ACIT, CIR-1(1), RAJKOT, RAJKOT vs. SHRI RAJKOT DISTRICT CO OPERATIVE BANK LTD, RAJKOT

(a) There has been a gross error in the allocation of expenditure by the assessee. In this case, the assessee has shown Rs. 127 crore interest income from 97 crore interest expenditure in short term loans. A profit margin of 23%. However, in the case of long-termEligible Business, the assessee has shown 90 crores interest income from 48 crores interest expenditure. A profit margin of 47%. How can the profit margin vary from 23% to 47% unless the allocation of interest expenditure under long term and short term is made incorrectly.

(b) The assessee has somewhat arbitrarily allocated the expenses, not based on proportion but on some assumed weightage. In terms of salary, miscellaneous and other operating expenses, the assessee has claimed 41% as expenditure for short term loans, however, only 28% for long term Eligible Business. This again has been done without providing any cogent material proof and just to increase the amount of net profit from Eligible Business.

(c) The assessee failed to provide any cogent material evidence so as to establish that the weighted expenses that have been allocated in accordance with the provisions of section 36(1) (viii) of the Act.

(d) As regards assessee contention that its appeal on the identical issue has been allowed by the CIT(A), it may be pointed out that the decision of CIT(A) has not been accepted by the department and appeal has been filed against the order of CIT(A) before the ITAT which is pending.

(e) As regards the assessee claim for allowing deduction u/s 36(1)(viii) at Rs.3,75,00,000/- in place of Rs.2,62,50,000/- on the ground that its tax consultant inadvertently claimed the said deduction on lower side is not acceptable in view of the discussion and eligible deduction of Rs. 1,87,34,799/- as worked out above. With prejudice, it may also be pointed out that the assessee has not filed revised return as such claim of enhanced deduction is not acceptable. Further reliance is placed on decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd. [(2006) (157 Taxman 1) (SC)] wherein it is held that the assessee cannot claim deduction other than filing a revised return. Reliance is also placed on decision of Hon'ble ITAT, Rajkot Bench, Rajkot in the case of ACIT Ghandhi Dham vs. The Kutch District Co-op. Bank Ltd. wherein following the decision of Hon'ble Supreme Court in Goetze (India) Ltd. (supra) held that AO is justified in completing the assessment on the basis of original return filed u/s 139(1) without taking into consideration the revised Page | 3 statement filed in absence of revised return as contemplated u/s 139(5) of the I.T. Act. (f) The A.O. work out the profit of the Eligible Business at Rs. 9,36,73,995/ and 20% thereof amounted to 1,87,34,799/- The AO held that since the deduction claimed u/s 36(10(viii) of the Act cannot exceed 20% of the profit of the Eligible Business, the appellant could not be allowed any deduction over and above Rs. 1,87,34,799/- Since the appellant had claimed deduction of Rs.2,62,50,000/- in the return of income, the excess claim of Rs. 75,15,201/- (Rs. 2,62,50,000/- less Rs.1,87,34,799/-) was disallowed and added to the total income of the appellant”.

4. Aggrieved by the order dated: 28/12/2017 of the Ld. AO the assessee filed an appeal in the office of CIT(A) (NFAC). The Ld. CIT(A) has decided the appeal with following observation by order dated 01-02-2024 1. “Ground No. 1 is general in nature and does not require any adjudication. 1. Assessee computed profit of the eligible business working adopted on the same line in the previous year and the computation been determined in the previous years i.e. A.Y. 2012-13 and 2013-14.Thatthe Ld. ITAT has approved in A.Y. 2017-18.that method of computing the eligible business profit is correct. “In view of the aforesaid binding decision of the ITAT, it is hereby held that the method adopted by the appellant for computation of net profit of the eligible business is correct and that the net profit of the eligible business for the year is Rs. 23,26,34,782/- and not Rs. 9,36,73,995/- adopted by the AO. The 20% limit for computation of deduction u/s 36(1) (vii) is to be determined on the figure of Rs. 23,26,34,782/-, which amounts to Rs.4,65,26,965/- Accordingly ground no. 2 is treated as allowed.” 2. The amount actually carried to the Special Reserve is Rs. 3,75,00,000/-, which is less than the outer limit of 20% of net profit of the eligible business, which has been held to be Rs. 4,65,26,965/- in Para 6.3 above, the claim of deduction u/s 36(1)(viii) of Rs. 3,75,00,00/- is hereby held to be correct. The AO is directed to allow deduction u/s 36(1)(viii) of Rs. 3,75,00,000/- Ground no. 3 is hereby allowed.

