court, in the case of Catholic Syrian Bank (supra). Thus, to conclude, the Ld. AO has completely ignored newly inserted Explanation (2) to section 36(1)(vii), while allowing deductions towards bad debt written off, which rendered the assessment order erroneous, insofar as it is prejudicial to the interest of the revenue.

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expenditure is clearly fall under the purview of section 37(1), as expenditure incurred for the purpose, which is an offence or prohibited under any law for the time being in force and such expenditure is not deductible u/s 37(1) of the I.T.Act, 1961. As regards, provisions for wage arrears, the Ld. DR, submitted that it is an admitted fact that wage revision had not occurred at the time, when the assessment order was passed. Therefore, the claim of the assessee was contingent in nature, which cannot be allowed as deduction. The Ld.PCIT after considering the facts of the case has rightly noted that the Ld. AO has allowed the claim without considering the facts in right perspective, which rendered the assessment order erroneous, insofar it is prejudicial to the interest of the revenue. In this regard, he has filed detailed written submissions which is reproduced as under:-

Written Submission: - This appeal has been filed by the assessee against the Order u/s. 263 passed by the Pr. CIT-2, Mumbai dated 27.02,2018 in respect of assessment order passed by the AO, ACIT-2(3)(1), Mumbai, dated 27.02.2016. The Pr. CIT has held that the following claims are incorrectly allowed and which renders the assessment order erroneous, insofar as, prejudicial to the interest of Revenue as excess allowances/claims have been allowed.

(i) Bad debts Rs. 402,26,72,141/- claimed u/g 36(l)(vii) without setting it against provision u/s 36(l)(viia). (ii) Claim of Rs, 48,06,00,000/- u/s 43B in respect of advance payment towards gratuity fund. (iii) Penalty of Rs. 2,00,00,000/- as penalty levied by RBI for violation of KYC Norms. iv) Rs. 96, 00,00,000 /- claimed as provision for wages arrears. 2. Bad debts Rs. 402,26,72,141/- claimed u/s 36(1)(vii) 2.1. During the year, the Assessee has written off Rs. 478.85 crores of bad debts. As per the Assessee, Rs. 4.02 crores is towards advances by Rural Branches and Rs. 474.83crores is in respect of advances made by Non- Rural Branches. Rs. 4.02 crores shown as advances made by Rural Branches and Rs. 75.56 crores out of advances made by Non-Rural Branches have been set off against opening balance of provisions for bad

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debts u/s. 36{i)(viii} of Rs. 1235.74 crores. The balance bad debts of Non- Rural Branches of Rs. 402.26 crores has been claimed u/s. 36(i)(vii) and which is the subject matter of the order u/s. 263 of the Pr. CIT. The assessee has also separately claimed deduction this year of Rs. 507.85 crores u/s- 36(i)(viia).

2.2 It is pointed out that there was an amendment in law, in as much as, explanation to section 36(l}(vii) was inserted by Finance Bill, 2013 which became applicable w.e.f. 01.04.2014 and applied to the A.Y, 2014-15 which is the assessment year involved in this case- Explanation-2 inserted reads as follows: Explanation 2,-For the removal of doubts, It is hereby clarified that for the purposes of the proviso to clause (vii) of this subsection and clause (v} of subsection. {2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause(viia) and such account shall relate to all types of advances. Including advances made by rural branches"

The Memorandum explaining the Finance Bill in this regard is reproduced as below:

“Under the existing provisions of section 36(1)(viia) of the Income-tax Act, in computing the business income of certain banks and financial institutions, deduction is allowable in respect of any provision for bad and doubtful debts made by such entities subject to certain limits specified therein. The limit specified under section 36(1)(viia)(a) of the Act restrict the claim of deduction for provision for bad and doubtful debts for certain banks (not incorporated outside India) and certain cooperative banks to 7.5% of gross total income (before deduction under this clause) of such banks and 10% of the aggregate average advance made by the rural branches of such banks. This limit is 5% of gross total income (before deduction under this clause) under sections 36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and certain financial institutions. Provisions of clause (vii) of section 36(1) of the Act provides for deduction for bad debt actually written off as irrecoverable in the books of account of the assessee. The proviso to this clause provides that for an assessee, to which section 36(1)(viia) of the Act applies, deduction under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1) (viia) of the Act.

