DCIT, CIR-2(1), KOLKATA, KOLKATA vs. M/S ROYAL BANK OF SCOTLAND N.V., KOLKATA

Per M.Balaganesh, AM

2 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 Assessment Year [ in short Asst Year] 2011-12. Both these cross appeals are disposed off by this common order for the sake of convenience.

3.1. The brief facts of this issue are that the assessee is a bank incorporated in Netherlands with limited liability with branches in India. In India, the assessee is registered as a scheduled bank in terms of Schedule II of the Reserve Bank of India Act, 1934. The main activities of the assessee in India comprise of accepting deposits, giving loans, discounting / collection of bills, issue of letters of credit / guarantees, executing forward transaction in foreign currencies for importers / exporters , money market lending / borrowings, investment in securities , etc in terms of the prevailing

3 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 rules and regulations governing such transactions. The ld AO observed that assessee bank had not recognized the interest income in respect of advances, which were overdue for more than 3 months, in the profit and loss account in accordance with the RBI guidelines applicable to the banks.

3.2. The assessee replied that since the amount has been classified as NPA as per RBI Prudential Norms for Income Recognition, the interest income on such advances had to be recognized only on receipt basis. Since there was no receipt of interest on these NPA accounts during the year, no interest income need to be recognized on accrual basis as per RBI prudential norms for income recognition. The ld AO show caused the assessee stating that unless the advances were overdue for more than 6 months as required under Rule 6EA of the IT Rules, it cannot be classified as a sticky advance or doubtful debts as stipulated in section 43D of the Act and accordingly sought to add back the interest income on accrual basis in the assessment. The assessee replied that assessee had classified its advances into NPA as per the RBI prudential norms laid down in this regard which is mandatory in n ature. As per the said prudential norms, if an account is overdue for more than 3 months (reduced from 6 months to 3 months) , then the interest income thereon should not be recognized as income unless it is actually received. It was submitted that as per Accounting Standard - 9 (AS 9) issued by ICAI, where there is an uncertainty about the collection of income / revenue, recognition of such income / revenue is to be postponed to the extent of uncertainty involved, which is also in accordance with the theory of taxing only the real income, which is a settled law as per various judicial precedents. The assessee argued that the application of section 43D of the Act was specifically intended to clarify the income recognition by the banks to be in sync with the RBI guidelines and was never intended to be a static norm. Thus, purposive interpretation should be followed keeping in mind the legislative object. The assessee also referred to Para (xii) of CBDT’s Instruction No. 17/2008 dated 26.11.2008 which directed the assessing authorities to bear in mind that the bank has to

4 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 follow system of accounting and prepare accounts as mandated inter alia by RBI guidelines. Withou prejudice to the above, Rule 6EA of the Rules, which deviates from current RBI guidelines, is in conflict with the parent provisions of section 43D of the Act and it is well settled that the Rules, being a subordinate legislation cannot override the express mandate of the parent statutory provision. Reliance in this regard was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Sirpur Paper Mills reported in 237 ITR 41 (SC).

3.3. Without prejudice to the above, it was submitted that Rule 6EA is practically difficult to be implemented, since the categories of advances prescribed therein do not exist anymore as the classification of advances have changed and RBI now follows the international norm of classification (viz./ standard, sub-standard, doubtful and loss assets). The ld AO relied on the judgement of the Hon’ble Supreme Court in the case of Southern Technologies Ltd vs CIT reported in (2010) 320 ITR 577 (SC). The assessee stated that the said decision is distinguishable from the facts of the assessee bank in as much as the same pertained to claim of deduction in respect of ‘Provision for NPA’ in the hands of a Non-Banking Finance Company (NBFC) u/s 36(1)(vii)(a) of the Act which is available only to banks. Even the said decision did not contemplate recognition of interest income in respect of NPA accounts on accrual basis. The assessee also submitted that the said accounts remained overdue for more than 180 days as on 31.3.2010 (i.e the next financial year) and hence it had become NPA even as per Rule 6EA of the Rules in the subsequent financial year and hence the said adjustment is only a timing difference and there is no loss to the revenue. The assessee also submitted that Rule 6EA was in conformity with the RBI guidelines at the time of its introduction. However, subsequently, the RBI guidelines have been tightened without any corresponding amendment in Rule 6EA thereby presently leading to a disconnect between Rule 6EA and RBI guidelines.