5. That the revenue is an appeal against the impugned order dated 01/02/2024 before us.

6. During the course of hearing, Ld. Sr. DR of the revenue has filed written submissions, which are reproduced; Filed on 24/09/2024 Sub: Written Submission along with oral argument in the matter of Rajkot District Co-Operative Bank Limited, ITA 188/Rjt/2024 for AY-2015-16-reg. 2. Argumentative Note on Section 36(1) (viii) of the Income Tax Act, 1961 in Favor of the Income Tax Department Introduction Section 36(1)(viii) of the Income Tax Act, 1961, allows specified entities engaged in eligible businesses to claim a deduction of 20% of their profits by creating a special reserve. While this provision aims to encourage long-term financing in specific sectors, it is imperative that taxpayers adhere strictly to the stipulated requirements to prevent misuse and ensure transparency. This note argues that claiming the deduction through the profit and loss account and separately disclosing eligible business profits are essential prerequisites. Failure to comply not only renders the expenditure void but also opens avenues for potential misuse and diversion of funds. Requirements for Claiming the Deduction 1. Specified Entity: The taxpayer must be a specified entity as per the Act, such as a financial corporation providing long-term finance for industrial or agricultural development, infrastructure facility, or housing development. 2. Eligible Business: The deduction applies exclusively to profits derived from the eligible business activities mentioned above. 3. Creation of Special Reserve: The entity must transfer up to 20% of the eligible profits to a special reserve, as reflected in the financial statements. Necessity of Claiming Through Profit and Loss Account 1. Legal Compliance: The Income Tax Act mandates that deductions under Section 36(1)(viii) be claimed explicitly in the profit and loss account. This ensures legal compliance and validates the deduction. 2. Transparency and Accountability: Recording the deduction in the profit and loss account promotes transparency, allowing for accurate assessment and verification by tax authorities. 3. Preventing Misuse: Omitting the deduction from the profit and loss account can lead to the expenditure being considered void. This omission creates opportunities for misuse and diversion of funds, undermining the purpose of the deduction. Importance of Separately Disclosing Eligible Business Profits 1.Accurate Calculation of Deduction: The 20% deduction is calculated on the profits of the eligible business. Without separate disclosure, determining the exact amount becomes challenging.

2. Facilitating Assessment: Separate figures enable the assessing officer to verify the deduction efficiently, reducing the likelihood of disputes and reassessments.

3. Ensuring Integrity of Financial Reporting: Segregating eligible business profits upholds the integrity of financial statements, reflecting true and fair views of different business segments. Consequences of Non-Compliance 1. Invalid Deduction Claims: Failure to claim the deduction through the profit and loss account may lead to disallowance, increasing the tax liability of the taxpayer.

2. Administrative Burden: Without separate profit figures, assessing officers must delve into detailed accounts to compute the deduction, leading to administrative inefficiencies.

3. Risk of Penalties: Non-compliance can attract penalties and interest, as it may be perceived as an attempt to evade taxes. Conclusion For taxpayers to legitimately benefit from the deduction under Section 36(1)(viii), strict adherence to statutory requirements is non-negotiable. Claiming the deduction through the profit and loss account and separately disclosing eligible business profits are crucial steps in this process. These practices not only ensure compliance but also safeguard against potential misuse and uphold the integrity of the tax system. Therefore, it is essential for specified entities to align their accounting and reporting mechanisms accordingly, facilitating transparent and accurate tax assessments. The revenue also is placing these arguments on record after linking them with provisions of Indian evidence act 1872, as per provision of section 143(3) of the income tax act, the assessment is a proceeding where assessing officer take evidence of what assessee may produce or what he may ask as evidence only, so there is a perfect harmony between section 143(3) and Indian evidence act 1872.