The provisions of section 36(1)(vii) of the Act are subject to the provisions of section 36(2) of the Act. The clause (v) of section 36(2) of the Act provides that the assessee, to which section 36(1)(viia) of the Act applies, should debit the amount of bad debt written off to the provision for bad and doubtful debts account made under section 36(1) (viia) of the Act.

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Therefore, the banks or financial institutions are entitled to claim deduction for bad debt actually written off under section 36(1)(vii) of the Act only to the extent it is in excess of the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act. However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances. Section 36(1)(viia) of the Act contains three sub-clauses, i.e. sub-clause (a), sub-clause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-clause (a) refers to rural advances whereas other sub-clauses do not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances.

It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of section 36(1). In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and sub-section (2), it is proposed to insert an Explanation in clause (vii) of section 36(1) stating that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account as referred to therein is made in respect of provision for bad and doubtful debts under section 36(1)(viia) and such account relates to all types of advances, including advances made by rural branches. Therefore, for an assessee to which clause (viia) of section 36(1) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) without any distinction between rural advances and other advances.

This amendment will take effect from 01.04.2014 and will accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.

2.3, Though the submissions were railed in respect of claim, of bad debts during the assessment proceedings and the AO has computed the bad debts claimed to be allowed in the assessment order, it needs to be pointed out that the newly inserted explanation to sec. 36(1)(vii) which came into effect for A.Y, 2014-15 was neither enquired into by the AO,

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nor finds any mention in the submissions made by the assesse during the assessment proceedings. It is thus clear that a vital change in taw which applied to A,Y. 20J4-15, the assessment year before the assessing officer in this case, totally escaped the attention of the AO, The AO has neither considered, nor applied his mind on application of explanation 2 to sec, 36(l)(vii) in the facts of the case of the assesse. 2.4. The assessee has cited at length various case laws including the Apex Court decision in the case of Catholic Syrian Bank and has claimed that the decision rendered by the Apex Court still holds field even after the explicit amendment to the law. It is submitted that this is a totally incorrect interpretation canvassed by the assessee and is a complete misinterpretation where the statute is clear and explanatory. The Memorandum clearly spells out the mischief sought to be curbed and the judicial decisions and interpretations rendered inoperative. There is no doubt that the view expressed in the earlier decisions on the subject including the apex court decision in the case of Catholic Syrian Bank stands overridden by explicit expression of intention of the Parliament through which the section has been amended. It is to be noted that the assessee has not submitted any decision rendered after the amendment and insertion of the explanation 2 to section 36(l)(vii)in support of its interpretation. Needless to state that such an interpretation fails in the face of the explicit and clear memorandum explaining the amendments. Refer case laws- • [2008] 172 Taxman 386 (SQ-Commissioner of income-tax, Ahmadabad Coin Health Food (P.) Ltd. * [2009] 180 Taxman 494 (Bombay)-Commissioner- of Income- tax-9, Mumbai v.Ajanta Pharma Ltd.

2.5, It may also kindly be noted that Section 36(l)(vii)(a) provides for deduction of a blanket provision for bad and doubtful debts which is applicable only for banks, whereas, sub clause (b) and (c) relates to foreign banks and other Financial Institutions. Sub-clause (a) deals with Scheduled banks incorporated within the country and Co-operative banks and Agricultural society. Unlike the case of other taxpayers where deduction is allowed only if bad debts are written off u/s. 36(l)[vii), eligible banks are entitled to claim of deduction in respect of even provision made for bad and doubtful debts irrespective of requirement of bad and doubtful debts to be written off u/s 36(1)(viia). Further, u/s. 36(l)(viia), the amount allowed to be provided for cad and doubtful debts co'mprises of two items viz. 'an amount not exceeding 7 '/j percent of the total income and 'an amount not exceeding 10% of the aggregate advances made by the Eligible Bank'. Thus, it is dear that the provision for bad and doubtful debts is not exclusively limited to the advances made by rural branches since the section also allows provision to be made linked to the total income of the hank. Thus, it is not correct, as canvassed by the assessee, that the provision allowed to be made as the percentage of total income unrelated to the advance made by the rural branches is applicable only to foreign banks/institutions covered under sub-clause (b) and (c) of section 36(1)(viia),

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2.6. Thus, to conclude, insertion of Explanation 2 to 36(l)(vii) was neither noticed nor considered by the AO in the assessment order, as can be easily observed. Neither was the amendment highlighted by the assesee in the assessment proceedings. In light of the newly inserted explanation 2 applicable for the first time to AY 2014-15 involved, the computation made by the appellant was patently incorrect and not as per law and therefore the claim made of Rs. 402 crores was not allowable and was against the law. This renders the assessment order erroneous, in so far as, prejudicial to the interest of Revenue as incorrect claim has been allowed. 2.7. The Authorised Representative has also argued that the show Cause Notice issued u/s 263 indicates the prejudicial and biased mindset of the Principal CIT This contention is again devoid of merit. The show cause notice provides an opportunity to the appellant to rebut the views expressed in the Show Cause Notice, Naturally the SCN will indicate the basis for the issue of show cause and the order has been passed only after hearing the assessee.

