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Income Tax Appellate Tribunal, BANGALORE BENCH ‘A’
Before: SHRI N.V VASUDEVAN & SHRI JASON P BOAZ
PER SHRI N.V VASUDEVAN, JUDICIAL MEMBER : ITA No. 673/Bang/2014 is an appeal by the Revenue against the order dated 26/2/2014 of Commissioner of Income-tax (Appeals), Hubli relating to the assessment year 2009-10. ITA No.684/Bang/2014 is an appeal by the assessee while ITA No.674/Bang/2014 is an appeal of the Revenue. Both these appeals are directed against the order dated 26/2/2014 of Commissioner of Income-tax (Appeals), Hubli relating to the assessment year 2010-110. Since common issues are involved in these appeals, these appeals were heard together. We deem it convenient to pass a common order.
ITA Nos.673, 674 & 684/B/14 2
673/Bang/2014 (Revenues’ Appeal for Asst. Year 2009-10)
Ground Nos.1, 7 and 8 raised by the Revenue are general in nature and calls no specific adjudication.
Ground Nos.2 to 4 raised by the revenue reads as follows:-
Whether on facts & circumstances of the case, is the learned CIT(A) correct in allowing deduction of Rs.177.38 crores U/s.36(1)(viia), even when the provision made in books of accounts by the assessee was only for Rs.9.11 crores. 3. Whether QQ facts & circumstances of the case, is the learned CIT(A) right in relying on the decision of Catholic Syrian Bank Ltd Vs. CIT - 343 ITR 270 in respect of Sec.36(1)(viia) when the facts and issues involved in both cases are different. 4. The learned CIT(A) has failed to appreciate the fact that deduction U/s. 36(1)(viia) can only be claimed to the extent of provision made in books and subjected to the restrictions mentioned in Sec.36(1)(viia).
The assessee is a rural regional bank engaged in the business of banking. In the course of assessment proceedings u/s 143(3) of the Income- tax Act, 1961 (Act) for AY 2009-10, the AO noticed that the asssessee had claimed deduction on account of provision for bad and doubtful debts for a sum of Rs.9,11,50,296/-. The sum of Rs.9,11,50,296/- is the sum which was debited towards Provision for Bad and Doubtful Debts by the Assessee in its Profit & Loss Account. The assessee filed revised return of income on 13/1/2010 withdrawing the claim for deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) of the of Rs.9,11,50,296/-and substituted the claim for a sum of Rs.177,38,45,734/-. It is not disputed by the assessee that the amount debited in the profit and loss account on account of provision for bad and doubtful debts was only a sum of Rs.9,11,50,296/-. The question before the AO was whether the assessee can claim deduction of a sum which is much more than what has been debited by the assessee in the books of account towards provision for bad and doubtful debts. The AO held that deduction u/s 36(1)(viia) cannot be more than what has been debited by the assessee as provision in the profit and loss account and accordingly refused
ITA Nos.673, 674 & 684/B/14 3
to allow the claim of deduction as made in the revised return of income for Rs.177,38,45,734/-.
On appeal by the assessee, the CIT(A) allowed the claim of the assessee as made in the revised return of income and in doing so followed the decision of the ITAT, Bangalore Bench in the case of Syndicate Bank Vs. DCIT, (2001) 72 TTJ (Bang) 744.
Aggrieved by the order of the CIT(A), the revenue has raised ground Nos.2 and 3 before the Tribunal.
We have heard the rival submissions. The learned DR submitted that as laid down by the Hon’ble Punjab and Haryana High Court in the case of State Bank of Patiala Vs. CIT 272 ITR 53 (P & H), claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. Our attention was drawn to a decision of the ITAT Bangalore in the case of Syndicate Bank Vs. DCIT (2014) 150 ITD 0103 (Bangalore), wherein the Hon’ble ITAT Bangalore Bench preferred to follow the view taken by the Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra) rather than the decision of the Syndicate Bank (supra) of the Bangalore Bench relied upon by the learned CIT(A) in giving relief to the Assessee on this issue. The ld. counsel for the assesses submitted that the decision of the Bangalore Bench of ITAT in the case of Syndicate Bank (Supra) should be followed by the Tribunal in preference to the decision of the Hon’ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra)and in this regard submitted that the decision of co-ordinate Bench of the Tribunal should be followed in preference to the decision of non jurisdictional High Court decision. In this regard, the ld counsel for the assessee placed reliance on the decision of the Hon’ble Karnataka High Court in the case of Patil Vijayakumar & Others Vs. Union of India 151 ITR 48 (Kar).
We have considered the rival submission. The provisions of Section 36(1)(viia)(a) of the Act lays down as follows:
ITA Nos.673, 674 & 684/B/14 4
“viia) in respect of any provision for bad and doubtful debts made by –
(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner;
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year.”
In the case of Syndicate Bank (supra) 78 ITD 103 (Bang.), the Bangalore Bench of ITAT took the view that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an Assessee is entitled to 10 percent of the AARA as deduction
u/s.36(1)(viia) of the Act. The relevant observations of the Tribunal in the aforesaid decision was as follows:
“20. The learned CIT has also acted under the misconception that deduction under cl. (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is entitled to a deduction which is quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this is a specific deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts.”