3. Argumentative Note on Section 36(1)(viii) of the Income Tax Act, 1961 in the Context of Sections 17, 31, 34, and 58 of the Indian Evidence Act. Introduction This note links the compliance requirements under Section 36(1)(viii) of the Income Tax Act, 1961, with the evidentiary principles established under Sections 17, 31, 34, and 58 of the Indian Evidence Act, 1872. It argues that when an assessee, in their audit report, fails to provide a separate schedule for eligible business income or show a specific reserve as required under Section 36(1)(viii), these admissions become binding and serve as conclusive evidence against the assessee. Such admissions lead to estoppel under Section 31, make the audit report a relevant fact under Section 34, and eliminate the need for the revenue to prove these facts under Section 58 of the Evidence Act. Linkage of Section 36(1)(viii) with Section 17 of the Indian Evidence Act 1. Section 17 Definition of Admission: Under Section 17 of the Indian Evidence Act, an "admission" is a statement, oral or documentary, which suggests any inference as to any fact in issue or relevant fact, and which is made by any of the persons mentioned in Section 18.

2. Admission by the Assessee: The audit report, which is a documentary statement, prepared based on the assessee's own books of accounts, qualifies as an admission under Section 17. In this case, the audit report clearly indicates that no separate schedule for showing eligible business income under Section 36(1)(viii) was provided, and no specific reserve was created. This admission suggests that the assessee did not fulfill the statutory requirements necessary for claiming the deduction.

3. Implication for the Deduction: The assessee's failure to provide the required schedule and reserve indicates non-compliance with Section 36(1)(viii) of the Income Tax Act. As per the Indian Evidence Act, this admission can be used as evidence to negate the assessee's claim for deduction.

4. The Supreme Court in Bharat Singh v. Bhagirathi (1966 AIR 405) held that admissions are substantive evidence and can be used against the party making them. In the present case, the assessee's audit report, which lacks a separate schedule for eligible business income and fails to reflect the specific reserve, is an admission that suggests non-compliance with Section 36(1)(viii). This admission is substantive evidence against the assessee's claim. Linkage with Section 31 of the Indian Evidence Act 1. Section 31 Admissions Not Conclusive Proof but May Estop: While admissions are not conclusive proof of the matters stated, they can lead to estoppel under the Evidence Act. This means the person making the admission is barred from contradicting it in court.

2. Estoppel Against the Assessee: The assessee's own audit report admits that there was no separate disclosure of eligible business income and no creation of a specific reserve. This statement, being made by an independent auditor based on the assessee's books, estops the assessee from claiming the deduction in contradiction to the admissions made in the audit report. The assessee cannot now argue that they complied with Section 36(1)(viii) when their own records state otherwise.

3. Supreme Court Interpretation: In Narayan Bhagwantrao Gosavi Balajiwale v. Gopal Vinayak Gosavi (AIR 1960 SC 100), the Supreme Court ruled that an admission is the best evidence that an opposing party can rely upon. While not conclusive, an admission can be decisive of the matter unless successfully withdrawn or proved erroneous. Here, the assessee's audit report, which indicates the absence of a special reserve and separate schedule, prevents them from later claiming that they complied with the requirements of Section 36(1)(viii) Linkage with Section 34 of the Indian Evidence Act 1. Section 34-Entries in Books of Account When Relevant: Section 34 states that entries in books of account, regularly kept in the course of business, are relevant whenever they refer to a matter in which the Court has to inquire. However, such statements alone are not sufficient unless corroborated by independent evidence.

2. Relevance of Audit Report: The audit report, which is based on the assessee's books of accounts, is a relevant fact under Section 34, It shows that the assessee did not maintain a separate schedule for eligible business income nor create the required reserve under Section 36(1)(viii). This report can be used to demonstrate non- compliance and supports the case of the Income Tax Department against the deduction claim made in the Income Tax Return (ITR).

