JOINT COMMISSIONER OF INCOME TAX, (LTU),, BENGALURU vs. M/S. VIJAYA BANK, BENGALURU

3. The learned Commissioner of Income Tax (Appeals) erred in -: 3 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank directing the Assessing Officer to classify rural branches as was done for AY 2010-11 for the purpose of Section 36(1)(vii). 3.1 The learned Commissioner of Income Tax (Appeals) erred in holding that some of the branches are not rural branches as per the definition of Sec 36(1)(viia). 3.2 The learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that term “rural branch” has to be determined based only on the population and not on any other basis.

4. The learned Commissioner of Income Tax (Appeals) erred in confirming levy of interest u/s. 220”.

2.1. At the time of hearing the Ld.AR has restricted his arguments and submissions only to the extent of Ground of appeal No.2 on the validity of re-opening of assessment u/s 147 of the Act.

3.1. The main objection of the assessee-bank is that the re- opening of assessment is based on the existing material and it is merely a change of opinion and the assessee filed the information and the AO has referred at Page Nos. 4 to 6 of the order and finally the assessment was completed by the AO by disallowing the claim under section 36(1)(viia) of the Act for Rs. 120,87,72,242/- and disallowance of deduction u/s. 36(1)(vii) of the Act of Rs. 91,86,24,875/- and other additions and further the AO has held that the provisions u/s 115JB of -: 5 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank the Act are applicable and passed order u/s 147 r.w.s. 143(3) dated 16-01-2014.

3.2. Aggrieved by the order of AO, assessee preferred an appeal before the CIT(A).

4. Ld.CIT(A) considered the submissions of assessee and the findings of AO and observed that claim u/s. 36(1)(vii) of the Act has to be allowed to the assessee-bank to an extent of Rs. 91,86,24,875/- and the provisions of Section 115JB of the Act are not applicable. But CIT(A) confirmed the reopening of assessment u/s. 147 of the Act and disallowance of claim u/s. 36(1)(viia) of the Act and partly allowed the appeal.

4.1. Aggrieved by the order of CIT(A), assessee preferred an appeal before the Tribunal on two issues being the reopening of assessment u/s. 147 of the Act and disallowance of claim u/s. 36(1)(viia) of the Act.

5. At the time of hearing, Ld.AR submitted that the original assessment was completed u/s. 143(3) of the Act on 31-01- 2008, whereas notice u/s. 148 was issued on 25-03-2013,

-: 6 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank which is beyond a period of four years and the AO has made disallowance of claim u/s 36(1)(viia) of the Act. Ld.AR emphasized that the reasons for reopening was provided to the assessee and objections were filed, whereas the AO has dismissed the objections and confirmed the validity of re- opening of assessment. The contentions of learned AR are that the assessee-bank has disclosed the material facts necessary for assessment and there is no failure on the part of assessee-bank. Further the AO has not complied with the requirements of 1st proviso to Section 147 of the Act and re- opening of assessment. Ld.AR referred to Pg. 90 to 91 of the Paper Book, where the RBI has mandated the license to open the branch and referred to the publication of branch banking statistics and the definition of Rural Branch. Ld. AR’s contentions are that the assessee-bank has been following RBI’s guidelines on classification and relied on the RBI’s data. Further, assessee-bank has fairly and truly submitted all the details and the classification of RBI was considered in the assessment proceedings and the details were filed and further, provision u/s 36(1)(viia) of the Act was made in the Books of -: 7 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank account. Ld.AR referred to explanatory notes at Page No. 91 in respect of population groups cluster. Ld.AR also read-out the observations of CIT(A) in the order at Page Nos. 11 and 12 and the assessee’s cases and judicial decisions and prayed for annulling of the re-assessment proceedings.

“Section 36(1)(vii) of the Income-tax Act, 1961, read with the NBFCs Prudential Norms (Reserve Bank) Directions, 1998 - Bad debts - Whether 1998 Directions deal only with presentation of NPA provisions in balance sheet of a NBFC and they have nothing to do with computation or taxability of provisions for NPAs under Income-tax Act - Held, yes - Whether provision for NPAs in terms of 1998 Directions constitutes expense on basis of which deduction can be claimed by NBFCs under section 36(1)(vii) - Held, no - Whether even applying theory of real income, a debit, which is expressly disallowed by Explanation to section 36(1)(vii), if claimed, has got to be added back to total income of assessee, because Act seeks to tax 'real income' which is income computed according to ordinary commercial principles but subject to provisions of Act - Held, yes Section 36(1)(vii), read with section 43D, of the Income-tax Act, 1961 - Bad debts - Whether sections 36(1)(vii) and 43D are -: 8 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank violative of articles 14 and 19 of Constitution - Held, no Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowable as - Whether section 37 applies only to items which do not fall in sections 30 to 36; if a provision for doubtful debt is expressly excluded from section 36(1)(vii), then such a provision cannot be claimed as a deduction under section 37 even on basis of 'real income theory' - Held, yes” and the learned DR prayed for upholding the order of the CIT(A).