ITA Nos.673, 674 & 684/B/14 5
However the Bangalore Bench of ITAT in the case of Syndicate Bank (supra) 150 ITD 103 (Bang.) noticed that the ITAT Bangalore Bench in the case of Canara Bank in ITA No.58/Bang/2004 dated 9.6.2006 considered in the case of Canara Bank in ITA No.58/Bang/2004 dated 9.6.2006 considered the decision of the ITAT in the case of Syndicate Bank 78 ITD 103(Bang) and the decision of the Hon’ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra) and held that the decision rendered by the Hon’ble High Court has to be followed. The above decision though of a non jurisdiction High Court was followed as the said decision of the Hon’ble High Court was rendered after the decision in the case of Syndicate Bank 78 ITD 103 (Bang.). The Tribunal held that Judicial discipline demands that the Tribunal should follow the later decision which has considered both the decisions on the issue. The Tribunal following the said decision held deduction on account of Provision for Bad and Doubtful Debts u/s.36(1)(viia) of the Act has to be allowed only to the extent such provision is actually debited in the Profit & Loss Account by the Assessee for the relevant previous year. We therefore respectfully following the decision of the Tribunal in the case of Canara Bank (supra), allow Gr.No.2 to 4 raised by the Revenue and hold that the disallowance made by the AO was proper and the Assessee is entitled to deduction only to the extent PBDD is debited to the P & L A/c. Thus Gr.No.2 to 4 3 raised by the revenue are allowed.
As far as the decision of the Hon’ble Karnataka High Court in the case of Patil Vijayakumar (supra) cited by the learned counsel for the Assessee is concerned, We find that the issue in the aforesaid case was as to whether the Income-tax Act 1961 being all India statute, the view expressed by one High Court should be followed by the other High Courts of different state. The Hon’ble Karnataka High Court took the view that decision rendered by the High Court is binding only on the authorities and Courts subordinate to the said High Court and will not be binding on the High Court of another state and Courts and Tribunals functioning in that other State. The Tribunal in the case of in the case of Canara Bank in ITA No.58/Bang/2004 dated 9.6.2006 considered the decision of the ITAT in the case of Syndicate Bank 78 ITD 103(Bang) and the decision of the Hon’ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra) and held that the decision rendered by
ITA Nos.673, 674 & 684/B/14 6
the Hon’ble High Court has to be followed. The Hon’ble Karnataka High Court in the case of Patil Vijayakumar (supra) dealt with argument that decision of one High Court of a State is not binding on the High Court of another State. In the present case the only decision of Hon’ble High Court available on the issue whether deduction u/s.36(1)(viia) of the Act has to be allowed only on the basis of actual debit towards PBDD in the profit & Loss Account by the Assessee, is the decision of the Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra). The question therefore is as to whether the co-ordinate Tribunal decision has to be followed in preference to a non jurisdictional High Court decision. The Hon’ble Karnataka High Court in the case of Patil Vijayakumar (supra) has not dealt with any such issue. Going by the hierarchical system in our country, this Tribunal in the case of Canara Bank ITA No. 58/Bang/2004 dated 9.6.2006, after considering the decision rendered in the case of Syndicate Bank 78 ITD 103(Bang.) preferred to follow the decision of Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra) though of a non jurisdictional High Court than the decision of co-ordinate Bench in the case of Syndicate Bank 78 ITD 103 (Bang.). In our view therefore the decision of the Hon’ble Karnataka High Court in the case of Patil Vijayakumar (supra), does not support the plea of the assessee. We, therefore hold that the relief allowed by the CIT(A) in the matter of allowing deduction for provision for bad and doubtful debts was not in accordance with law. The addition made by the AO is, therefore, restored. The ground Nos. 2 and 4 raised by the Revenue are allowed.
Ground Nos. 5 and 6 raised by the Revenue in its appeal reads as follows:- “5. Whether on facts & circumstances of the case, is the learned CIT(A) correct in holding that Rs.778.48 crores as eligible for deduction U/s.36(1)(viii) of the Act.
Whether on facts & circumstances of the case, is the learned CIT(A) correct in allowing deduction even though the following advances prima fade are not eligible U/s. 36(1)(viii) for deduction.
ITA Nos.673, 674 & 684/B/14 7
Before we proceed to discuss these grounds, it is useful to set out the provision of sec. 36(1)(viii) of the Act which allows certain deductions to Banking companies and it reads as follows:-
“(viii) 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” (before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.
Explanation.—In this clause,—
(a) “specified entity” means,—
(i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956);
(ii) a financial corporation which is a public sector company;
(iii) a banking company;
(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
(v) a housing finance company; and
(vi) any other financial corporation including a public company;
(b) “eligible business” means,—
ITA Nos.673, 674 & 684/B/14 8
(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for—
(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;]
(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;
(c) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
(d) “co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P;
(e) “housing finance company” means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes;
(f) “public company” shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
(g) “infrastructure facility” means—
(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed;
(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and
(iii) an undertaking referred to in sub-section (10) of section 80-IB;
(h) “long-term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for
ITA Nos.673, 674 & 684/B/14 9
repayment along with interest thereof during a period of not less than five years.”