2.8 The assesses has also contended that jurisdiction under section 263 is available only if explanation 2 to section 263 applies to the facts of the case. It has also been contended that in this case this is not an order passed without making enquiries or investigations which should have been made. It is humbly submitted that the inherent scope of revision orders u/s 263 is based on subsection (1) of section 263, The explanation 2 only further elaborates the kinds of Orders which shall be deemed to be erroneous insofar as it is prejudicial to the interest of revenue. The Explanation has in no way narrowed down the scope available under section 263. Without prejudice to the above, in this case the AO failed to consider the explanation 2 to section 36(l)(vii) which was incorporated and became applicable for the first time in the year 2014-15 which was the case before the AO. Thus it is covered under explanation 2 sub- section (a) as well as (b) of section 263. The necessary awareness and verification that should have been made by the assessing officer is conspicuously absent. 2.9. On the issue of taking one possible view, it is clear that AO has not at all taken any view, question of taking one view does not arise. As a matter of fact the AO has not at all scrutinized the claim vis-a-vis the amended section and has not noticed that the claim for deduction of bad debts write off does not exceed the opening provision u/s 36(1))(viia) and hence the claim was incorrect. Acceptance of claim without any enquiry or investigation in the context of the amended section applicable for the first time this year and merely following the earlier year assessment order by the AO during the scrutiny assessment u/s 143(3) is tantamount to non-application of mind by the AO [Malabar Inds. 243 ITR 81 (SC)], The AO is not only an adjudicator but also an investigator. He is supposed to be aware of the change in statute and apply it in the background of facts and circumstances of the case. Reliance is placed on following case laws.

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> {1968) 67 ITR 84 /SCJ Rampyari Devi Baraogi v/s CIT. acceptance without enquiry & evidence. ClTs direction upheld > (173) 88 ITR 323(SC) Smt. Tara Devi Aggarwal V.s CIT 263 - applicable for assessment in different hand > {2005)2 SOT 732 Mum.Trib) Recon Oil Industries Ltd vs. JCIT. Non application of mind on inclusion of trading Profit for deduction u/s 80IA warrants revision u/s 263 > (20O6) 101 ITD 495 (Mum Trib.) Arvee International V/s Addl. CIT. AO is not only an adjudicator but also an investigator. These failure to investigate on the face of return of income make order erroneous and prejudicial > (2O13) 30 Taxman 332 (Chennai Trib) Cairn Energy Jfttfta (P) Ltd v/s DIT(IT), Chennai: Non application of mid on claim of deduction u/s 80IB/80IA > (2013) 31 Taxman 77 (Punjab HC) VT v/s Abhishek Inds. Ltd.: Non examination of 80 HHC claim-263 valid. > (2014} 44 taxman.com 319 (Kerala HC) CIT, Cochin V/s Abad Constructions P.Ltd.: Lack of proper enquiry in allowing deduction u/s 80IB (10)-263 valid. It is urged that the ground raised by the assessee in this regard be dismissed. 3. Claim of Rs. 48,06,00,000/- u/s 43B in respect of advance payment towards gratuity fund, penalty of Rs. 2,00,00,000 levied by RBI for violation of KYC norms and Rs. 96,00,00,000/- claimed as provision for wages arrears.