-: 9 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank …………………………………………….As explained earlier, the duty on the part of the assessee is to disclose fully and truly all material facts. Omission or failure to discharge this duty alone will attract the section and not otherwise. If, factually, the information is untrue not for a reason or on account of the omission or failure to disclose fully and truly, this would attract section 147(b) and not section 147(a)………………..…….the requirement of this section is that there is a duty cast upon the assessee to disclose fully and truly all material facts. That duty can be said not to have been discharged only when he does not place all the material facts necessary for the assessment or falsely states the facts in the returns. Therefore, if the facts stated are false, then there is no question of attributing any knowledge to the assessee because when stating that the matter is false that by itself will indicate that the assessee had knowledge of the same………………………..

Associated Stone Industries (Kotah) Ltd., Vs. CIT [224 ITR 560] …………………………While passing the order, the Assessing Officer has to look into the evidence that the assessee may produce along with its returns and also at the time of hearing the assessee, as well as evidence which the Assessing Officer required him to produce. The Assessing Officer having come to know, since it was made known in the return of income that its business of distribution of electricity is taken over by the Karnataka Electricity Board, under Indian Electricity Act, there was an obligation on the part of the Assessing Officer to have enquired with the assessee whether he has made any claim for payment of compensation, since he was passing an order under section 143(3) of the Act………”

7.1. Ld.AR referred to the reasons for reopening of assessment provided by the AO at Page No. 19 of the Paper Book, where the assessment for the AY. 2006-07 was re-

-: 10 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank opened because the assessee has claimed deduction u/s. 36(1)(viia) of the Act calculated on the basis of 10% of average aggregate rural advances. But whereas in the scrutiny proceedings of assessment year 2010-11, the assessee-bank has claimed similar deduction and as per the provisions of Section 36(1)(viia) of the Act, the average aggregate advances of the rural branches shall be taken into consideration for calculating deduction available u/s. 36(1)(viia) of the Act. Whereas AO on verification of the details submitted by the bank found that the branches located in sub areas, cannot be defined as Rural Branches. The AO observed that the rural branch must be located in a place that is revenue village, however, the branches are situated in place which is defined as per Urban Agglomeration Census of India of 2001 as town Panchayats and Municipalities. Hence, the AO based on the information obtained from the scrutiny assessment proceedings for the AY. 2010-11 has re-opened the assessment and issued notice u/s 148 of the Act. Ld.AR referred to Page No. 90 of the Paper Book on the Branch

-: 11 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank Banking statistics information as on 31-03-2009 and the explanatory notes, which read as under:

Explanatory Notes 1. Reference Period of data on all bank offices/branches prescribed in this volume relate to 31 March 2009, unless otherwise specified.

3. The state-wise data on Average Population Per Bank Office (APPBO) and Average Population per Bank Branch (APPBB) presented in Table nos, 2 and 3 respectively are worked out based on estimated population as on 1st March 2009 received from the Office of the Registrar General and Census Commissioner, Government of India.

4. Bank Offices comprise of branches doing banking business (i.e., either accepting deposit and/or offering credit to their customers) as well as administrative offices.

6. Administrative Offices relate to those offices which offer exclusive administrative support to their branches. These include Head Office, Zonal Office, Regional Office, Local Head Office, Training Centre, Clearing Cell, Service Branch, Asset Recovery Branch, Divisional Office, etc.

7. Population groups of the banked centres presented in this -: 12 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank Volume are based on the 2001 census. The population groups are defined as under:

'Rural' group includes all centres with population of less a) than 10,000. 'Semi-urban group includes centres with population b) of 10,000 and above but less than I lakh. 'Urban' group includes centres with population of 1 c) lakh and above but less than 10 lakh. 'Metropolitan' group Includes centres with population of d) 10 lakh and more.