As can be seen from the aforesaid provision, deduction is allowed to specified entity (the assessee is a specified entity) of 20% profits derived from eligible business computed under the head “Profits and gains of business or profession” (before making any deduction under this clause). The Assessee has to create and maintain a special reserve A/C and transfer to such reserve account the sum which is claimed as deduction u/s.36(1)(viii) of the Act. “Eligible business” has been defined in Explanation (b) to sec. 36(1)(viii) of the Act which is providing long term finance for development of infrastructure facility. Explanation (g) to sec. 36(1)(viii) defines what is “infrastructure facility” for the purpose of the Act. The dispute between the assessee and the Revenue in the present case is the manner in which the deduction u/s 36(1)((viii) of the Act has been allowed by the AO and the CIT(A). The AO allowed deduction of Rs.1,58,62,378/- as against the claim of the assessee for deduction of a sum of Rs.2.91 crores. The basis on which the AO arrived at the amount allowed by him as deduction was as follows:-
Before CIT(A) the Assessee submitted that the basis on which the AO arrived at a sum of Rs.374.56 Crores as Advances given for eligible business was not correct. The Assessee pointed out to the CIT(A) that its gross loans and advances as on 31.03.2009 was Rs. 2626.29 crores ( As per schedule 9 of Balance Sheet). The loans and advances shown in the Balance Sheet as at
ITA Nos.673, 674 & 684/B/14 10
31.03.2009 was Rs. 2526.28 crores which was net of Rs. 100.01 crores provision for bad and debts (deducted from the gross advances). Further out of Rs. 2626.29 crores gross outstanding, advances and the loans given for a period of five years and more pertaining to eligible business was Rs. 778.48 crores and the list of such advances was given to the assessing officer in the course of assessment proceedings. The Assessee further pointed out that at page 68 of the Annual Accounts of the Assessee, it has given maturity wise Assets and Liabilities Management figures (ALM) which was as follows:
The Assessee pointed out that the AO had taken the long term finance from the table above at Rs.374.56 Crores by considering the loans given by the Assessee for a period above 5 years was Rs.374.56 Crores. The Assessee pointed out that the above table showed the remaining term of loans and advances as on 31.03.2009 (Maturity Pattern) and not the tenure of the loans given. The Assessee also submitted that as per RBI, the banks have to give Assets and Liabilities Management (ALM) statement as on Balance Sheet date showing maturity pattern of Deposits, Advances, Investments, etc but it does not indicate the tenure of the loan or deposits but only maturity pattern of deposits and advances. The Assessee pointed out that the learned assessing officer without discussing the ALM Statement given in the Annual Report with the Assessee has mistaken the maturity pattern of loans and advances as
ITA Nos.673, 674 & 684/B/14 11
on 3103.2009 as tenure of loan sanctioned and arrived the eligible Advances at Rs. 374.56 crores as the loans for more than 5 years period and eligible long term loans as per section 36 (i)(viii). The eligible advances sanctioned for a period of five years and more was Rs. 778.48 crores as on 31.03.2009. The Assessee thus submitted that the learned assessing officer has erred in taking eligible advances for the purpose 20%, deduction towards special reserve u/s 36(i)(viii) and mistaken the maturity pattern of loans as on 31.03.2009 as tenure of loans for the purpose of deduction under section 36(i)(viii). The Assessee prayed that the action of the AO was unjustified and wrongful disallowance made by the assessing officer of Rs. 1,32,37,622.00 should be allowed.
After examining the various contentions put forth by the assessee before him, the CIT(A) allowed the relief to the assessee observing as follows:- “I have gone through the facts of the case, contents of the assessment order and written submissions of the assessee. The Hon'ble jurisdictional ITAT, 'C' Bench, Bangalore in the case of Karnataka Vikas Grameena Bank Vs. ACIT, C-2(1), Hubli ITA No. 226 & 227/BANG/2012 (AY 2007-08 & 2008-09) it was held that: " the rival arguments at length and perused and carefully considered the material on record. On an appreciation of the facts of the matter, we find that the learned CIT (Appeals) has accepted that the eligible advances amount to Rs. 1055.01 crores and not Rs. 456 crores as adopted by the AO. It appears that the error on the part of the AO was due to the fact that in the break-up of advances based on ageing analysis as on 31.03.2008, the amount of advances outstanding for a period of more than 5 years as on 31.03.2008 was Rs. 456 crores. This the AO misunderstood to be the total eligible advances. The AO does not appear to have considered the fact that certain advances were given for a period of more than 5 years, may be outstanding for a period of less than five years as on 31.03.2008 due to repayments being made in accordance with the terms of loans and advances. It appears to be a clear case of misunderstanding of facts on the part of the AO. With respect to the quantum of total income of the assessee, the AO has considered the total income at Rs. 41.88 crores. In this context it would be relevant to
ITA Nos.673, 674 & 684/B/14 12
reproduce the provisions of section 36(1)(viii) of the Act which reads as under : 36(1)(viii) 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" (before making any deduction under this clause) carried to such reserve account." From the provision of section 36(1)(viii) of the Act, it is clear that the deduction of 20% should be on the profits pertaining to the eligible business. The AO, in the case on hand, has considered the profits from the eligible business to be at 17% of the book profit instead of considering the total income from the eligible profits. Various courts have held that for the purposes of claiming deduction under section 36(1)(viii) of the Act, it has to be computed on the total income before deduction under this section. As regards the issue of whether statutory deduction under section 36(1)(viii) of the Act should be calculated on the total income, before deduction under section 36(1)(viii) itself or after deduction under section 36(1)(viii) of the Act, it is a settled issue in view of the decisions of the Hon'ble Apex Court in the cases of Kerala State Industrial Development Corp. (supra) and Andhra Pradesh State Financial Corporation (supra) relied on by the assessee that the statutory deduction under section 36(1)(viii) should be calculated on total income before the deduction under section 36(1)(viii) itself. In view of the findings that the assessee had correctly worked out the deduction under section 36(1)(viii) of the Act at Rs. 8,10,91,000 and therefore the amount of eligible advances is Rs. 1055.01 crores, and following the aforesaid two decisions of the Hon'ble Apex Court in the cases of Kerala State Industrial Development Corporation(supra) and Andhra Pradesh State Financial Corporation (supra) as regards the total income for the purpose of computing deduction under section 36(1)(viii) of the Act, we uphold the order of the learned CIT(Appeals)." Respectfully following the jurisdiction of ITAT, 'C' Bench, Bangalore judgment mentioned supra the addition made by the AO was disallowed and assesses ground of appeal is allowed.”