5 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 3.4. The ld AO however not convinced with the aforesaid explanations proceeded to add the interest income on NPA accounts on accrual basis, which was also confirmed by the ld DRP. Aggrieved, the assessee is in appeal before us.

3.5. The ld AR reiterated the submissions made before the lower authorities and placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs Vasisth Chay Vyapar Ltd reported in 330 ITR 440 (Del) on the impugned issue, among others. He argued that this issue is covered in favour of the assesse by the order of this tribunal in assesssee’s own case for the Asst Year 2010-11 in ITA No. 477 & 496/Kol/2015 dated 14.10.2016. In response to this, the ld DR argued that the provisions of Rule 6EA states non-recognition of interest income only if the loan account if overdue for more than 3 months. He argued that the recognition of income as contemplated by RBI prudential norms are not binding on the provisions of the Income Tax Act and placed reliance on the decision of the Hon’ble Supreme Court in the case of Southern Technologies Ltd vs CIT reported in 320 ITR 577 (SC) in support of his proposition. The assessee had not proved the factum of uncertainty in collection of the said advances and argued that it is also claiming provision for NPA which includes interest element also as a deduction. Hence on one hand, it is not offering the interest income and on the other hand, it is claiming deduction towards the interest component added to the party’s loan account balance. He placed reliance on the decision of Hon’ble Delhi High Court in the case of Housing and Urban Development Corporation Limited vs Additional CIT in ITA No.s 440, 442, 444 to 446 / 2016 dated 3.7.2017 wherein the decision of Vasisth Chay Vyapar Ltd ( 330 ITR 440 –Del HC) was also considered and decision held in favour of the revenue. He further stated that against the tribunal order passed for the earlier year, the Hon’ble Calcutta High Court had admitted the appeal of the revenue and hence the matter had not attained finality. In defence, the ld AR argued that the fact of uncertainty of collection of these dues from the parties were never in dispute and the same is raised for the first time only by the ld DR. Hence there is no question of recognizing any interest income on accrual basis in respect of such sticky loans. 5

6 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12

3.6 We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute before the lower authorities that the loan accounts had become sticky and doubtful of recovery. The only contention of the revenue is that section 43D of the Act read with Rule 6EA of the Rules permits accounting of interest income on receipt basis only if the loan account had become overdue for more than six months, whereas in the instant case, it is more than three months but less than six months as on 31.3.2011. The loan account becoming overdue and becoming sticky was never disputed. The next issue is whether the prudential norms of RBI for income recognition would override the provisions of the IT Act. This issue has been addressed by the Hon’ble Supreme Court in the case of Southern Technologies Ltd supra in the context of allowability of deduction towards ‘Provision for NPA’. We find that the same decision clearly stated that the interest income on NPA accounts should not be recognized on accrual basis which is in line with RBI prudential norms for income recognition. This fine distinction has been duly considered in the decision of the Hon’ble Delhi High Court in the case of CIT vs Vasisth Chay Vyapar ltd supra. When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances and respectfully following the decisions of Hon’ble Delhi High Court in 330 ITR 440 and various other decisions referred to by the ld AR and in view of this issue being already decided in favour of the assessee by this tribunal in its own case supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Accordingly, the ground nos. 2(a) to 2(d) raised by the assessee are allowed.

7 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 Ground No. 1 of Revenue Appeal The brief facts of this issue are that the ld AO observed that the assessee had made payment of lease rent against leased vehicles amounting to Rs 2,89,01,721/- during the financial year 2010-11 relevant to Asst Year 2011-12 and was asked to furnish the details of tax deducted at source on such payments. The assessee , among others, replied that tax was not deducted at source on payments made to M/s Leaseplan India Limited . It was pleaded however that the payee , being a corporate assessee, is assessable to tax and had offered the rental income received from assessee bank to income tax and paid taxes thereon. It also submitted that the second proviso to section 40(a)(ia) of the Act introduced by the Finance Act 2012 should be held to be retrospective in operation and accordingly no disallowance u/s 40(a)(ia) of the Act is to be made in the hands of the assessee payer. The ld AO in his final assessment order pursuant to the directions of ld DRP, sough to verify M/s Leaseplan India Limited as to whether they had offered the subject mentioned lease income to tax in their income tax returns, for which purpose, he issued notice u/s 133(6) of the Act , which returned unserved. Accordingly, the ld AO proceeded to disallow the lease rent u/s 40(a)(ia) of the Act. Aggrieved, the assessee is in appeal before us.