7.2. The Ld.AR drew attention to the computation of income and in particular head of ‘business or profession’ for the AY. 2006-07 at Page No. 22 of the Paper Book, where the assessee

-: 13 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank has made disclosure of claim permissible u/s. 36(1)(viia) of the Act and the Revenue has not disputed such disclosure. We found strength in the submissions of the Ld.AR on validity of assessment u/s 147 of the Act in the assessee’s own case and the Bank has disclosed the complete particulars/information. The Ld.AR has substantiated with voluminous material, which cannot be overlooked. We are of the substantive opinion that the bank is a public sector undertaking and has followed the RBI guidelines, which are mandatorily considered in the accounting system of bank and relied on the judicial decisions: i. Chaitanya Properties (P) Ltd., (2016) [67 taxmann.com 201] (Karnataka); “……………..It is clear from a perusal of the order u/s. 143(3) of the Act dated 31.12.2007 that AO was fully aware of the fact that property at Whitefield which was held as investment got converted into stock-in-trade during the previous year relevant to A.Y. 2005-06. It is also clear from the order u/s. 143(3) of the Act that AO was fully conscious of the fact that property at Whitefield having been given under joint development agreement to PEPL on 5.2.2005. In the said assessment order, the AO despite knowing the fact that property at Whitefield was stock-in-trade……………………..

ii. Karnataka Bank (2014) [52 taxmann.com 526] (Karnataka);

“5…………….It is a case where facts were fully and truly set out in the returns and disallowance was claimed in the assessment under section 143(3) of the Act. The Assessing Authority on application of mind and being satisfied with the claim allowed the case of the assessee. The said order has been confirmed in appeal. It is thereafter i.e., after four years, the reassessment proceedings are initiated. When the returns fully and truly disclosed all material facts, the Assessing Authority could not have initiated proceedings under section 147 of the Act, after the end of assessment year. That is precisely what the Tribunal has held. Therefore, we do not see any merit in this appeal. The substantial question of law are answered in favour of the assessee and against the Revenue”. iii. Usha International Ltd., (2012) [25 taxmann.com 200] (Del)(FB);

-: 15 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank “13. It is, therefore, clear from the aforesaid position that: (1) Reassessment proceedings can be validly initiated in case return of income is processed under Section 143(1) and no scrutiny assessment is undertaken. In such cases there is no change of opinion; (2) Reassessment proceedings will be invalid in case the assessment order itself records that the issue was raised and is decided in favour of the assessee. Reassessment proceedings in the said cases will be hit by principle of “change of opinion”. (3) Reassessment proceedings will be invalid in case an issue or query is raised and answered by the assessee in original assessment proceedings but thereafter the Assessing Officer does not make any addition in the assessment order. In such situations it should be accepted that the issue was examined but the Assessing Officer did not find any ground or reason to make addition or reject the stand of the assessee. He forms an opinion. The reassessment will be invalid because the Assessing Officer had formed an opinion in the original assessment, though he had not recorded his reasons”. iv. National Dairy Development Board 2011 (3) TMI 1391 – Gujarat High Court;

“…………..Moreover, insofar as the second ground for reopening of assessment is concerned, it may be noted that the second proviso to section 147 of the Act expressly provides that the Assessing Officer may assess or reassess such income, other than the income involving matters which are subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Thus by virtue of the second proviso to section 147 of the Act, income involving matters which are subject matters of any appeal, reference or revision has expressly been taken out of the purview of the said section. In the circumstances, insofar as the income stated to have escaped assessment under the second ground is concerned, the same having been subject

-: 16 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank matter of appeal would not fall within the ambit of section 147 of the Act and as such the Assessing Officer lacks jurisdiction to reopen the assessment on the said ground.” v. Jhankit Chandulal Prajapati 2019 (3) TMI 813 – Gujarat High Court;

“………Thus, the third proviso to section 147 of the Act permits the Assessing Officer to assess or re-assess only such income which was not subject matter of appeal, reference or revision. In the present case, the Assessing Officer seeks to reopen the assessment in respect of income involving a matter which was subject matter of appeal before the Commissioner(Appeals). The reopening of assessment by the impugned notice under section 148 of the Act is, therefore, also hit by the third proviso to section 147 of the Act and is not permissible in law”. vi. ICICI Bank 2011 (11) TMI 304 – Bombay High Court;

“17. In this regard, it needs to be noticed that the second proviso to Section 147 stipulates that the Assessing Officer may assess or re-assess such income other than the income involving matters which are the subject matter of any Appeal, Reference or Revision, which is chargeable to tax and has escaped assessment. In the present case, it has emerged from the affidavit in reply of the Revenue that the Assessee had filed an Appeal to the CIT(Appeals) against the order of assessment. paragraph 4(v) of the reply states that by his order dated 29 September 2010, the CIT(Appeals) partly allowed the Appeal filed by the Petitioner by accepting the claim under Section 36(1)(vii) and Section 36(1)(vii) and by allowing a proportionate deduction under Section 10(23G) on the basis of the ratio adopted in the earlier assessment…………….”. vii. Reliance Energy Ltd., 2012 (12) TMI 379 – Bombay High Court;