3. Corroboration Through Books of Account: Since the audit report is prepared from the assessee's own books of accounts, it serves as independent corroboration. Therefore, the entries in the books of accounts further validate the facts stated in the audit report, making them highly relevant for the assessment proceedings.

4. Supreme Court Interpretation: The Supreme Court, in Chowgule& Co. v. Union of India (1990 AIR 1370), emphasized that entries in books of account can be relevant but need corroboration. In this context, the audit report, derived from the books of account and showing non-compliance, serves as independent evidence supporting the Income Tax Department's stance that the deduction claimed under Section 36(1)(viii) is invalid. Linkage with Section 58 of the Indian Evidence Act 1. Section 58-Facts Admitted Need Not Be Proved: Section 58 states that no fact need be proved in any proceeding which the parties thereto or their agents agree to admit at the hearing, or which, before the hearing, they agree to admit by any writing under their hands.

2. Binding Nature of Admissions: Since the assessee has admitted, through the audit report and books of accounts, that they did not separately disclose the eligible business income or create the required reserve under Section 36(1)(viii), these facts are deemed to be admitted and do not require further proof by the revenue authorities. The audit report serves as written admission under the assessee's hand, making these facts binding in nature and eliminating the need for the Income Tax Department to provide additional evidence.

3. Supreme Court Interpretation: In Nagindas Ramdas v. DalpatramIchharam (AIR 1974 SC 471), the Supreme Court held that facts admitted in pleadings are binding and do not require further proof. In the present context, the audit report acts as an admission by the assessee. Thus, the Income Tax Department need not produce additional evidence to prove non-compliance with Section 36(1)(viii).

Conclusion The audit report, prepared based on the assessee's own books of accounts, reveals critical admissions that directly contradict the claim for deduction under Section 36(1)(viii). Under Sections 17, 31, 34, and 58 of the Indian Evidence Act, these admissions are binding and serve as conclusive evidence against the assessee's claim. They establish that the necessary statutory requirements for claiming the deduction were not met, and hence, the deduction claimed is void. The principles of estoppel and relevance further strengthen the case of the Income Tax Department, supporting the disallowance of the deduction and highlighting the importance of accurate and transparent financial disclosures by taxpayers.

7. Therefore, as per provision of article 141 of the constitution of India these Supreme court rulings become binding in nature and the stand taken by revenue is correct and judgement of CIT (Appeal) is not correct and revenue made this prayer that order of the assessing officer should be restored.

Filed on 13/02/2025 Sub: Written Submission in the matter of Rajkot District Co-operative Bank Limited, ITA 188/Rjt/2024 for AY-2015-16-reg.

3. Previous Order Under Section 143(3) Overturned Under Section 263 Revenue's Stand is Clear The assessment order passed under Section 143(3) of the Income Tax Act in the previous year has been overturned by the Commissioner of Income Tax under Section 263 of the Act, which signifies that the order was found to be erroneous and prejudicial to the interests of the Revenue. This revision under Section 263 establishes that the Revenue has taken a clear and consistent stand on the issue in question. Since the higher authority has already intervened and rectified the matter, any contention that Revenue's stand is inconsistent or unjustified lacks merit. The present proceedings align with the revised position taken by the Revenue post-revision under Section 263.

7. That Ld. AR on behalf of the assessee has filed written submission on 18/02/2025. The details of claim of deduction made u/s36(1)(viii) by the Appellant are as under:

Sr. Particulars Amount (in Rs.) 1. Claim made in the return of income 2,62,50,000/- 2. Claim made during assessment 3,75,00,000/- 3. Claim allowed by A.O. 1,87,34,799 4. Claim of deduction disallowed and treated as excess 75,15,201/- by the A.O.[(1)-(3)] 5. Claim allowed by CIT(A) 3,75,00,000/-

Method of allocation of profit to the various business segments followed by the Bank and has a basis/logic which was elaborately explained; A.O.'s method is general in nature and ignores differences in business nature between various activities of Bank. The impugned issue is covered by own case appeal orders (ITA No. 285/Rjt/2018, vide order dated 19.07.2023).History of assessments/appeals in own case (as per chart) shows that same method of claiming deduction has been followed and were allowed by the Department.