4.1. We have heard the rival submissions. We find that the assessee had furnished the certificate from a chartered accountant in the prescribed form as mandated in first proviso to section 201(1) of the Act to prove that the payee had included the subject mentioned receipt as its income and had paid taxes thereon. Hence by application of second proviso to section 40(a)(ia) and 201(1) of the Act, which has been held to be retrospective in operation by the Hon’ble Jurisidictional High Court in the case of Principal CIT vs Tirupati Construction – GA No. 2146 of 2016 with ITAT No. 287 of 2016 dated 23.8.2016 , we hold that no disallowance u/s 40(a)(ia) of the Act in the hands of the payer assessee could be made. This CA certificate was filed before the

8 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 lower authorities. Accordingly, the Ground Nos. 3(a) to 3(d) raised by the assessee are allowed and Ground No. (i) of Revenue appeal is dismissed.

9 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 • RDB Industries Ltd vs DCIT 120 ITJ 107 (Kol). • CIT v. Punjab FinanciaL Corpomtion Ltd.. [2007] 295 ITR 510 (Punj. & Har.) • Khimji Visram & Sons (Gujrat) (P.) Ltd. v. CIT [1995] 79 Taxman 112 (Guj) • CIT v. Akkem Labomtories (P.) Ltd.. [2009] 314 ITR 329 (Pat) • CIT vs Hindustan Motors Ltd 175 ITR 411 (Cal); • CIT vs. Karamchand Premchand Pvt. Ltd. 200 ITR 281 (Gui), • CIT v Punjab Financial Corporation Ltd., 295 ITR 510 (P&H); • Decom Marketing Pvt. Ltd vs CIT 251 ITR 398 (Guj); • CIT vs Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd. 128 ITR 70 (Guj), and • Mylan Laboratories Ltd. vs ACIT (ITA No. 1616/Hyd/2010 dated 16 January, 2015). • Further, we understand that your goodself wishes to place reliance on the decision of the Calcutta High Court in the case of Brooke Bond India Limited vs. Joint Commissioner of Income-tax [2011] 337 ITR 482, while seeking to disallow the payment of Rs. 4.09 crore to employees towards unfunded pension. In this regard, we submit that the aforesaid decision is not applicable to the Bank's case for the following reasons: • In the case of the Bank the deduction for pension has been made in respect of amounts which have been actually paid to the employees of the Bank and which has been gone out irretrievably and on which the Bank has no control. However, in the case of Brooke Bond, the deduction for pension was claimed merely on basis of a provision created based on a Board Resolution which could have reversed at a later date. • The Brooke Bond judgment only covers disallowance of provision made in respect of such liability based on actuarial valuation and the Hon’ble Court have not looked into the question of deduction of such pension payment made directly to employees. The Bank’s relies on jurisdiction High Court ruling in the case of CIT vs. Hindustan Motors Ltd 175 ITR 411 (Cal) wherein it was held that payment of pension to employee is a deductible expenditure under Section 37(1) on ground of commercial expediency. • The intention of Section 36(1)(iv) read with Section 40A(9) of the Act is to restrict the tax avoidance by the employer by creating trust wherein the utilization of contribution made to trust is left to the discretion of the trustee and wherein the amounts flows back to the employer in the form of the deposits or investment. Thus, the Bank submits that the provisions which are introduced to curb a particular mischief should be construed in a manner that they do not create jeopardy beyond the mischief which is sought to be remedied. As per the intent, the above restriction should apply to contribution to superannuation trust/funds which are not approved by CIT. As mentioned above, in the Banks' case, the deduction for unfunded pension has been made in respect of amounts which have been actually paid to the employees of the Bank (and not as contribution to a fund/trust) and on which the Bank has not control. • In rendering the decision in the case of Brooke Bonde, the Hon’ble Kolkata High Court has not taken into consideration the decision of the Supreme Court in the case of High Land Produce and the decision of the jurisdictional High Court in the case of Liberty Cinema.

10 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 In light of the above, we submit that the decision in the case of Brooke Bonde is not applicable to the Bank case and the Bank has righty claimed the deduction of the unfunded pension under section 37 of the Act. Given the above, the Bank submits that the payment of Rs. 4.09 crores towards unfunded pension should be allowed in full.”