Aggrieved by the order of the CIT(A) Revenue has raised ground Nos. 5 and 6 before the Tribunal.
ITA Nos.673, 674 & 684/B/14 13
We have heard the rival submissions. It is not clear as to how the assessee made its claim for a sum of Rs.2.91 crores as deduction u/s 36(1)(viii) of the Act. The basis as given by the assessee in the written submission before the CIT(A) was as follows:-
The perusal of the CIT(A) order shows that the relief allowed by the CIT(A) to the assessee is based on the decision of the ITAT, Bangalore Bench in Assessee’s own case for assessment year 2007-08 and 2008-09 in ITA Nos. 226 and 227/Bang/2012. The CIT(A) has not given a factual finding as to what should be considered as eligible advances i.e., long term finance provided by the Assessee. We are of the view that since no finding has been given by the CIT(A) as to the basis on which the relief was given by the CIT(A), we deem it fit and proper to set aside the order of the CIT(A) and remand to the AO for fresh consideration the question of proper deduction to be allowed u/s 36(1)((viii) of the Act. The AO will consider the contentions put forth by the assessee and decide the issue afresh affording opportunity being heard to the assessee.
ITA Nos.673, 674 & 684/B/14 14
Ground Nos.5 and 6 are treated as allowed for statistical purposes.
In the result, the appeal by the assessee is treated as partly allowed.
ITA No.674/Bang/2014 (Revenues’ Appeal for Asst. Year 2010-11)
Ground Nos. 1, 8 and 9 raised by the revenue are general in nature and calls for no specific adjudication.
Ground Nos.2 and 3 raised by the Revenue are similar to ground Nos. 2 to 4 raised by the assessee in its appeal for assessment year 2009-10 in ITA No.673/Bang/2014. For the reasons stated therein the disallowance made by the AO u/s 36(1)(viia) of the Act is restored and the relief allowed by the CIT(A) is held to be not correct.
The Ground Nos. 2 to 3 are accordingly allowed.
Ground Nos. 4 and 5 raised by the Revenue reads as follows:-
“4. Whether on facts & circumstances of the case, is the 01(A) correct in deleting addition of Rs.2.96 crores made on provision for depreciation of investments held to maturity (HTM) as stock-in-trade.
Whether on facts & circumstances of the case, is the CIT(A) correct in allowing deduction for depreciation of investment which is notional loss without appreciating the fact that loss claimed on account of depreciation is only notional and not actual loss incurred by the assessee.”
As far as ground Nos. 4 and 5 raised by the Revenue are concerned, it is not in dispute before us that an identical issue came for consideration in Assessee’s own case in assessment year 2008-09 and this Tribunal on identical issue held that the assessee is entitled to get deduction on account of depreciation of investments which were held in the category of HTM (Held to Maturity). The dispute in AY 2008-09 was the Assessee in its profit and loss. account for the year ended 31.3.2007 had written off a sum of Rs,17,59,00,087
ITA Nos.673, 674 & 684/B/14 15
claiming depreciation on investments, by way of loss on valuation of securities which represents depreciation in the value of securities held by the assessee as on 31.3.2007. The assssee had valued the securities held by it as on 31.3.2007 and found that the market value of such securities as on the said data was less than the cost of the securities by the above sum of Rs.1759,00,087 and wrote off the same in its books of account on the basis of the principle 'cost or market value whichever is less applicable to the valuation of closing stock'. The Assessing Officer however did not agree with the view of the assessee and relying on CBDT's lnstruction No.17/2008 dt.26.12.2008 came to the conclusion that the securities in respect of which the decrease in value was written off in the profit and loss account are held “investments held to maturity" and therefore these cannot be treated as stock-in-trade and consequently cannot be valued in the manner in which stock-in-trade is valued. On appeal, the learned CIT (Appeals) in his order relying on the decisions of the coordinate benches of this Tribunal in the case of :- I. ACIT (LTU) V Vijaya Bank in ITA Nos.253 & 205/Bang/2007 d.24.1.2008 for Assessment Year 2003-04. II. (ii) The Karnataka Bank Ltd. VJCIT in ITA No.50/Bang! 997. III. (in) ING Vysya Bank Ltd V DCIT (2006) 6 SOT 606 (Bang)
held that all investments made by the assessee constitute stock in trade for the purpose of income tax and has to be therefore valued in the manner in which stock-in-trade is valued. On further appeal by the revenue the Tribunal upheld
the order of the CIT(A). Following are the relevant observation of the ITAT in ITA No.226/Bang/2012 for assessment year 2008-09 held as follows:-
“11.5 We have heard the rival contentions on the issue before us and have perused and carefully considered the material on record including the judicial, pronouncements relied on. In the case on hand, we find that there is no dispute as regards the investment made by the assessee in securities and the said investments have been treated and classified by the assessee as stock-in-trade, which have been valued at the end of the year at cost or market value, whichever is less. From this it is clear that the asses-see is treating the securities held under the category ‘held to maturity' as stock-in-trade. This issue has been considered in detail by thê Hon'ble Karnataka High Court in the case of
ITA Nos.673, 674 & 684/B/14 16
Karnataka Bank Ltd. V CIT in its order (ITA No.172/2009 dt.22.3.2013), wherein the Hon’ble Court after considering the decision in the case of CIT V IG Vysya Bank Ltd. in ITA No.2886/2005 dt.6.6.2012 hzi held at pages 23 to 25 at paras 9 & 10 its order as under: 9. In instant cases, the assessee has maintained the accounts in terms of the RBI Regulations and h has shown it as investment. But consistently for more than 1tqdçades it has been shown as stock-in-trade and depreciation is claimed and allowed Therefore notwithstanding that in the balance feet it is shown as investment, for the purpose of Income Tax Act, it is shown as stock-in-trad. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank has to take into consideration the market value, of the shares. If the market value is less than the cost price, in law they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the Balance Sheet. 10. In that view of the matter, the order passed by the authorities balding that in view of the RBI guidelines, the assessee is stopped from treating the investment as stock-in-trade is not correct That finding recorded by the authorities is hereby set aside. Tie appeal is allowed.....
