ACIT 2(1)(2), MUMBAI vs. CENTRAL BANK OF INDIA, MUMBAI

These cross appeals filed by the assessee and Revenue are directed against the order of the CIT(A)-4, Mumbai dated 06.09.2016 and it relates to A.Y. 2011-02.

2. (1) (herein after referred to as 'DCIT') has erred in disallowing Rs.44,50,73,900 u/s. 14A of the Income-tax Act, 1961 read with Rule 8D of Income-tax Rules, 1962 towards expenditure

2 & 7485/Mum/2016 Central Bank of India incurred in relation to income claimed exempt u/s. 10 of the Act and the Hon'ble CIT(A) has erred in confirming the disallowance u/s. 14A read with Rule 8D. The learned DCIT be directed not to disallow any expenditure in relation to the income claimed exempt u/s. 10 of the Act by applying provisions of Rule 8D and delete the addition of Rs.44,50,73,900 made to the total income and reduce the total income accordingly. IB Without prejudice to Ground no. 1A above, on the facts and in circumstances of the case and in law, the Appellant Bank prays that the disallowance made u/s. 14A read with Rule 8D is highly excessive and the learned DCIT be directed to make disallowance u/s. 14A on a reasonable basis and reduce the total income accordingly.” Revenue, in the cross appeal, has raised the following grounds: - “1. On the facts and in the circumstances of the case and in law, the LD. CIT(A) has erred in allowing the claim of bad debts of Rs.208,57,64,535/- without appreciating the fact that the claim of bad debts written off is allowable to the extent it exceeds the credit balance in the provision account. 1(b) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that in the Finance Bill 2013, Explanation 2 has been inserted below clause (vii) of Section 36(1) to clarify that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches. 2(a) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that the broken period interest is allowable on matching principles, without realizing that the same has not been incurred for realizing the interest on securities as enunciated by the Apex Court in Vijaya Bank Ltd. (57 Taxman 152)(SC). 2(b) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in relying on the ratio of the Apex Court in the case of Citi Bank (Civil Appeal No. 1549 of 2006) where the income from securities were treated as business income which was not the same in the present case. 3(a) Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was correct in law, in holding that the provisions of Sec. 1 15JB of the Income tax Act, 1961, are not applicable to assess to whom proviso to sub-section (2) of Section 211 of the Companies Act, 1956, applies i.e. companies which are not required to prepare its profit & loss account in 3 & 7485/Mum/2016 Central Bank of India accordance with Part -II & III of Schedule VI of the Companies Act, 1956 without appreciating that u/s. 115JB(2) of the Income tax Act, 1961, every company is mandatorily required to prepare profit & loss account in accordance with the provisions of Part-II & III of Schedule VI of the Companies Act, 1956, for Income tax purposes? 3(b) Whether on the facts and in the circumstances of the ease, the Ld.CIT(A) was correct in law, in holding that the amendment to Section 115JB of the Income tax Act, 1961, to bring all the companies (including companies to whom proviso to sub-section (2) of Section 211 of the Companies Act, 1956, applies) is not applicable in the assessment year under consideration without appreciating that the said amendment is clarificatory in nature and thus, retrospective in effect? 4. The Ld.CIT(A) erred in allowing the loss on account of valuation of securities while shifting from Available for sale (AP"S) to Hold to maturity (HTM) without appreciating that shifting from one category to another cannot give rise to loss or profit as one cannot make profit or loss with one self.”

4 & 7485/Mum/2016 Central Bank of India 5. Ground No. 1 in assessee’s appeal relates to disallowance under Section 14A of the Act read with Rule 8D of I.T. Rules, 1962. The learned A.R. submits that similar disallowance was made in assessment years 1998-99, 1999-2000, 2004-05, 2008-09, 2009-10 and 2010-11. In all cases the Tribunal granted relief to the assessee. The learned A.R. further submits that recently in appeal for assessment years 2004-05 and 2010- 11 the Tribunal, vide its order dated 08.06.2017 in ITA Nos. 1891/M/2011 & 3958/M/2014, CO No.200/M/2013 and in 1891/M/ 2011& 1431/M/2011 & 3757/M/2014 dated 08.06.2018 restricted the disallowance under section 14A @ 2% of the exempt income. On the other hand the ld DR for the revenue relied on the order of the authorities below.