5.1. The ld AO in the draft assessment order placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Brooke Bond India Ltd vs JCIT & Anr. reported in 337 ITR 482 (Cal) and observed that the said decision would be applicable to the facts of the instant case. Moreover, the assessee in the instant case had not provided the details in respect of the classes of employees eligible to avail it. When certain details were furnished by the assessee before the ld DRP, the matter was remanded to the ld AO. The ld AO in his remand report commented as under:- “The list does not indicate the class of employees, their place in the hierarchy, whether these were terminal benefits or short term benefits, etc. The submission is devoid of the Boards resolution, terms and conditions of payment of benefits and business expediency of such payments inter alia. It is therefore could not be perceived from the additional evidence filed, as to how it negates the proposal of the AO to disallow payment of unfunded pension to the employees. On the basis of the facts and circumstances of the case, the additional evidence filed does not hold merit to overturn the AO’s proposal.”

5.2. The ld DRP observed that this remand report was sent to assessee for its rebuttal and no submissions were made later on. Accordingly , the ld DRP upheld the action of the ld AO in disallowing the said expenditure in the sum of Rs 4.09 crores. Accordingly, the same was sought to be disallowed in the final assessment order by the ld AO. Aggrieved, the assessee is in appeal before us.

5.3. We have heard the rival submissions. The ld AR submitted that the very basis on which the claim of expenditure was disallowed by the ld AO as well as by the ld DRP was stated to be non-furnishing of details of employees by the assessee to whom the payments were made. In this regard, he drew the attention of the Bench to pages 247 to 10

11 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 250 of the paper book containing the list of employees, their designation, employee code details and the amounts paid to 276 employees in total. He also drew our attention to page 416 of the paper book wherein these payments were duly approved by the competent authority in the assessee company including the Head of Human Resources in charge of Indian operations of the assessee bank. We find that though the assessee had nomenclatured the subject mentioned payments of Rs 4.09 crores as ‘unfunded pension’, it is effectively paid to employees of the assessee bank and no contribution was made whatsoever to any fund with respect to the said pension payments. It is more of a exgratia or extra payment of salary made to the employees of the bank based on some criterion, which has been duly subjected to deduction of tax at source and the same has been duly included in their respective Form No. 16. This fact is not in dispute before us. In other words, the payments made by the assessee bank to the various employees had been treated effectively as salary and other allowances including perquisites and the employees in turn had paid taxes for the same by offering it to tax in their returns, wherever applicable. Hence it is effectively a payment made as a welfare measure for the benefit of the employees of the assessee bank, which is squarely allowable as deduction u/s 37 of the Act. It is well settled that nomenclature or the form of a transaction should have to be ignored for the purpose of allowability of the same as deduction for income tax purposes and substance of the transaction is to be looked into. The real substance is that payment has been made as a welfare measure to employees of the assessee bank which makes it eligible for deduction u/s 37 of the Act. The payments were made to employees pursuant to Employer – Employee Relationship. Even the TDS obligations associated with the said payments have been duly complied with by the assessee, which is not disputed by the revenue before us. Even the sample Form No. 16 were duly submitted by the assessee before the ld AO which are enclosed in page 246 of the paper book. It was specifically submitted before the ld AO that the payment made under this particular scheme covered all eligible employees ranking from clerical staff, assistant manager, manager, vice president etc. We find that the

12 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 genuinity of the said payments are not disputed by the revenue before us. We find that the case law relied upon by the ld AO in his assessment order and by the ld DR i.e Brooke Bond India Ltd supra, refers to payments made to fund . In the instant case, there was no contribution made by the assessee bank to any of the funds. The payments were directly made to the employees of the bank and subjected to deduction of tax at source. The moment the payments are made to those employees, the assessee had lost complete control over those funds and it had not come back to the assessee in any manner whatsoever either by creation of any fund managed by it or otherwise. From the approval letter of the competent authority of the assessee bank, we find that these payments were made only to meet the increased cost of living of the employees and hence it is effectively a payment made as a welfare measure . Hence the provisions of section 40A(9) of the Act as heavily relied upon by the ld DR is not at all applicable to the facts of the instant case. In view of these observations, we have no hesitation in directing the ld AO to grant deduction of the sum of Rs 4.09 crores in the instant case to the assessee. Accordingly, the Ground Nos. 4(a) to 4(c ) raised by the assessee are allowed.