3.1. The other items covered in the order under section 263 is discussed next. The general arguments and case Jaws mentioned earlier in respect of incorrect claim of bad debts with regards to invoking section 263 and its validity, is equally applicable here. Further, in respect of these three items it is pointed out that there is no explicit discussion in the assessment order indicating any opinion expressed in this regard, unlike the issue of bad debts write off claim discussed above. Routine submissions were filed by the assessee during the assessment proceedings. Thus, these errorsinn assessment order again are also covered by explanation 2 sub-section (a) and (b) of Section 263.These errors were subject matter of the second show cause notice issued u/s 263 by the Principal CIT 3.2 Claim of Rs. 48,06,00,000/- u/s 43B in respect of advance payment towards gratuity fund. 3.2.1. In the computation of income, the assesses claimed deduction of Rs.54 crores which was paid to gratuity fund during the year. However as per actuarial liability the amount to be allowed in the current year was only R$. 5.^4 crores and only Rs, 5.94 crores was claimed in the profit and loss account. Thus, the admitted fact is that the entire payment of Rs,54 crores was not for the AY 2014-15. The assessee claimed the amount of 48.06 crores in the returned income which W£.s treated as advance in its books on the basis of sec. 43B, It has been claimed by the assesse that such payments are allowable since section 43B starts with a non-obstante clause

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and overrides all other sections of Income tax Act, In making such a claim the assesses has ignored the phrase "a deduction otherwise allowable under this Act "Thus, the interpretation sought by the assessee is to ignore the phrase (a deduction otherwise allowable under the Act) which is against the cannons of interpretation of statute which states that no phrase or words explicitly mentioned in the statue should be omitted while interpreting a statute.

3.2.2. In this case, the amount claimed by the assessee is as much as 3 times more than the amount allowable for the year. The assessee has relied on the decision of the apes court in case of Modipon. It is humbly submitted that the discussion therein was on specific facts of the case and was not on the issue of payment to gratuity fund. In the case of Modipon the issue was advance payment of central excise duty in the PLA account. Such excess payment of Excise duty was made for a short period and it was held that once paid to government, assessee has no domain over the amount deposited. The practice was consistently followed for several years and accepted by the department The other decisions cited have similar facts and relate to excise /customs duty' and the valuation of closing stocks and its consumption. The facts in the present case is entirely different. Here the payment is to gratuity fund and not to any government account. The amount of liability allowable as per books of accounts regularly followed is only Rs 5.94 crores. The claim of another Rs 48.06 crores not otherwise allowable under the Act cannot be claimed by resorting to section 43B. Refer 306 ITR 54 (Ker) CIT v Kerala Solvent Extractions Ltd. where It was held that Sec. 43B in itself is not 3 provision providing tor deduction of any item of expenditure which is otherwise not allowable under any of the provisions of the Act. The opening words of s. 43B dearly show that the section is dealing with deductions otherwise allowable under provisions of the Act. The section only lays down conditions for eligibility for deduction of certain allowances which are otherwise admissible under the Act. The scheme of s. 436 Is to allow the deductions referred to in cls. (a) to (f) only on payment basis, even though assesses is following mercantile system of accounting. In other words. It ts an exception to s, 145 inasmuch as even If the claim is an allowable deduction of the assesses, based on system of accounting followed by the assessee, it will still be inadmissible under s. 43B, if it is not paid on or before the end of the relevant previous year or at least before date of filing of the return. Therefore, s. 43B is only supplementary to s. 145 and it Is only an additional condition for allowance of deductions otherwise allowable under the other provisions of the Act.

3.2.3. It may also be kindly noted that there are several decisions upholding this interpretation where disallowance was made by revenue in respect of unpaid sales tax or service tax liability which were not claimed by assessee in their Profit and Loss account, and it was held

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that section 43B would apply only if the claim is made in the P & L account. 3.2.4. An amount paid in advance, can always be claimed and is allowable: in the year in which it accrues and since it is already paid, section 43B will not prohibit its allowance.

Thus the claim made in respect of Rs. 48.06 crores was clearly not allowable, but was erroneously allowed by the A.O. It is urged that the ground raised by the assesee in this regard be dismissed.

3.3. Penalty of Rs. 2.00.00.000 A as penalty levied by RBI for violation of KYC Norms.

3.3.1. The assesses had claimed amount of Rs. 2 crores paid m respect of penalty levied by RBI for flouting of KYC norms. The Explanation 1 to section 37 prohibits allowance of any expenditure for any purpose which is an offence or prohibited by law. The RBI is entrusted with the Regulations and Regulations of Banks such as the appellant. It Lays down Rules and Regulations and violation of such Rules and Regulations has led to levy of penalties. The assesses has contended that only such penalties which are in respect of criminal offence can be covered and fall tinder the purview of section 37(1). The apex court in the context of several cases has held that where penalties are compensatory in nature, the same will not be disallowed u/s, 37(1). Refer; • 201 ITR 684 (SC) Prakash Cotton Mills Pvt. Ltd. • CIT v Dhanlakshmi Bank Ltd./Catholic Syrian Bank Ltd, Kerala High Court order dated 12.11.2002 * [2014] 49 taxmann.com 565 (Punjab & HaryanaJ-Nahar Spinning Mills Ltd. v. Commissioner of Income-tax, Ludhiana * [1999] 103 Taxman 160 (Bombay) Commissioner of Income- tax vs. Jolly Steel Industries (P.) Ltd.

