UNITED BANK OF INDIA,KOLKATA vs. ACIT, LTU - 1, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH KOLKATA

BEFORE SHRI S. S. GODARA, JM & Dr. A. L. SAINI, AM आयकर अपीलसं/I.T.A No.75/Kol/2018 (�नधा�रण वष� / Assessment Year: 2012-13) United Bank of India Vs. ACIT, LTU-1, Kolkata. 16, Old Court House Street, Kol-1. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AAACU5624P (Appellant) .. (Respondent) Appellant by : Shri Soumitra Choudhury, Advocate Respondent by : Shri Vijay Shankar, CIT सुनवाई क� तार�ख/ Date of Hearing : 24/02/2020 घोषणा क� तार�ख/Date of Pronouncement : 28/02/2020 आदेश / O R D E R Per Shri S. S. Godara: This assessee’s appeal for assessment year 2012-13 arises against the Commissioner of Income Tax - 23, Kolkata’s order dated 08.06.2017 passed in case no.06/CIT(A)-23/L.T.U-1/16-17 involving proceedings u/s 143(3) of the Income Tax Act, 1961 (in short ‘the Act’). Heard Shri Soumitra Choudhury, learned authorized representative for assessee and Shri Vijay Shankar, CIT-DR appearing at the Revenue’s behest. 2. The assessee’s first substantive grievance challenges correctness of both the lower authorities’ action disallowing club entrance fees of Rs.97,794/- in the course of assessment affirmed in the lower in the lower appellate proceedings. The assessee herein is admittedly a bank which claimed the impugned expenditure as an allowable deduction under revenue head. The Assessing Officer’s assessment order dated 25.02.2015 held the same to be capital expenditure than revenue in nature. The CIT(A) has confirmed the impugned disallowance.

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“8. Coming to Revenue’s appeals ITA No.77&78/Kol/2016, we notice that Revenue’s identical first substantive grievance in both of its appeals seeks to reverse CIT(A)’s action deleting section 35D amortization of expenses disallowance of Rs.1,12,60,000/- in the two impugned assessment years. We thus treat the former assessment year 2010-11 as the “lead” assessment year for adjudication of the instant issue. 9. A perusal of the case file suggests that the assessee’s audited accounts of the relevant financial year 2009-10 and its prospectus relating to public offering as well

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working of the impugned expenses from part of records in pages 36 to 55, 75 & 76; respectively. The assessee company engaged in civil construction business, had sought for the impugned amortization u/s 35D(2)(c)(iv) of the Act regarding its “IPO”. It stated that although the expenditure eligible for amortization in issue stood at Rs.5,96,58,485/- out of which 5% of the project cost came to Rs.1,12,60,000/- only. The Assessing Officer rejected the impugned claim on two counts. He first of all observed that since the assessee stood incorporated way back on 25.08.1995 and it had been carrying out its business activities, it could not be said that this expenditure was prior to commencement of the business. And that this expenditure pertained to IPO only and therefore, it carried imprint of capital expenditure as well. The Assessing Officer then dealt with assessee’s plea that capital raised through IPO has helped in achieving the growth and thus, it was an instance of extension of undertaking only. The Assessing Officer did not agree to the foregoing explanation. He came to assessee’s details that the gross receipts had gone up 55.67% by raising share capital than 26.21% in the immediate succeeding assessment year even though no such capital had been raised. All this made him to hold that the assessee’s capital did not have any direct impact on the gross receipts. He finally concluded that the assessee’s impugned claim relating to its IPO did not qualify section 35D amortization since it neither pertained to time period “prior to commencement of business” nor in “connection with extension of undertaking or setting up of a new unit”. He therefore disallowed the assessee’s section 35D amortization claim amounting to Rs.112,60,00,000/-. 10. The CIT(A) has deleted the impugned disallowance as under:

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respectively. His case therefore is that these figures sufficiently indicate a substantial expansion of assessee’s undertaking. Mr. Tulsiyan then draws our attention to assessee’s increase in turnover as well involving corresponding figures of Rs.505.84 crores in 2009 rising to 628.88 crores in financial year 2009-10 relevant to impugned assessment year. He thus clarifies the effect of assessee’s IPO in question involving raising of funds having come into play in relevant previous year only. Mr. Tulsiyan also refers to assessee’s investments compiled in items no.1 to 8 suggesting that the corresponding projects are otherwise eligible for section 80IA deduction as well. 13. Next comes the assessee’s detailed paper book page 7 in latter assessment year 2011-12 indicating 98.99 per cent increase in turnover in assessment year 2009-10 (supra). Mr. Tulsiyan took us to assessee’s objects of share capital as well and submits that the funds raised related to investment in capital equipment only as per page 24 of the paper book. 14. We have given our thoughtful consideration to the rival submissions in support of and against the CIT(A)’s action deleting impugned section 35D amortisation disallowance. There can hardly be any dispute that this statutory provision prescribes amortisation of capital expenditure relating to specified items only u/s 35D which have been incurred; “before the commencement of business” or “after the commencement of his business, in connection with the extension of its undertaking or in connection with his setting up a new industrial unit” provided in sub-section 2(i) and (ii) of section 35D; respectively. We find that there is no rebuttal coming from the Revenue side about the purpose of assessee’s capital raised as meant for investment in capital equipments, working capital requirement, general corporate purposes followed by issue expenses only. This tribunal’s recent decision in ACIT vs. West Gujarat Expressway Ltd. (2015) 154 ITD 103 (Mumbai-Trib) allows similar instance of expenses of authorized share capital as amortizable falling under extension of the undertaking” only. Learned coordinate bench has also considered EID Parry (India) Ltd. vs. DCIT 256 CTR 104 (Madras). We conclude in the foregoing factual and legal position that the assessee’s case comes u/s 35D(2)(ii) since in connection with extension of its undertaking only as evident from assessee’s foregoing factual details. The CIT(A)’s identical findings under challenge deleting impugned identical section 35D disallowance of Rs.120,00,000/- in both these assessment years are upheld therefore. We adopt the above detailed reasoning mutatis mutandis and accept the assessee’s contention seeking impugned amortization.

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only case before us is that section 40(a)(ia) 2nd proviso inserted in the Act vide Finance Act 2012 w.e.f. 01.04.2013 makes it clear that the impugned disallowance does not apply in case an assessee is not in default u/s 201(1) first proviso of the Act if the payees’ concerned stand assessed. Mr. Choudhury quotes hon’ble apex court’s decision in (2018) 302 CTR 201(SC) holding CIT vs. Calcutta Export Company similar first proviso to section 40(a)(ia) as a curative one having retrospective effect. The legislature had made the said amendment vide vide Finance Act 2010 w.e.f 01.04.2010 which has been retrospectively applicable w.e.f. 01.04.2005. Hon’ble jurisdictional high court in PCIT vs. Tirupati Construction also holds the impugned 2nd proviso to section 40(a)(ia) as carrying retrospective effect on same lines.

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assessment year 2010-11 holds that the impugned disallowance does not apply in its case as under:

“13. Ground no. 5 raised by the assessee relates to disallowance u/s 14A amounting to Rs. 1. 58 crores. 14.When this appeal was called out for hearing, learned counsel for the assessee invited our attention to the order dated 19.11.2018, passed by the Division Bench of Delhi Tribunal in the case of Nice Bombay Transport (P) Ltd,in ITA No.1331/Del/2012for the Assessment Year 2008-09 whereby the issue relating to section 14A read with rule 8D in respect of shares held in stockhas been discussed and adjudicated in favour of assessee. Learned counsel for the assessee submitted that the present issue is squarely covered by the aforesaid order of the Tribunal, a copy of which was also placed before the Bench. 15. Learned Departmental Representative relied upon the orders of the authorities below. 16.We see no reasons to take any other view of the matter than the view so taken by the Division Bench of ITAT, New Delhi vide order dated 19.11.2018. In this order, the Tribunal has inter alia observed as follows: “6. We have carefully considered the submissions and perused the records. There is no denial of the assertions by the assessee that the assessee is engaged in the business of trading in share and all the shares are held by the assessee company as part of its stock-in-trade and not as an investment as is evidenced by the balance sheet of the company. However, Ld. AO recorded that a profit making company pays dividend to its shareholders who have invested some money to its shares, whether the Shareholder is a trader of share or not. Ld. AO further noted that the assessee company has purchased units from the mutual funds under the Dividend Reinvestment Plan and earned day to day dividend in the shape of units and value of the purchase account had increased by such units and the motive of the assessee company is clear to earn the dividend income. Ld. AO further observed that for a trader of shares, two types of gains are available, simultaneously. Firstly, earning profit from the settling of shares at higher prices from its cost price and secondly is the dividend income and without making investments, the assessee could not have earned dividend income.