13 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 expenses along with the service tax applicable thereon. The expenses component (excluding service tax) is debited by the bank to its profit and loss account and the service tax component is recognized as CENVAT credit in the balance sheet in accordance with the service tax laws. In other words, the bank follows ‘Exclusive Approach’ for treatment of service tax. A set off principle is prescribed under the CENVAT credit rules, wherein such CENVAT credit can be set off only against payment of output service tax liabilities. No mechanism of refund has been prescribed in case of CENVAT credit balances is in excess of the output tax liabilities. As the quantum of output tax liabilities is purely driven by business considerations, event of set-off is totally dependent on future business prospects.

6.1. The assessee explained the rationale for write off of CENVAT credit as under:- • As on 31st March, 2011, the Consumer Business Division of the Bank had an unutilized CENVAT credit of Rs. 510.9 million available with its books. Pursuant to an internal review of the Bank’s future business prospects in line with RBS Group Global Strategy, the Bank revisited the utilized CENVAT credit relating to Consumer Business Division. It was observed that the reduced business consumer Business Division would adversely impact the taxable fee income generated by the said division. This was reflected in reduced fee income trend for Consumer Business division observed year on year. • Consequently, the service tax liability to be discharged by the Consumer Business Division would also be impacted and would result in accumulation of un utilized CENVAT Credit balance. As such, the CENV AT credit amount was in excess of service tax liability for future years. Given that the service tax laws do not prescribe fund mechanism for unclaimed CENV AT Credit, the Bank took a considered decision, to write off an amount of Rs. 460 million during Financial Year ('FY') 20 10-11.

14 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 • Accordingly, the Bank had written off the un-availed service tax input credit amounting to Rs. 460 million and intimated about the same to the service tax authorities vide letter dated 24 February 2012. A copy of said intimation was already submitted with your goodself vide our submission dated 09 September 2013. Pursuant to the same, the available CENVAT Credit balance as of 31st March 2011 was reduced to such extent and the Bank surrendered its right to claim/set-off such CENVAT credit balances in future years.

6.2. The assessee submitted that the aforesaid write off met the test of ‘Expenditure’ incurred or laid out wholly and exclusively for the purpose of business as laid down u/s 37(1) of the Act. It was also submitted that such write off of un-availed input service tax credit pertains to various revenue expenses incurred and claimed by the bank for the purpose of its business. Accordingly, even the unavailed portion of the input service tax credit is to be characterized as a revenue expense allowable as a deduction to the bank, as the same was incurred wholly and exclusively for the purpose of business of the bank. The assessee also submitted that the said write off was in accordance with the Guidance Note on Accounting Treatment for MODVAT / CENVAT issued by the Institute of Chartered Accountants of India (ICAI) wherein it was reflected as under:- “REVIEW OF BALANCES IN MODVANT/CENVAT CREDIT REVEIABLE ACCOUNTS

6.3. The assessee submitted that the said write off was in accordance with the Accounting Standard prescribed and notified by Central Board of Direct Taxes as under:-

15 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 • As per the provisions of Section 145 of the Act, Accounting Standards prescribed by the CBDT are to be followed in computing the business income of an assessee. Accounting Standard-1 prescribed by the CBDT vide notification No. SO 69 (E) dated 25th January, 1996 provides that accounting policies adopted by an assessee should be such that it represents a true and fair view of the state of affairs of the business in the financial statements prepared and presented on the basis of such accounting policies. As per the principles of prudence, the assessee is required to recognize all known liabilities and losses immediately in its financial statement. • Accordingly, in light of the Bank’s future business prospects and having regard to the principle of prudence, the bank had written off CENVAT credit amounting to Rs. 460 million during the year under consideration.”