6 & 7485/Mum/2016 Central Bank of India for the assessee filed decisions of the Tribunal in the cases of DCIT vs. HDFC Bank Ltd in ITA Nos. 4529/M/2005 and others, dated 29.6.2011 and order of the Tribunal in the case of Bank of India vs. ACIT in ITA No.1498/Mum/2011 for the AY 2001-2002, dated 9.4.2014 and submitted that disallowance @ 1% of the exempt income in the case of Banks is accepted as a „reasonable basis‟. Further, he also referred to the decision of the Tribunal in the case of M/s. Godrej Agrovet Ltd vs. ACIT in ITA No.1629/Mum/2009, dated 17.9.2010, which was subsequently ratified by the Hon'ble jurisdictional High Court in the same case. This case is relevant for the proposition that the I.T.A. No.1525 and 364 9/Mum/2013 And I.T.A. No.1561 and 3438/Mum/2013 disallowance of 2% of the exempt income is found reasonable by the Hon'ble High Court." Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to make addition to the 2% of the exempt income. This ground of appeal is partly allowed.

10. In this view of the matter and consistent with the view taken by the Co-ordinate Bench in the assessee’s own case for earlier years, we direct the Assessing Officer to restrict the disallowance worked out u/s. 14A to 2% of the exempt income.” Respectfully following the decision of coordinate bench, we direct the AO to restrict the disallowance under Section 14A to 2% of the exempt income. in the result the ground of appeal raised by the assessee is allowed.

7 & 7485/Mum/2016 Central Bank of India 9. We have considered the rival submission of the parties and have gone through the orders of the authorities below. We have noted that almost on identical facts on identical issues the Tribunal in assessee’s own case in ITA Nos. 1561/M/2013 & 3438/M/2013 for assessment years 2008-09 & 2009-10 held as under: - “13. We have heard the rival contentions and perused the material placed before us including the orders relied upon by the parties and impugned orders. We find from the record the co-ordinate Bench of the Tribunal that an identical issue has been decided in assessee‟s case in the earlier years by following the decision of the Hon‟ble Supreme Court in (2012) 343 ITR 270 (SC). For the sake of convenience, we reproduce the operative part of the judgement as under: “41. To conclude, we hold that the provisions of Sections 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2).

8 & 7485/Mum/2016 Central Bank of India 2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in sub-section (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962.Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under Section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be 9 & 7485/Mum/2016 Central Bank of India meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii).

3. Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s). For the above reasons, I agree that the appeals filed by the assessees stand allowed and the appeals filed by the Revenue stand dismissed with no order as to costs.” We, respectfully following the decision of the co-ordinate bench of the Tribunal uphold the order of the ld.CIT(A) and dismiss the ground taken by the revenue.”

11 & 7485/Mum/2016 Central Bank of India 20. The appellate authorities, therefore, rightly deleted the addition of Rs.1,21,57,517/- by the Assessing Officer as interest income.” We, therefore, respectfully following the ratio laid down by the Hon'ble jurisdictional High Court, dismiss the ground raise by the revenue. Resultantly, the appeal of the revenue is dismissed.” Respectfully following the same we dismiss this ground of Revenue.

in the present appeal may be taken up first as the MAT provisions u/s. 115JA/115JB are not applicable against the Banking Companies and relied upon the following decision of ITAT Mumbai and other Benches of the Tribunal: (a) Krung Thai Bank PCL v. JD1T (2011)16 taxinann.com 239 (Mum), (b) The Union bank of India v. ACIT (1TA No. 4702 to 4706/Mum/10), (c) Times bank Ltd. v. ACIT (ITA No. 4355/Mum/2008), (d) State bank of Hyderabad v. DCIT (2013) 33 taxmann.com 312 (Hyd. ITAT), (e) Dena Bank v. ACIT. (ITA No. 237/M/2002), (f) UCO Bank v. DCIT (2015) 64 taxmann.com