The penalty levied for violation of KYC norm is under the provisions of Section 47A(l)(c) read with Section 46(4)(i) of the Banking Regulation Act, 1949. This is not compensatory in nature. The Apex Court has nowhere held or has interpreted the Law that only where criminal proceedings can be launched, disallowance u/s, 37(1) can be made. Thus the claim made in respect of Rs. 2 crores was clearly not allowable, but was erroneously allowed by the A,O. 3.4, Rs. 96.00.00,000/- claimed as provision for wages arrears.

3,4.1. As regards the claim of provision of Rs. 96 crores the assessee has submitted that wage revision was due from 01.11.2000 onwards. However, the admitted fact is that wage revision had not occurred at the time when the assessment order was passed and the claim was contingent in nature. Furthermore, the submissions filed in the

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assessment proceedings did not give any details as to how provisions were computed, nor did the AO examine the computation. Even as on date, the assessee has not furnished the date of actual revision of wages and the actual wage arrears for A.Y. 2014-15 based on the same. Failure of the A.O. to examine this issue clearly falls within the purview of order passed which are erroneous and prejudicial to the Revenue. Thus the claim made in respect of Rs, 96 crores was clearly not allowable, but was erroneously allowed by the A.O.

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time of consideration of the issue, the newly inserted Explanation(2) to section 36(1)(vii) was very much on in the statue. Therefore, the Ld.PCIT is incorrect in stating that the Ld. AO ought to have conducted required enquiries, in light of Explanation (2) to section 263 of the I.T.Act, 1961. Insofar as, other three issues, even though there is no specific reference to those items in the assessment order passed by the Ld. AO, but it was an undisputed fact that the details with regard to issues were made available to the Ld. AO at the time of assessment proceedings, which is evident from the fact that the assesee has given a detailed note in statement of total income, which is part of income tax returns filed for the year, where it has narrated, how and why payment of Rs. 54 crores towards gratuity fund is allowable on actual payment, in light of provisions of section 43B of the Act, Similarly, the assessee has also narrated the facts and how, said payment is allowable u/s 37(1), in respect of penalty paid to RBI for violation of KYC norms. Likewise, a detailed note has been annexed regarding deductibility of provision for wage arrears amounting to Rs. 96 crores, these are part of assessment records. Therefore, we are of the considered view that it is not a case of the Ld.PCIT that the Ld. AO had not considered those issues at all, at the time of assessment proceedings, which results in erroneous order passed by the Ld. AO, which caused prejudice to the interest of the revenue. In any way, all the four issues questioned by the Ld.PCIT were thoroughly examined by the Ld.AO during the assessment proceedings, and after considering relevant facts and explanations furnished by the assessee has chosen to accept the claim of the assessee and hence, the same cannot be termed as non consideration of issues or the Ld. AO has failed to carry out

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required enquiries, which ought to have been carried out in accordance with law.

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Every loss of revenue as a consequence of an order of AO cannot be treated as prejudicial to the interests of the Revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the Interests of the Revenue unless the view taken by the ITO is unsustainable in law. An order of assessment passed by the ITO without making necessary enquiries on certain important points connected with the assessment would be erroneous and prejudicial to the interests of the Revenue, when the ITO is expected to make an enquiry of a particular item of income and he does not make an enquiry as expected, that would be a ground for the PCIT to interfere with the order passed by the ITO since such an order passed by the ITO is erroneous and prejudicial to the interests of Revenue, but, the ITO had made enquiries in regard to the nature of the expenditure incurred by the assessee who had given detailed explanation in that regard by a fetter in writing and all these are part of the record of the case and the claim was allowed by the ITO on being satisfied with the explanation of the assessee such, decision of the ITO cannot be held to be erroneous simply because in his order he did not make elaborate discussion in that regard