6 The facts of the case on hand are similar to those in the case of Karnataka Bank Ltd in ITA NO.172/2009 decided by the Hon'ble Karnataka High Court by order dt.23.3.2013. This decision of the Hon'ble Karnataka High Court has also been followed by a co-ordinate bench of this Tribunal in the case of DCIT V Syndicate Bank in ITA Nos.668 & 669/Bang/2010 and 708 & 709/Bang/2010 dt 19 6 2013 We, therefore, respectfully following the decision of the Hon’ble Karnataka High Court in the case of Karnataka Bank Ltd. (supra) hold that the order-of the learned.CIT(Appeals)does not call for any interference and consequently, dismiss grounds No.2 to 4 raised by revenue.”
Respectfully following the decision referred above, we uphold the order of the CIT(A) and dismiss ground No.4 and 5 5aised by the Revenue.
Ground Nos. 6 and 7 raised by the revenue as follows:-
ITA Nos.673, 674 & 684/B/14 17
“6. Whether on facts & circumstances of the case, is the CIT(A) correct in deleting the addition made on account of stale drafts and pay orders U/s. 41(1). 7. Whether on facts & circumstances of the case, is the CIT(A) correct in not appreciating that stale drafts & pay orders have not been claimed by the persons and the amounts involved remained with the assessee bank and hence taxable as per Section 28(iv) of the l.T. Act.”
As far as ground Nos. 6 and 7 are concerned, the issue is with regard to whether the AO was justified in making an addition by treating liability of the assessee on account of stale drafts as income of the assessee u/s 41(1) of the Act. It was not disputed by the parties before us that identical issue was considered by the Tribunal in assessee’s own case in assessment year 2008- 09. The facts in AY 2008-09 which are similar to the facts in the present AY are that the Assessing Officer noticed that in the Assesse’s Balance Sheet as on 31.3.2007 an amount of Rs.58,31,851 was shown as liability outstanding towards Drafts and Pay Orders. The Assessing officers treated these amounts as income of the assessee u/s.41(1) of the Act by relying on the ns of the Hon'ble Apex Court in the case of T.V. Sundaram lyengar & Sons reported in 22 ITR 334 and of the Hon'ble Bombay High Court in the case of Batlibol & Co. Pvt. Ltd. (149 ITR 604). On appeal, the learned CIT (Appeals) upheld the addition made by the Assessing Officer. The case of the assessee was that the above sums amounting to Rs.58,31,851 do not represent income u/s.41(1) of the Act. It was submitted that for any amount to constitute income u/s.41(1) of the Act, it ought to have been treated as an allowance or deduction in an assessment year earlier to the previous year in which it is sought to be treated as income. It was submitted that the amounts collected to issue drafts and Pay Orders are held in trust by the Bank and these amounts have never even been treated as an allowance or deduction. The only income that the bank earns for issue of Drafts and Pay Orders is commission which was already be offered as income in the relevant periods. The Assessee placed reliance on a decision of the co-ordinate bench of ITAT Bangalore in the case of Canara Bank Ltd. in ITA No.390/Bang/2011 dt.8.6.2012, wherein the Bank transferred a sum of Rs.52,77,81,540 representing amounts collected towards issue of drafts and pay orders to the profit and loss account after seeking necessary permission from the Reserve Bank of India ('RBI') to do so. The Assessing Officer in that
ITA Nos.673, 674 & 684/B/14 18
case treated the above amount as income of the Bank. The co-ordinate bench of the Tribunal held that the same does not constitute income after duly considering the decision of the T.V. Sundaram lyengar & Sons (supra) and distinguished the same on facts. Reliance was also placed on a decision of the ITAT Bangalore Bench in the case of Vijaya Bank Ltd. (ITA No.455/Bang/2011 dt.22.6.2012 wherein the Bank transferred a sum of Rs 10,50,47,796 representing amounts collected towards issue of drafts and pay orders to the profit and loss account after following necessary permission from the RBI to do so. The Assessing Officer in that case treated the above amount as income of the bank. The Tribunal, in that case also, after duly considering the decision of the Hon'ble Apex Court in the case of TV Sundaram lyengar & Sons (supra) held, at paragraph 12 of its order as under: “12. In the present case the assessee never wanted the amount to be treated as its income by credit to the profit and loss account. It was, only because of RBI's direction the amount was credited to the profit and loss account. The RBI's directions are also clear that the assessee should not use the amount transferred to General Reserve for any purpose other than meeting any, future claims by the persons entitled to claim the aforesaid amount. The amount was also not available for distribution of dividend. In the fight of the aforesaid facts and circumstances prevailing in the case of the assessee, we are of the view that the decision of the Hon'ble Supreme Court in the case of TV Sundaram lyengar and Sons (supra) will not be applicable to the facts of the present case.'