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assessee would be entitled to deduction of interest under section 36(1)(iii) of the Act on borrowed funds utilized for the acquisition of shares, when the shares held as stock-in-trade which arise if the assessee is engaged in the trading of shares.

40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of that view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT,

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though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.

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We note that the issue is squarely covered in favour of assessee by the judgment of Co- ordinate Bench of ITAT New Delhi in the case of Nice Bombay Transport Pvt. Ltd. (supra) therefore, respectfully following the judgment of Co-ordinate Bench, we delete the addition of Rs. 1.58 crores.” 10. We thus conclude in light of the above-extracted detailed discussion that both the lower authorities have erred in law invoking the impugned disallowance in case of an assessee’s shares held as stock-in-trade. The assessee’s instant fourth substantive grievance is accepted.

“12. Now we take up the assessee’s appeal being ITA No. 980/KOL/2018, which involves a solitary issue relating to the disallowance of Rs.62,69,78,740/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee’s claim for deduction under section 36(1)(viii) of the Income Tax Act, 1961. 13. In the return of income filed for the year under consideration, a deduction of Rs.198.49 crores was claimed by the assessee under section 36(1)(viii) being 20% of its profit of the eligible business of providing long-term finance. While determining the said profit, the operating expenses were apportioned by the assessee in the ratio of eligible business to total business by taking into consideration the deposits, borrowings and advances. The said apportionment was done as under:- Particulars Amount (Rs.) Operating expense as per profit & 2691,38,87,410 loss account (domestic) Total business of the bank 270738,17,90,301 (Advances + deposits) Balance of long-term lending 36407,49,27,134 outstanding Operating expenses apportioned to 361,92,42,632 income from long-term lending 2691,38,87,410 x 36407,49,27,134 2,70,738,17,90,301

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The basis adopted by the assessee for apportionment of the total operating expenses was not found acceptable by the Assessing Officer. According to him, the assessee while apportioning the operating expenses had considered the non-performing assets also from which no income was recognized. He held that when no income was recognized from the non- performing assets, the operating expenses were not required to be apportioned to such non-existent income and, therefore, the method adopted by the assessee was not correct. He held that it was prudent to apportion the operating expenses in the ratio of turnover especially in the case of Bank. Accordingly he apportioned the operating expenses in the ratio of interest earned on long-term lending to total interest income earned and worked out the operating expenses apportionable to income from long-term earning at Rs.675,41,36,332/- as against Rs.361,92,42,632/- worked out by the assessee. The profit of the eligible business of long-term finance accordingly was re-computed by the Assessing Officer at Rs.678,96,54,842/- and the claim of the assessee for deduction under section 36(1)(viii) was restricted by him to Rs.135,79,30,968/- thereby making a disallowance of Rs.62,69,78,740/- on this issue. 14. The disallowance made by the Assessing Officer on account of its claim for deduction under section 36(1)(viii) was challenged by the assessee and the following submissions were made on behalf of the assessee in support of its case on this issue before the ld. CIT(Appeals):- “The appellant bank's contention is that operating expenses are to be apportioned in the ratio of eligible business (i.e. business of providing long term finance) to total business of the bank (i.e. aggregate of advance and deposits). Operating expenses of the bank represents various indirect expenses i.e. common expenses incurred by the bank. Such expenses are incurred by the appellant bank in relation to the entire business carried on by the bank i.e. granting of loans and advances and acceptance of various deposits. As operating expenses are incurred in relation to the total business of the bank, a part of such expense is definitely attributable to non-performing assets of the bank. The bank has to manage both performing assets and non-performing assets. Keeping this fact in mind operating expenses attributable to long term lending is to be worked out by considering the total business of the bank.

According to the Learned Assessing Officer, loans and advances of the appellant bank are classified into performing & non- performing assets. Interest income from performing asset is only recognized whereas interest on non-performing asset is recognized on receipt basis. Because of this reason the Learned Assessing Officer has thought it prudent that operating expenses are to be apportioned in the ratio of interest on long term lending to total interest income.