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has been subject matter of litigation and in order to put an end to the same, the legislature vide Finance Act, 2013 inserted Explanation (2) to section 263 in which it has been declared, when order shall be deemed to be erroneous. The said explanation contains four clauses (a) to (d), to determine, whether the impugned order is erroneous in the opinion of the PCIT. In light of above legal position, if you examine the facts of the present case, it can be said that it is only clause (a) and (b) are relevant and other two clauses are not relevant to decide, whether the order passed by the Ld.AO is erroneous, in light of newly inserted Explanation (2). Clause (a) deals with circumstances where the order has been passed without making enquiries or verification, which should have been made. In this case, from the facts, it can be seen that there was an enquiry by the Ld. AO, in respect of all issues and the assesee had also furnished a detailed reply. Therefore, we are of the considered view that this clause is not applicable in this case. Clause (b) of the Explanation deals with circumstances, where the order is passed allowing any relief without enquiring into the claim. In this case, from the facts, it can be seen that the relief has been allowed only after making enquiries. Therefore, this clause has also not applicable in this case. Therefore, we are of the considered view that the conditions to invoke the powers u/s 263 of the Act are not satisfied and hence, the Ld.PCIT was erred in invoking the scope of provisions of 263 of the I.T.Act, 1961. Further, assuming for a moment, but not accepting in order to invoke 263, the other conditions, which is to be satisfied is that the order should be prejudicial to the interest of the revenue, because in respect of bad debts claim, if any deduction allowed u/s 36(1) (vii) of the Act, then when the recovery of the same in subsequent years needs to be

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offered to tax u/s 41(4) of the Act. In respect of payment towards contribution to the gratuity fund, whether or not deduction is allowed in full on payment basis in this year, but the same needs to be allowed in subsequent years, if said payment is not allowed during the year under consideration. Likewise, provision for wage arrears is also liable to be allowed, when the actual payment has been made. In this case, the assessee has made payment of the wage arrears in the subsequent years. Therefore, we are of the considered view that invocation of jurisdiction u/s 263 on these issues is also incorrect.

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satisfied with the explanation of the assessee such decision of the ITO cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard.

"The power of suo motu revision under sub-s. (1) of s. 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. An order cannot be termed as erroneous unless it is not in accordance with law. If an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because according to him the order should have been written more elaborately. This section does not visualise a case of substitution of judgment of the Commissioner for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where ITO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and, ITA 2463/Mum/2015 left to the Commissioner, he would have estimated the income at a higher figure than the one determined by the ITO. That would not vest the Commissioner with power to re- examine the accounts and determine the income himself at a higher figure. It is because the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is prejudicial to the interest of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, namely, the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interest of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be

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subject-matter c revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully eligible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed. There must be material available on record called for by the Commissioner to satisfy him, prima facie, that the aforesaid two requisites are present. If not, he has no authority to initiate proceedings for revision. Exercise of power of suo motu revision under such circumstances will amount to arbitrary exercise of power. It is well-settled that when exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on records to satisfy it in that regard. If the action of the authority is challenged before the Court, it would be open to the Courts to examine whether the relevant objective factors were available from the records called for and examined by such authority. Any other view in the matter will amount to giving unbridled and arbitrary power to revising authority to initiate proceedinqs for revision in every case and start re- examination and fresh enquiries in matters which have already been concluded under the law. It is quasi-judicial power hedqed with limitation and has to be exercised subject to the same and within its scope and ambit. So far as calling for the records and examining the same is concerned, undoubtedly it is an administrative act, but on examination, "to consider", or in other words, to form an opinion that the particular order is erroneous in so far as it is prejudicial to the interest of the Revenue, is a quasi-judicial act because on this consideration or opinion the whole machinery of reexamination and reconsideration of an order of assessment, which has already been concluded and controversy about which has been set at rest, is again set in motion. It is an important decision and the same cannot be based on the whims or caprice of the revising authority. There must be materials available from records called for by the Commissioner.-- Parashuram Pottery Works Co. Ltd, vs. [TO 1977 CTR (SC) 32 : (1977) 106 ITR 1 (SC), Sirpur Paper Mills Ltd, vs. ITQ 1977 CTR (AP) 138 : (1978) 114 ITR 404 (AP), Dawjee Dadabhov & Co. vs. S.P. Jain & Anr. (1957) 31 ITR 872 (Cal) and Russell Properties 1M. Ltd, vs. A. Chowdhury, Addl. CIT (1977) 109 ITR 229 (Cal) relied on ."