7.1. Profit Allocation method adopted by the Appellant is complied with the Accounting Standard (AS-17)"Segment Reporting" issued by the Institute of Chartered Accountants of India.

7.2. It has been judicially accepted that when no allocation method is prescribed under the Act, then it is to be done as per the accounting standards issued by the ICAI. (Commissioner of Income Tac vs. Virtual Soft Systems Ltd. (2018) 404 ITR 0409 (SC), 255 TAXMAN 0352 (SC)] - Copy annexed.

“Assessee had to take course of Guidance Note prescribed by ICAI if it was available-Only after applying such method which was prescribed in Guidance Note, assessee could show fair and real income which was liable to tax under IT Act- Therefore, it was wrong to say that assessee claimed deduction by virtue of Guidance Note rather it only applied method of bifurcation as prescribed by expert team of ICAI-Rule of interpretation said that when internal aid was not available then for proper interpretation of Statute, court might took help of external aid-If term is not defined in Statute then its meaning could be taken as is prevalent in ordinary or commercial parlance-There was no force regarding plea of accounting standards prescribed by Guidance Note could not be used to bifurcate lease rental to reach real income for purpose of tax-Assessee was entitled for bifurcation of lease rental as per accounting standards prescribed by ICAI-Moreover, there was no express bar in IT Act regarding application of such accounting standards-Revenue's appeal dismissed.”

i. We note that the section 36(1)(viii) provides that "in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from Eligible Business computed under the head "Profits and gains of business or profession" carried to such reserve account". Therefore, it is condition precedent to compute the profit of the Eligible Business under the head "Profits and gains of business or profession". ii. The methodology for computing income under the head "Profit & Gain of Business or Profession" is provided in Chapter IVD of the Act covering Section 28 to 43D of the Act. It is mandatory to compute income of the business or profession in accordance with provision of the law. Section 29 states that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act. iii. Section 36(1)(viii) of the I.T. Act specified entities engaged in the Eligible Business to claim a deduction of 20% of the profit by creating reserves in books of Account of the assessee. That the requirement of the claim of deduction under the Act are as under; i. Taxpayer must be working as specified entity that is in the financial business entity. ii. Profit derived from Eligible Business activity. iii. 20% of the eligible profit from the business activity must be transfer to the in Special Reserve Account in the books of account of the specified entity. Claiming the deduction throw the profit and loss account and separately disclosing Eligible Business profit. This practice ensures legal compliance by the assessee. iv. We note that the method followed by the assessee duly acceptable by the Ld. CIT(A) meets the requirement of law as well as the cost accounting standard and therefore, profit of Eligible Business computed and deduction claimed on that basis of such profit is proper. The detailed working of computation of deduction under Section 36(1)(viii) of the Act had been furnished by the assessee along with giving scientific and cogent basis for the same. The basis of allocation of all elements of income and expenses, both direct and indirect was given, pointing out that it was in accordance with fundamental principles of cost apportionment as laid down by Cost Accounting Standards issued by the Institute of Cost Accountants of India. v. We note that the methodology followed by assessee for computing the "profit derived from Eligible Business" at flat 20% profit in the same proportion as the amount of long term advances bears to the total average advances is altogether irrational and illogical as it does not take into account the following fundamental principles of income and cost apportionment. vi. The methodology followed by assessee for computing the “profit derived from Eligible Business” at flat 20% profit in the same proportion as the amount of long term advances bears to the total average advances is altogether irrational and illogical as it does not take into account the following fundamental principles of income and cost apportionment. vii. Based on the above rationale and cost apportionment principles, segment- wise income, expense allocation and profit have been worked out by the assessee. On perusal of the same, it was found that the profit from the *Eligible Business of providing long term finance comes to Rs. 23,26,34,782 and the deduction @ 20% of the same comes to Rs. 4,65,26,956 as detailed below