6.4. The assessee further submitted that closure of business was not necessary to claim deduction of the CENVAT credit written off as under:- • “In the course of the earlier hearing, your goodself had contended that the judicial precedents relied upon by the Bank in the earlier submissions namely Mohan Spinning Mills vs. ACIT (2012) 27 taxmann.com 332) (Chd.) and the decision of the Ahmedabad Tribunal in the case of M/s Rangoli Industries Pvt. Ltd. (2013) (ITA No. 1936/Ahd/2010) (now upheld by the Hon’ble Gujrat High Court), are applicable only in the case of closure of business and accordingly, the said decisions are not applicable in the present case. In this regard, we submit that though in the facts of the above decisions, there was closure of one unit/surrender of license, your goodself would appreciate that the principle emanating from these decisions is that the write off of CENVAT credit should be allowed as deduction where it is fairly certain that the said credit would not be available for claiming as credit against the future service tax liability of the assessee. • In this regard, the bank submits that as part of its global strategy, it had decided to downsize its retail business which would consequently result in substantial reduction in the expected output service tax liability against which such CENVAT credit is required to be utilized. • Accordingly, we submit that the decision of write off of CENVAT credit & surrender the right to claim such credit is arising out of business expediency or commercial expediency which the bank as a prudent businessman had taken having regard to the bank’s future business prospect. In this regard, we submit as under: • ‘Business Expediency’ is a broad term. Further, the best person to judge the business expediency is the businessman himself. The Hon’ble Courts have also consistently held that the necessity or otherwise of the commercial expediency is to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue. • The assessee has relied on the following case laws: • S.A Builders Limited vs. CIT(2007) 288 ITR 1 (SC) 15

16 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 •CIT vs. Panipat Woollen & General Mills Co. Ltd.[1976] 103 ITR 66(SC) • CIT vs. Chandulal Keshavlal & Co(1960) 38 ITR 601 Thus, it is submitted that the write off of excess CENVAT credit need not always be on account of closure of the business but the write off could also trigger inter alia on account of expected reduction in the output service tax liability (against which the input service tax credit would have been adjusted) which may be on account of various reasons inter alia including reduction or downsizing in the business of the assessee due to market conditions, economic conditions, Government Policies, etc. Further, putting a restrictive interpretation on the event triggering the write off for the purposes of allowing deduction under the Act (i.e. deduction of write off only in the year of actual closure of business) is not justified and would be against the Guidance note issued by the ICAI on Accounting Treatment for MODVAT/CENVAT, which permits assessee to carry out such a write off.”

6.5. The assessee also placed reliance on the following decisions in support of its contentions:- • “CIT vs Samtel India Limited (ITA No. 130 of 2000) (Date of Order 26th September, 2013) (Delhi High Court) • Girdhar Fibers Pvt. Ltd. vs. ACIT (ITA No. 2027/Ahd/2009) (Ahmedabad Tribunal) • NCS Distilleries Pvt. Ltd. vs. ITO (ITA No. 699/Hyd/2012) (Hyderabad ITAT)

6.6. The ld AO however completely disregarded the various contentions of the assessee by observing that the assessee could not show any cogent reason for such immediate write off, exept for the fact that it is entitled to do so. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us.

6.7. We have heard the rival submissions. We find that the assessee had made out a case thoroughly in all force and the write off of the CENVAT credit deserves to be allowed from all angles. We find that when there is a reasonable certainty that the CENVAT credit is not likely to be utilized in the normal course of business within a reasonable time, which was a conscious business call taken by the assessee, which decision taken on account of commercial expediency cannot be questioned by the 16

17 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 revenue, then there is no point in retaining the said unutilized CENVAT credit in its books and hence the write off of the same in the books and claiming the same as a deduction is in order. It is not in dispute that the said CENVAT credit had admittedly emanated out of transactions on revenue account for the assessee in the past. The CENVAT portion (i.e service tax paid) at the time of incurrence of expenditure per se becomes the revenue expenditure, which would , in any case, would be allowable as a deduction for the assesee such as courier charges, telephone charges , maintenance charges, etc. The assessee had only postponed the claim of deduction by showing at CENVAT receivable as an asset in its balance sheet on the bonafide belief that the same could be utilized against the output service tax liability of the bank. When the same remains unutilized over a period of time and going by the future prospects of the business wherein the said credit would not be utilized in full, the assessee chose to write off the same in part during the year under consideration based on some rationale and proper workings, which in our considered opinion, is in order and cannot be questioned by the revenue. Accordingly, we direct the ld AO to grant deduction for the same in the sum of Rs 46 crores . Accordingly, the Ground Nos. 5(a) and 5(d) raised by the assessee are allowed. In view of this decision, the alternative claim of the assessee made in Grounds 5(b) and 5(c ) need not be looked into and accordingly the same are dismissed.

18 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 of the decision rendered for various grounds stated hereinabove. Hence the said ground does not require any specific adjudication at this stage.

19 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 within the sections 30 to 43D of the Act. Accordingly, it was submitted that the brought forward loses should not be deducted while computing total income for the purpose of ascertaining the eligible amount of deduction u/s 36(1)(viia)(b) of the Act. The ld AO did not agree to the said contentions of the assessee in the draft assessment order.