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"The submission of the revenue was that while passing the assessment order, the Assessing Officer did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which apparently did not give any reason while allowing the entire expenditure as revenue expenditure. However, that, by itself, would not be indicative of the fact that the Assessing Officer had not applied his mind to the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reasons in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate, that would not, by itself, give occasion to the Commissioner to pass orders under section 263 merely because he has different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open. [Para 12] In the instant case, the Assessing Officer had called for explanation on items in question from the assessee and the assessee had furnished his explanation. Said fact was even taken note of by the Commissioner himself in his order. [Para 13] That clearly showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools was to be treated as revenue expenditure or not. It appeared that since the Assessing Officer was satisfied with the assessee's explanation, he accepted the same. [Para 14] Even the Commissioner conceded the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquiries rather than accepting the assessee's explanation. Therefore, it could not be said that it was a case of'lack of inquiry'. [Para 15] The instant case was not a case where the Commissioner had concluded that the opinion of the Assessing Officer was clearly erroneous and not warranted on the facts before him, viz., the expenditure incurred was not the revenue expenditure, but should have been treated as capital expenditure. Even the Commissioner in his order passed under section 263 was not clear as to whether the expenditure could be treated as capital expenditure or it was revenue in nature. No doubt, in certain cases it may not be possible to come to a definite finding and, therefore, it is not necessary that in all cases the Commissioner is bound to express final view, but the least that was expected was to record a finding that order sought to be revised was erroneous and prejudicial to the interest of the revenue. No basis for that was disclosed. In sum and substance, accounting practice of the assessee was questioned. However, that basis of the order vanished in thin air when it was ITA 2463/Mum/2015 found that very accounting practice followed for a

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number of years had the approval of the income-tax authorities. Interestingly, even for future assessment years, the very same accounting practice was accepted. [Para 16] It was in that context, the question that assumed importance was as to whether powers could be exercised under section 263 when two views were possible. [Para 17] The matter could be looked from another angel. What was the material/ information available with the Assessing Officer on the basis of which he allowed the expenditure as revenue? It was disclosed to the Assessing Officer that the assessee was a manufacturer of car parts. In the manufacturing process, dyes were fitted in machines by which the car parts were manufactured. Those dyes were, thus, the components of the machines. Those dyes needed constant replacement, as their life was not more than a year. The assessee had also explained that since those parts were manufactured for the automobile industry, which had to work accurately at high speed for a longer period, replacement of those parts at short intervals became imperative to retain accuracy. Because of those reasons, those tools and dyes had a very short span of life and could produce maximum one lakh permissible shorts. Thereafter, they had to be replaced. With the replacement of such tools and dyes which were the components of a machine, no new assets came into existence, nor was their benefit of an enduring nature. It neither enhanced the life of existing machines of which these tools and dyes were only parts, nor had their production capacity increased. In CIT v. Mysore Spun Concrete Pipe (P.) Ltd.] 1992] 194 ITR 159/60 Taxman 170 (Kar.). the High Court held that the replacement of moulds was not in the nature of replacement of a capital machinery but in the nature of replacement of apart of the machinery which, in turn, was in the nature of maintenance of machinery installed in the factory. Such an expenditure was treated as revenue expenditure. With this position in law, it was clear that view taken by the Assessing Officer was one of the possible views and ,therefore, the assessment order passed by him could not be held to be prejudicial to the revenue. Such an order, thus, had rightly been set aside by the Tribunal. [Para 18] In the instant case, the purpose of replacing the dyes was to maintain the existing assets, viz., machines and not to bring a new asset. Moreover, case at hand was one of 'repairs of machinery'. The case proceeded on the controversy right from the order of the Assessing Officer till the Tribunal as to whether the expenditure was revenue or capital in nature. [Para 19] Likewise, whether the Commissioner should have recorded definite finding or not, may not be very relevant factor in the instant case where on the facts it was found that the opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and, thus, there was no material before the Commissioner to vary that opinion and ask for fresh inquiry. [Para 20] Thus, the conclusion would be that the order of the Tribunal did not call for any interference, as the question of law had rightly been decided. [Para 21]"

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neither erroneous, nor prejudicial to the interest of the revenue. We, therefore, quash the order of the Ld.PCIT u/s 263 of the Act, and allow the appeal of the assessee.

Order pronounced in the open court on this 23 /01/2020

Sd/- Sd/- (RAVISH SOOD) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 23/01/2020 Thirumalesh Sr.PS

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. स�यािपत �ित //True Copy// (Asstt. Registrar) ITAT, Mumbai