“5.1.1 Gross Income of the Eligible Business of long-term finance 90,48,47,603

5.1.2 Expenses Allocated: Less: Interest cost allocated on Funds used basis 48,18,83,198 Less Other Expenses appropriate weightage basis allocated on 19,03,29,623 Total cost Allocated to the segment 67,22,12,821 5.1.3 Adjusted profit Act. as per Chapter IV-D of I.T. 23,26,34,782 5.1.4 20% of profit of the eligible business 4,65,26,956 5.1.5 Our actual claim (revised in place of 2,62,50,000) 3,75,00,000 5.1.6 Allowable deduction being lower of 5.1.4 or 5.1.5 3,75,00,000

(a) DCIT vs GNFC Ltd. (2014) 42 taxmann.com 438 (Gujarat); “Where assessee's claim for preliminary expenses had been allowed in earlier years, in absence of any change in circumstances, following principle of consistency, said claim was to be allowed in relevant year as well IT: Where assessee's claim for depreciation in respect of leased out assets had been allowed in earlier years, there being no change in circumstances, following rule of consistency, said claim was to be allowed in relevant year also” (b) CIT(E) vs Gujarat Lion Conservation Society (2024) 166 taxmann.com 430 (Gujarat).

“Where assessee-trust during year received certain amount from State Government as grant and claimed same as exempt under section 11 and Assessing Officer completed assessment under section 143(3) accepting assessee's claim, since similar receipt of Government grant in earlier years had been accepted by Assessing Officer to be eligible for exemption under section 11, assessment order was not erroneous or prejudicial to interest of revenue”

(c) PCIT vs Salarpuria Simplex Dwelling LLP (2022) 143 taxmann.com 35 (Calcutta); “Where assessee was engaged in business of construction and development of property and it had been following project completion method which had been accepted by department in assessment year 2014-15, principle of consistency should be followed; Assessing Officer was not justified in adopting percentage completion method for A.Y. 2015-16”

(Ground no.3) The reason for disallowance is that this additional claim u/s. 36(1)(viii) of the Act should have been made by way of filing of revised return of income. In our considered view, the appellate authorities are vested with the authority to allow such claim of the assessee, in case the same is tenable in law. (a) In the case of Pruthvi Brokers &Shareholders[2012] 23 taxmann.com 23 (Bom.), the High Court held that an assessee is entitled to raise before appellate authorities additional grounds in terms of additional claims not made in return filed by it.

(b) The Bombay High Court in the case of Sesa Goa Ltd.[2020] 117 taxmann.com 548 (Bombay) held that where assessee inadvertently omitted to make claim for deduction under section 10B in respect of two 100 per cent Export Oriented Undertakings, however, all necessary facts for claiming deduction under section 10B were already on record, Commissioner (Appeals) in exercise of his plenary/co-terminus powers, as well as Tribunal, ought to have entertained claim.

(c) The Karnataka High Court in the case of Karnataka State Co-operative Federation Ltd.[2021] 128 taxmann.com 1 (Karnataka) held that assessee's fresh claim before appellate authority is entertainable even when same is not claimed in original return of income nor assessee has filed revised return of income to make such claim.

(i) in a view of Accounting standard - Profit Allocation method adopted by the Appellant is complied with Accounting Standard - 17 –

"Segment Reporting" issued by the Institute of Chartered Accountants of India. It has been judicially accepted that when no allocation method is prescribed under the Act, then it is to be done as per the accounting standards issued by the ICAI. [Commissioner of Income Tac vs. Virtual Soft Systems Ltd. (2018) 404 ITR 0409 (SC), 255 ΤΑΧΜΑΝ 0352 (SC)] - Copy annexed. (ii) in view of the principle to consistently the Ld. CIT(A) has followed the principle of consistently, since in the assessee’s own case in co-ordinate bench of ITAT, in the case i.e., has allowed the Page | 18 claim of the assessee, wherein the assessee’s same claim in year 2014- 15 and also in the year 2017-18. We further note that the assessee/ assessee’s calculation of claim deduction u/s. 36(1)(viii) has consistently accepted and approved by the Ld. CIT(A) in the case of AY 2012-14.

That the view of the Ld. DR that claiming the deduction through the profit and loss account separately disclosing eligible business profit and are essential perquisite is of no importance.

Order pronounced in the open court on 05/08/2025.