51. (Kolkata ITAT). The Ld. AR for assessee further submitted that all the other Grounds raised in the appeals are also covered in favour of assessee-bank and furnished a chart along with the copies of the decisions. Ld AR for the assessee further argued that in case the assessee succeeds on the 12 & 7485/Mum/2016 Central Bank of India additional Grounds of appeal

, the discussions on other grounds of appeals would become academic. Ld DR for Revenue relied upon the order of authorities below, however, on raising query regarding the applicability of various decisions cited by AR of assessee with regard to additional Ground of appeals, the same was not disputed by him.

4. We have considered the rival contentions of the parties and perused the various decisions cited by Id. AR of the assessee. In the case of Krung Thai Bank (supra), the identical Grounds of appeal was considered by the Coordinate Bench of this Tribunal i.e. the applicability of provisions of Section 115JB and after considering the applicability with regard to section 115JB, the Co-ordinate Bench held as under: "Learned Counsel for the assessee, however, contends that the provisions of MAT do not apply to the assessee, and, for this reason, very foundation of impugned re-assessment proceedings is devoid of legally sustainable merits. His line of reasoning is this. The provisions of MAT can come into play only when the assessee prepares its profits and loss account in accordance with Schedule 17 to the Companies Act. It is pointed out that, in terms of the provisions of Section 115 JB {2), every assessee is required to prepare its profit and loss account in terms of the provisions of Part II and III of Schedule VI to the Companies Act. Unless the profit and loss is so prepared, the provisions of Section 115JB cannot come into play at all. However, the assessee is a banking company and under proviso to Section 211(2) of the Act the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act, and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act. It is thus contended that the provisions of Section 115JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act. Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for re-opening the assessment are clearly wrong and insufficient. We are urged to quash the reassessment proceedings on this short ground. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submission of the learned counsel, 1TA No. 4355/Mum/2008 M/s. Times Bank Limited, 8 according to the departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute. The plea of the assessee is indeed well taken, and it meets out approval. The provisions of Section 115JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The starting point of computation of minimum alternate tax under section 13 & 7485/Mum/2016 Central Bank of India 115JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211(1) of the Companies Act. The final accounts of the banking companies are required to he prepared in accordance with the provisions of the Banking Regulation Act. The provisions of Section 115JB cannot thus be applied to the case of a banking company. In view of the above discussions, and following the view taken by a coordinate bench in the case of Maharashtra State Electricity Board Vs. JCJT (82 JTD 422), which holds that provisions of MAT cannot be applied to electricity companies for mutually similar reason we uphold the plea of the assessee. The provisions of Section 115JB do not apply to the assessee, and, as such, the Assessing Officer was in error in concluding that income had escaped assessment in the hands of the assessee. The very initiation of reassessment proceedings was bad in law, and we quash the same".

raised by assessee is allowed.” Respectfully following the same we dismiss this ground of Revenue.

15. Ground No. 4 in Revenue’s appeal relates to valuation of securities while shifting from Available for sale to Hold to Maturity. The learned A.R. submits that the issue is covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. 368 ITR 377. On the other hand the learned DR for the Revenue relied on the order of the authorities below.

16. We have considered the rival submission of the parties and have gone through the orders of the authorities below. We have noted that almost on identical facts on identical question of law the Hon'ble High Court in the case of CIT vs. HDFC Bank Ltd 368 ITR 3777 held that loss incurred on account of security held under category “ available for sale” to ‘held to maturity’ was to be allowed as business loss. Therefore, respectfully following the decision of jurisdictional high court this grpund of appeal raised by revenue is dismissed.