The Tribunal on the above contentions held in ITA No.226/Bang/2014 order dated 28/11/2013 as follows:- “7.3.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited on either side. The Assessing Officer has invoked the provisions of section 41(1) of the Act to bring the amount of Rs.58, 31,851 received for making drafts and pay orders to tax in the hands of the asses e in the period under consideration. section 41(1) of the Act, specifically deals with amour1t that were allowed as a deduction in the past assessments as trading liabilities which in later year ceases OR are remitted by the creditors If and when in a later year there is evidence to show that the liability is-remitted, it can be brought to tax. In order to invoke section 41(1) of the Act, it must be first established that the assessee had obtained some benefit -in respect of a trading liability Which was earlier allowed as a deduction. It is not enough if the assessee derives some benefit in respect of
ITA Nos.673, 674 & 684/B/14 19
such liability, but it is essential that such benefit arises by way of 'remission' or 'cessation' of Liability. In Sugauli sugar Works (P) Ltd reported in (1999) 234 ITR 518 (Sc) it was held that a unilateral action cannot bring about a cessation or, remission as a 'remission' can only be granted by a creditor and 'cessation' can only occur either by operation of law or the debtor by unequivocalIy declaring intention not to honour his liability when payment is demanded by creditor. In the case on hand taking into account the facts and circumstances involved, we find merit in the arguments put forth by the learned Authorised Representative since the outstandingly liability of Rs.58,31,851 on account of Demand Drafts and pay orders is still reflected in the books of accounts of the assessee as on 313.2007 and therefore the same stands acknowledged by the assessee and the liability subsists. In this view of the matter, we find that the authorities below have failed to establish the primary requisite for invoking the provisions of section 41(1) of the Act and hold that the provisions of section 41(1) of the Act would not le attracted in the case on hand in respect of the outstanding liability of Rs.58,31,851. 7.3.2 In the case on hand, the fact that the assessee has not credited the amount of Rs.58,31,851 received for making of Drafts and Pay Orders to its profit and loss account in the period under consideration, is not in dispute. In fact, the said amount admittedly appeared as An outstanding liability towards drafts and pay orders in the Balance Sheet of the assessee as 31 .3 .2007. We therefore find merit in the arguments put forth by the learned Authorised Representative which is further fortified by the decisions rendered by the co-ordinate bench of this Tribunal in the cases of Canara Bank (ITA No390/Bang/20111 dt.8.6.2012) and Vijaya Bank (ITA o.455/Bang/2011 dt.22.4.2012). Following, the aforesaid decisions of the co- ordinate Bench of the Tribunal (supra) we delete this addition of Rs.58,31,851 made by the Assessing Officer under section 41(1) of the Act as being unsustainable. 8.0. In the result, the assessee's appeal for Assessment Year 2007-08 is partly allowed.”
Respectfully following the decision of the Tribunal, we uphold the order of the CIT(A) and dismiss ground Nos.6 and 7 raised by the Revenue.
In the result, appeal by the Revenue is partly allowed.
ITA Nos.673, 674 & 684/B/14 20
ITA No.684/Bang/2014 (Assessment Year 2010-11) Assessee’s Appeal:
The Only issue that arises consideration in this appeal by the assessee is with regard to the disallowance of interest expenses made by the AO u/s 40a(ia) of the Act. In terms of Sec.40(a)(i) of the Act, if tax is deductible at source under Chapter XVII-B of the Act and where it is not so deducted at source on the amount of any interest or royalty, fees for technical services or other sum chargeable under the Act, which is payable outside India or in India to a non-resident, not being a company or to a foreign company, the same shall not be allowed as deduction while computing “Income from Business”. In terms of sec.40(a)(ia) of the Act, if tax is deductible at source under Chapter XVII-B of the Act and where it is not so deducted at source on the amount of any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), the same shall not be allowed as deduction while computing “Income from Business”. The relevant statutory provisions read as follows:
“Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",—
( a) in the case of any assessee—
(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub- contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200,
ITA Nos.673, 674 & 684/B/14 21
such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation.—For the purposes of this sub-clause,— (i) "commission or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194H; (ii)"fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; (iii) "professional services" shall have the same meaning as in clause (a) of the Explanation to section 194J ; (iv) "work" shall have the same meaning as in Explanation III to section 194C; (v) "rent" shall have the same meaning as in clause (i) to the Explanation to section 194-I; (vi ) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;”
Under Section 194A of the Act which is a section appearing in Part XVIIB of the Act, the Assessee was obliged to deduct tax at source where interest paid is in excess of Rs.10,000/- per annum. During the assessment proceedings it was noticed by the AO that the Assessee has paid total interest of Rs 234,62,57,000/- during the F.Yr 2009-10. Of this amount Rs 15,03,55,000/- was paid to NABARD and Rs 68,44,000/- was paid to Reserve Bank of India . Thus the interest paid on other deposits came to Rs.218,90,58,000/- . The assessee was asked to give further break up of the sum of Rs 218,90,58,000/- to verify whether TDS was made on the interest paid on term deposits exceeding Rs 10,000/-. In response the assessee submitted the following break up of interest paid :
ITA Nos.673, 674 & 684/B/14 22
In regards to deduction of Tax at source (TDS) on Term Deposits where payment on interest was in excess of Rs. 10,000/- , the Assessee submitted that depositors have sought exemption from TDS on payment of interest by submitting declaration in form no. 15G/H and in those cases, the various branches have not deducted TDS based on 15G /H submitted by the depositors. The Assessee further submitted that Branches have accepted the deposit from Government and Quasi Government Bodies Banks /Co-operative Societies etc., and not deducted the tax on the interest paid to them on the basis that depositors i.e. Government / Quasi Government, would have obtained exemption certificate from the Income Tax Department for non deduction of tax at source.