The Learned Assessing Officer has failed to appreciate the basic fact that operating expenses are incurred not only for managing performing assets but also for managing all assets and deposits accepted by the appellant bank. If the formula applied by the Learned Assessing Officer for apportioning operating expenses is

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accepted, it gives a distorted result. Such formula implies that the bank incurred operating expenses in relation 10 performing assets only which is not factually correct. No specific formula has been prescribed in section 36(1)(viii). The basis of apportioning operating expenses as adopted by the appellant bank is being followed consistently and such basis has been accepted by the Revenue consistently till assessment year 2010-11. There is no reason to deviate from the rule of consistency”.

The ld. CIT(Appeals) did not find merit in the submissions made on behalf of the assessee on this issue. According to him, the basis followed by the Assessing Officer for apportionment of operating expenses was more reasonable especially in the case of Bank as the volume of business of any Bank was considered on the basis of interest income earned. He accordingly confirmed the disallowance made by the Assessing Officer on this issue. 15. The ld. Counsel for the assessee submitted that the basis adopted by the assessee in apportioning the operating expenses in the ratio of eligible business of providing long-term finance to total business of the Bank after taking into consideration the aggregate of advances and deposits is more fair and reasonable. He contended that the operating expenses incurred by the assessee-Bank are in relation to its entire business of granting of loans and advances and acceptance of various deposits and that also include the non-performing assets. He contended that the Bank has to manage both performing and non-performing assets and the Assessing Officer as well as the ld. CIT(Appeals) failed to appreciate this vital aspect. He contended that the formula adopted by the authorities below for apportionment of the operating expenses implies that the Bank incurred operating expenses in relation to performing assets only and since it is not factually correct, the basis adopted by them has given distorted result. He also contended that the same basis as adopted by the assessee for apportionment of operating expenses in the year under consideration was adopted by it even in the earlier years and the same was consistently allowed by the Revenue till assessment year 2010-11. By relying on the Rule of Consistency, he contended that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee’s claim for deduction under section 36(1)(viii) thus is not sustainable. 16. The ld. D.R., on the other hand, relied on the order of the Assessing Officer as well as that of the ld. CIT(Appeals) in support of the revenue’s case on this issue and contended that the basis adopted by them to apportion the operating expenses is more fair and reasonable especially in case of Banking company. 17. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the apportionment of operating expenses made by the assessee in the ratio of eligible business to total business by taking into consideration the advances and deposits while determining the profit of the eligible business of long-term finance eligible for deduction under section 36(1)(viii) was not accepted by the authorities below mainly on the ground that the said basis adopted by the assessee had also taken into consideration the non-

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performing assets from which no income was recognized. According to them, when no income was recognized from the non-performing assets, there was no justification to apportion operating expenses by taking into consideration the non-performing assets which did not yield any income. As rightly contended on behalf of the assessee in this regard before the ld. CIT(Appeals) as well as before us, the operating expenses were required to be incurred by the assessee in relation to its total banking business and the non-performing assets definitely formed part of such business. The assessee-Bank was required to manage both performing as well as non- performing assets and the operating expenses incurred by it thus were attributable to non-performing assets also. It appears that this vital aspect was not appreciated by the authorities below in proper perspective and as rightly contended by the ld. Counsel for the assessee, the basis adopted by them for apportioning the operating expenses without proper appreciation of the vital position resulted in a distorted picture. Keeping in view all these facts and circumstances of the case, we are of the view that the basis adopted by the assessee for the apportionment of operating expenses was more fair and reasonable and since the same followed consistently by the assessee in the earlier years was accepted by the revenue till assessment year 2010-11, we hold that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on this issue by deviating from the stand consistently taken in the earlier year is not sustainable. We, therefore, delete the said disallowance and allow the appeal of the assessee.”

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restore the instant issue back to the Assessing Officer for carrying out necessary factual verification.

Order is pronounced in the open court on 28.02.2020.

Sd/- Sd/- (A. L. Saini) (S. S. Godara) ACCOUNTANT MEMBER JUDICIAL MEMBER कोलकाता /Kolkata; �दनांक/ Date: 28/02/2020 RS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. The Appellant - United Bank of India 2. The Respondent- ACIT, LTU-1, Kolkata. आयकरआयु�त(अपील) / The CIT(A), Kolkata [sent through email] 3. 4. आयकरआयु�त/ CIT 5. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, कोलकाता/ DR, ITAT, Kolkata [sent through email] गाड�फाईल / Guard file. 6. स�या�पत��त