10.1. The assessee filed objections regarding this aspect before the ld DRP. The ld DRP disposed off the same in favour of the assessee by observing as under:- “10.2. DRP’s Direction: It has been contended by the assessee that- Without prejudice to the above, the Bank would also like to submit were brought forward loss is proposed to be set off against total income for the purpose of computing the amount eligible of deduction under section 36(1)(viia)(b) of the Act, the bank’s claim for bad debts under Section 36(1)(viia) of the Act in the subsequent year would consequently increase. Thus, the aforesaid adjustment is merely a timing difference, as the aforesaid adjustment, if made by your goodself would result in a consequential adjustment to the income of the Bank in the next assessment year i.e. A.Y. 2012-13. Given that the aforesaid adjustment, merely results in a timing difference, the Assessee humbly submits that the impugned litigation is not warranted. The facts have been considered by the panel. The adjustment has to be as per Law and for the relevant period. The provisioning for bad debts is a prerogative of the assessee and it is a settled proposition in multiple jurisprudence. It cannot be removed just because there is a consequential adjustment in the following period. The adjustment in the current year shall result in increase in claim of the deduction by the assessee in the next year. Ostensibly the accounts have been finalized for the next year and the action of AO is revenue neutral on the face of it. Therefore, the AO shall take a view in the next period as per law when the stage arises. Accordingly, on the facts as prescribed, this objection is upheld. 10.2.ii) Conclusion In view of the upholding of the assessee’s objection by the Hon’ble DRP, the proposed determination of income after adjusting brought forward loss for working quantum of allowability of expenses u/s 44C is accordingly deleted.”

10.2. Following the directions of ld DRP, the ld AO granted relief to the assessee. Aggrieved, the revenue is in appeal before us .

20 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 10.3. We have heard the rival submissions. We find that the impugned issue is covered in favour of the assessee by the co-ordinate bench decision of Chennai Tribunal in the case of Indian Overseas Bank Ltd in ITA No. 248/Mds/2010 dated 5.3.2013 wherein it was held as under:-

“35. The first ground of appeal raised by the Revenue is with respect to deduction under section 36(1)(viia) allowed on the total income before setting of the brought forward losses. This issue has already been decided in favour of the assessee in ITA No.1147 /Mds/2008 relevant to the assessment year 2003-04 decided on 11the September, 2009. The Tribunal while dealing with the issue has held as under:-

"9. We have considered the rival contentions and the relevant records. The issue involved is what is to be the total income for computation of the deduction u/s.36(1)(viia) of the Income Tax Act, 1961. Though the word used in this provision is total income and the definition of total income u/s.2(45) of the Income Tax Act, 1961 which includes all income of the assessee as referred in Section 5 and computed as per the manner laid down in this Act. Since the definition of Section 2 begins with the term unless context otherwise requires which means that the definition provided u/s.2 of the Income Tax Act, 1961 are not exclusive. Moreover, as per Section 2(45) of the Income Tax Act, 1961 income of the assessee is to be computed as per the manner prescribed in this Act. The purpose of total income u/s.36(1)(viia) of the Income Tax Act, 1961 is for computing the deduction for computation of business income as per the provisions of section 28 to 43D of the Income Tax Act, 1961. Therefore, the term total income referred in Clause (viia) of Sub- section 1 of Section 36 of the Income Tax Act, 1961 is used for the purpose of statutory deduction available for business income. In the case of West Bengal Industrial Development Corporation Ltd. Vs. JCIT.(supra) the Kolkata Benches of this Tribunal has held as under:- "2. We have heard both the parties and have gone through the orders of the authorities below. We find that the issue involved in this appeal had come for consideration before this Tribunal 'E' Bench in I.T.A. No.1207/1994 wherein this Tribunal vide its order dated 18.08.1996 had held that the accounting of interest on non-performing assets is to be accounted. for on receipt basis. The similar issue had also come before this Tribunal in the assessee's appeal for the assessment year 1995 - 1996 wherein this Tribunal having followed its earlier order allowed the assessee's appeal. Respectfully following the decision of the Tribunal in the assessee's own case, we do not find any merit in the order passed by the learned Commissioner of Income Tax u/s.263 of the Act with regard to the direction to assess the interest income on accrued basis. Further, with regard to the point for allowing deduction ujs.36(1)(viia) on account of provision for doubtful debts, we find no substance in the Commissioner of Income Tax's order in directing the Assessing Officer to allow deduction ujs.36(1)(viia) after setting off of brought forward business losses in as much as the set off of brought forward business losses are the matter of Chapter - VI consisting of sections 70 to 80 and not falling within the manner of computation of business income in accordance with the provisions contained in sections 30to 43D. Be it stated here that income from profit and gain from business or profession are to be computed in accordance with the provision contained 20