The AO was of the view that the Assessee has admitted that out of the total interest paid of Rs 218,90,58,326/-, that interest paid above Rs 10,000/- on Term Deposits where no TDS was made comes Rs 12,98,57,409/-. As no TDS was made on this amount the same needs to be disallowed u/s 40a(ia) of IT Act. As far as the interest paid of Rs 28,98,43,076/- on which no TDS was made as the recipients of the interest submitted form 15G/15H to the assessee
ITA Nos.673, 674 & 684/B/14 23
bank, AO held that the Assessee ought to have submitted Form No.15G/H obtained from the depositors before the prescribed Authority which is Commissioner of Income Tax, within the prescribed period. Since the Assessee failed to do so, the AO held that disallowance u/s.40(a)(ia) of the Act has to be made. With regard to interest paid to Government/quasi-Government Authority payment of interest to whom the Assessee claimed was not liable to TDS, the AO held that the Assessee failed to furnish evidence to show payments to Government/Quasi Government. The AO therefore disallowed interest expense of Rs.28,98,43,076 u/s.40(a)(ia) of the Act. With regard to disallowance of interest of Rs.12,98,57,409 which was payment of interest without TDS, the AO disallowed the claim for deduction of the said sum for violation of provisions of Sec.40(a)(ia) of the Act.
On appeal by the Assessee, the CIT(A) upheld both the additions made by the AO. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. 39. Before the Tribunal, on the issue of disallowance of a sum of Rs.28,98,43,706, the learned counsel for the Assessee submitted that once the
depositors give Form No.15G/H, the law empowers the Assessee to make payment of interest without deduction of tax at source. The requirement of filing the form so obtained before the prescribed authority within the prescribed period was only a procedural requirement and it was mandatory and for failure to file the form before the prescribed authority no disallowance
can be made u/s.40(a)(ia) of the Act. For the above proposition the learned counsel for the Assessee relied on the decision of the Hon’ble Karnataka High Court in the case of Sri Marikamba Transport Co. 231 Taxman 484 (Karn.) wherein the Hon’ble Karnataka High Court as follows: “4. The combined reading of these two provisions make it clear that if there is any breach of requirements of Section 194C(3), the question of applicability of Section 40(a)(ia) arises. The exclusion provided in Sub-section of Section 194C from the
ITA Nos.673, 674 & 684/B/14 24
liability to deduct tax at source under sub-section (2) would be complete, the moment the requirements contained therein are satisfied. Once, the declaration forms are filed by the subcontractor, the liability of the assessee to deduct tax on the payments made to the sub-contractor would not arise. As we have examined, the sub-contractors have filed Form No. 15-1 before the assessee. Such being the case, the assessee is not required to deduct tax under Section 194C(3) of the Act and to file Form No. 15J. it is only a technical defect as pointed out by the Tribunal in not filing Form No.15J by the assessee. This matter was extensively considered by the ITAT, Ahmedabad Bench in Valibhai Khanclbai Mankad case (supra) and the said Judgment has been upheld by in High Court of Gujarat in CIT v. Valibhai Khanbhai Mankad 120131 216 Taxman 18/28 taxmann.com 119 wherein it is held that once the conditions of Section 194C(3) were satisfied, the liability of the payee to deduct tax at source would cease and accordingly, application of Section 40(a)(ia) would also not arise. The Tribunal, placing reliance on the judgment of the ITAT, Ahmedabad Bench, has dismissed the appeal filed by the Revenue. We agree yith the said propositions and hold that filing of Form No. 151/J is only directory and not mandatory.” (emphasis supplied)
The learned DR relied on the order of the CIT(A). He further pointed out that as far as the payments to other exempted person is concerned, the AO in
his order has made the following observations:- “9.3. During the course of hearing the Assessee was asked to furnish the respective evidences. Apart from the questionnaire issued u/s.142(1) dated 24.1.2013, the Assessee was asked to furnish the necessary evidences in support of its claim for not invoking provisions of Sec. 40a(ia), during the hearings on 26.02.2013, 06.02.2013, 07.03.2013 and 11.03.2013. However, the assessee could not produce any such evidences Hence the amount which is liable for deduction of TDS amounting to Rs 28,98,43,076/- but no TDS was done because of stated submissions of form 15G/15H by the recipient or interest claimed to be paid to the Government , now cannot be allowed as deduction. The non submissions of 15G/15H before the Prescribed authority, amounts to, all together, non - deduction of TDS, where it ought to have been done, thus inviting the disallowance of the same u/s 40a (ia) of IT Act. Like so the claim of interest payment stated to be made to Government was not properly supported with the evidences thus inviting the disallowance of the same u/s 40a (ia) of IT Act.
ITA Nos.673, 674 & 684/B/14 25
9.4. Thus an amount the Rs 12,98,57,409 for non-deduction of TDS on theinterest paid exceeding Rs 10,000/- and an amount of Rs 28,98,43,076/- where no 15G/15H forms were stated to be submitted or interest stated to be paid to Government Department, is disallowed u/s 40a (ia) of IT Act. Thus the total amount of Rs. 41,97,00,485/- disallowed and added back to the income returned by the assessee.”
Without prejudice to his reliance on the order of the AO, the ld DR submitted that the disallowance to the extent of payment to government should be set aside to the AO and the assessee should be asked to furnish the required details.