-: 17 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank “…………..Moreover, the Tribunal has also correctly held that the jurisdiction to issue a reopening notice for the assessment year 2001-02 is absent in view of the fact that the profits earned as determined under Section 80IA of the Act with regard to its Dahanu generation plant was the subject matter of appeal before the Commissioner of Income Tax (Appeals) and the Tribunal leading to order dated 02.08.2004 and 24.01.2008 respectively. Consequently, the original order of assessment dated 23.03.2004 had merged into the order of Appellate Authority interalia with regard to the profits earned from the power generation plant at Dahanu for the purposes of deduction claimed under Section 80IA of the Act. The jurisdiction to exercise powers of reopening and assessment is specifically barred in respect of any matter which has been a subject matter of appeal by the 3rd proviso to Section 147 of the Act……..” viii. Chennai Garments 2015-TIOL-1899-HC-MAD-IT;

“9. It is well settled that merely because another Assessing Officer finds some thing wrong with the order of assessment passed by the previous one, assessment cannot be re-opened. The provisions of Section 147, which enables the Assessing Officer, who has reason to believe that income chargeable to tax has escaped assessment to reopen the assessment and recomputed the assessment, cannot be exercised merely because one officer finds fault with the previous one. Hence, we do not find any justification to entertain the appeal. Therefore, it is dismissed. No costs”.

7.3. The Ld.DR has vehemently argued and filed written submission. We, considering the facts and circumstances and materials filed and submissions and legal position and also there is no violation on the part of the assessee to fully disclose material facts, are of the substantive opinion that the -: 18 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank re-assessment u/s 147 is bad in law as the assessee bank has substantiated with evidence and judicial decisions on full and fair disclosure of material. Further, the assessee-bank has discharged its duty by disclosing all material facts fully and truly and if the information submitted is untrue or on account of omission or failure to discharge fully and truly, the provisions of section 147(a) shall not apply. We also support our view and rely on the decision of the Hon’ble Karnataka High Court in the case of Infosys Ltd. (Formerly known as Infosys Technologies Ltd.) vs. Deputy Commissioner of Income-tax [2019] (6) TMI 1261(Kar.)

“Reassessment u/s 147 r.w.s 148 - deduction u/s 10A - original assessment u/s 143(3) - reason to believe that the income chargeable to tax has escaped assessment - full and true disclosure of the material facts at the time of original assessment - alleged that Master Service Agreements, Work Orders, Scope of Works and invoices were not placed before the AO at the time of the original assessment - borrowed satisfaction,

HELD THAT: It is held that 'Note' on Software development projects and the various stages of software development placed by the assessee before the AO discloses the stages wherein the petitioner — assessee was required to carry out the project at the customer's site/onsite and the same are reflected in the Annual Reports. Considering these materials, deduction u/s 10A was allowed in the order passed u/s 143(3). In such circumstances, it is presumed that AO has examined the entitlement of deduction u/s 10A by the assessee in all angles. Withdrawal of the deduction allowed u/s 10A based on the assessment order relating to the -: 19 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank assessment year 200708 is without application of mind and nothing but change of opinion, which tantamounts to review and the same is not permissible to initiate the proceedings u/s 147/148 of the Act.

This Court is of the opinion that there was no material on record before the Assessing Authority to establish failure on the part of the assessee to disclose truly and fully the relevant material while passing the original assessment order u/s 143(3) and as such the respondent authority had no jurisdiction to invoke Section 147 and 148 of the Act for the assessment years in question. Writ petitions are allowed.”

Accordingly, we set aside the order of CIT(A) and quash the re- assessment proceedings for the AY. 2007-08 and allow this ground of appeal. Since the legal ground has been considered and allowed in favour of assessee, the other grounds of appeal become academic and they are dismissed. Similarly, for the AY. 2006-07 the same decision shall apply. Hence, the appeals of assessee for assessment years 2006-07 and 2007- 08 are partly allowed.

7.4. Since the Revenue has filed cross appeals, the grounds of appeal become infructuous as the original order of re- assessment has been cancelled. Accordingly, both the appeals of Revenue for AY 2006-07 and 2007-08 are dismissed.

-: 20 :- 1831, 1835 & 1836/Bang/2018 Vijaya Bank 8. In the result, the appeals of assessee are partly allowed and the appeals filed by the Revenue are dismissed.