21 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 in section 30 to 43D and as such the computation of income from profit and gains of business have nothing to do with the amount of business losses brought forward from earlier years which is deductible u/s.70 to 80 of the Act and not within the sections 30 to 43D of the Act. In this connection reference may be made to a decision of the Madras High Court in the case of Commissioner of Income Tax, Madras Vs. L.M. Van Moppes Diamond Tools (India) Limited reported in 107 ITR 386. We accordingly, set aside the order passed u/s.263 by the Commissioner of Income Tax."

We find that issue in hand is identical to the one already decided by the Tribunal in ITA No.1147/Mds/2008 in assessee's own case. Respectfully following the same, we dismiss this ground of the appeal of the Revenue.”

Respectfully following the aforesaid judicial precedent, we hold that the final order of the ld AO granting relief to the assessee does not call for any interference. Accordingly, the Ground No. (ii) raised by the revenue is dismissed.

22 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 decision, it was also held that the amendment brought in by the Finance Act 2012 in section 115JB of the Act is applicable only from assessment year 2013-14 onwards and not earlier. Respectfully following the said judicial precedent, we hold that the provisions of section 115JB of the act are not applicable to the assessee bank for the year under appeal. Hence the ground no. 3 raised by the assessee is allowed.”

Respectfully following the same, we dismiss the Ground No. (iii) raised by the revenue.

Ground No. (iv) to (vi) of Revenue Appeal The brief facts of this issue are that the assessee made a claim for refund of TDS amounting to Rs 9,50,38,280/- which were deducted from interest paid to its head office and other overseas branches. The reason for the claim was that such interest payment being payment to self was not chargeable to tax under the provisions of the Act and this was affirmed in the assessee’s own case upto the stage of Hon’ble Supreme Court. Since the alleged tax was deducted from the sums not to be considered as income of recipient in India, the assessee made the said claim of refund which was denied by the ld AO on the ground that there was no corresponding increase in income of the assessee due to such TDS. Accordingly, the TDS credit was denied to the assessee by the ld AO in the draft assessment order. The ld DRP by following its own directions given in the assessee’s case for the Asst Years 2009-10 and 2010-11, directed the ld AO to grant relief to the assessee. Aggrieved, the revenue is in appeal before us.

12.1. We have heard the rival submissions. We find that this issue is covered in favour of the assessee in its own case in ITA Nos. 1738/Kol/2009 , 1926/Kol/2010 , 519/Kol/2011 and 1805/Kol/2012 dated 13.4.2016 for the Asst Years 2005-06 to 2008- 09. Similarly the issue was decided in favour of the assessee for Asst Year 2010-11 in ITA Nos. 496 & 477/Kol/2015 dated 14.10.2016. Since the issue is already settled in favour of the assessee, the ld AO has to give refund of the said TDS. We are not 22

23 ITA Nos.503 & 505/Kol/2016 M/s Royal Bank of Scotland N.V. A.Yr. 2011-12 inclined to accept the arguments of the revenue that the said refund is to be collected from the TDS officer and not from the assessing officer. Accordingly, we direct the ld AO to grant refund of TDS to the assessee with immediate effect. Accordingly, the Ground Nos. (iv) to (vi) raised by the revenue are dismissed.

Order pronounced in the Court on 05.09.2018

Sd/- Sd/- [A.T. Varkey] [ M.Balaganesh ] Judicial Member Accountant Member Dated : 05.09.2018 SB, Sr. PS

Copy of the order forwarded to: 1. DCIT(IT), Circle-2(1), Kolkata, 2nd Floor, Aaykar Bhawan Poorva, Room No. 210, 110, Shantipally, Kasba, Kolkata-700107. 2. M/s Royal Bank of Scotland N.V., Unit 3, 4 & 5, Azimgunj House, 17, Camac Street, Kolkata-700017. 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.