We have given a careful consideration to the rival submissions. As far as disallowance of interest of a sum of Rs.28,98,43,076/- is concerned to the extent of the disallowance relates to interest paid to persons furnished Form 15 G and Form 15 H to the assessee, no disallowance can be made u/s 40a(ia) of the Act as held by the Hon’ble Karnataka High Court in the case of Sri Marikamba Transport Co., (Supra). The requirement of filing of Form 15G and 15H with the prescribed authority viz., CIT is only procedural and that cannot result in a disallowance u/s 40a(ia) of the Act. To the extent that payment of interest relates to the Government and the exempted category of persons, the assessee is directed to furnish required details to the AO and the AO will consider the claim of the assessee after affording opportunity of being heard to the assessee.
As far as the disallowance of Rs.12,98,57,409/- which is the interest paid without deduction of TDS and in which case there is no declaration in Form 15G or Form 15H given by the recipient, the ld. Counsel for the assessee submitted that sec. 40(a)(ia) of the Act is applicable only with a deduction is claimed u/s 30 to 38 of the Act. He pointed out that the interest which the assessee paid was interest on term deposits and savings bank account held by the various customers of the bank. He submitted that the provision of sec. 36(1)(iii) of the Act are not applicable because interest in question is not interest paid in respect of capital borrowed for the purpose of business. It was argued by him that the deposits of money by the customers in fixed deposits or SB account cannot be termed as capital borrowed by an assessee. According
ITA Nos.673, 674 & 684/B/14 26
to him none of the other provision of sec. 30 to 38 of the Act are applicable to the interest in question. It was submitted by him that the deduction on account of interest paid in the case of the assessee who is the banker should be allowed u/s 28 of the Act on commercial principles as expenses linked with the determination of profits. In this regard, it was submitted by him that in several decisions, courts have taken the view that money borrowed cannot be regarded as capital employed. Reference was made to principles of accountancy in this regard. The ld. counsel for the assessee further submitted that sec. 40(a)(ia) of the Act refers to tax deductible at source under Chapter XVII B of the Act and since no order u/s 201(1) of the Act treating the assessee as ‘an assessee in default’ under Chapter XVIIB of the Act has been passed, no disallowance u/s 40(a)(ia) of the Act can be made. In other words, according to him any disallowance u/s 40(a)(ia) of the Act without corresponding order treating the assessee as ‘an assessee in default’ u/s 201(1) of the Act is passed as Sec.40(a)(ia) in Chapter XVIIB are interlinked provisions.
The ld DR however, submitted that the interest in question is allowable as revenue expenditure u/s 37(1) of the Act and, therefore, the disallowance u/s 40a(ia) of the Act is applicable. It was submitted by him that commercial principles cannot be made applicable in the context of disallowance u/s 40a(ia) of the Act. It was submitted by him that the acceptance of deposits by banking company is only for the purpose of lending which is a regular business of the assessee and interest paid on such deposits will fall within the ambit of sec. 37(1) of the Act and not u/s 28 of the Act. It was also submitted by him that even sec. 40(a)(ia) of the Act makes a specific reference to any interest and, therefore all types of interest are covered within the ambit of sec. 40(a)(ia) of the Act. It was submitted by him that language of the sec. 40(a)(ia) of the Act does not require for its application that there must be an order u/s 201(1) of the Act under Chapter XVII B of the Act.
We have given a careful consideration to the rival submissions. We do not find force in the submission of the learned counsel for the Assessee. Interest paid by a banker on the deposits held by its customer, though may not strictly fall within the ambit of Sec.36(1)(iii) of the Act, will fall within the ambit of
ITA Nos.673, 674 & 684/B/14 27
Sec.37(1) of the Act, as an expenditure incurred which is of a revenue nature, wholly and exclusive for the purpose of business of the Assessee. The argument of the learned counsel for the Assessee to treat the interest expenses as allowable u/s.28(i) of the Act on commercial principles cannot be accepted, especially in the context of Sec.40(a)(ia) of the Act, which are provisions which are meant for collection of taxes. Sec40(a)(ia) is a disabling provision which and not an enabling provision. As rightly submitted by the learned DR, there is nothing in the language of Sec.40(a)(ia) of the Act to the effect that it is only when an Assessee is treated as an Assessee in default under Chapter XVII B of the Act by an order passed u/s.201(1) of the Act, can a disallowance be made u/s.40(a)(ia) of the Act of the expenses claimed in respect of which there is a default in deducting tax at source. The arguments raised by the learned counsel for the Assessee are without any merit and rejected. Thus the disallowance to the extent of Rs.12,98,57,409 is confirmed.
In the result, the appeal by the assessee is treated as partly allowed for statistical purpose.
In the combined result, ITA No.673/Bang/2014 is partly allowed, ITA No.674/B/2015 is partly allowed and ITA No.684/Bang/2014 is partly allowed for statistical purpose.
Order pronounced in the open court on 25th April, 2017.
Sd/- Sd/- (JASON P BOAZ) (N.V VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER
Vms. Bangalore Dated : 25/04/2017
ITA Nos.673, 674 & 684/B/14 28
Copy to : 1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order
Sr. Private Secretary, ITAT, Bangalore.
ITA Nos.673, 674 & 684/B/14 29
Date of dictation …………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr. P.S .……………………….. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ……………….. 9. Date on which order goes for Xerox & endorsement………………….. 10. Date on which the file goes to the Head Clerk ……………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ……………………………… 12. The date on which the file goes to despatch section for despatch of the Tribunal Order …………………………. 13. Date of despatch of Order. ……………………………………………