DCIT, CIR-6(1), KOLKATA, KOLKATA vs. M/S. INDUSTRIAL INVESTMENT BANK OF INDIA, KOLKATA

3.1. The brief facts of this issue are that the assessee is engaged in the business of project financing and investment in capital market In response to notices issued u/s 143(2) and 142(1) of the Act, the assessee bank filed the audited accounts, tax audit report u/s 44AB, copy of return of income and the computation thereon. In the course of assessment proceedings, Shri R.N.Dhar, Liquidator of the assessee company

3 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 appeared and submitted that the normal business of the assessee has been stopped and the assessee bank is under the process of liquidation. The ld AO observed in his order that though the assessee bank was engaged in the activity of project financing and investment in capital market, but since at present it is under the process of liquidation, the assessee bank is restricted to issue fresh loan and investment and fresh borrowings. It is also engaged in the implementation of VRS scheme and deployment of the employees to Public Sector Banks/ Other organizations and merger of offices / branches as well as disposal of surplus assets. The ld AO observed that the primary focus is only on recovery of assets and servicing of its liabilities in normal course of business till exercise of resolution of its asset is completed.

3.2. The ld AO on perusal of the computation of income observed that the assessee bank had claimed a deduction of Rs 151,82,11,000/- as writing back of provisions which were not allowed in earlier years. The assessee stated that in earlier years , in respect of its lending and investments made in the normal course of its business, due to non- recovery of the same, had made provision for those assets treating the same as Non- Performing Assets (NPA) and that the same were also added back in the computation of income in earlier years. Since these assets were either sold or settled during the year, the provision remaining in these accounts were no longer required and accordingly the same were written back to the profit and loss account of the assessee bank by crediting the profit and loss account. Since the very same sums were already offered to tax in the earlier years at the time of making provisions, the same is to be reduced from computation of income while writing back to profit and loss account (i.e when the provision earlier made is reversed). The assessee also furnished the detailed chart showing the treatment of provision made for bad debts in the various assessments commencing from Asst Year 2003-04 onwards. This reply not proving satisfactory to the ld AO, he proceeded to add the sum of Rs 151,82,11,000/- to the total income by 3

4 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 disallowing the claim of deduction made by the assessee bank in the computation under the normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act.

3.3. The assessee reiterated its submissions before the ld CITA. The ld CITA sought for a remand report from the ld AO. The first remand report was submitted by the ld AO vide letter dated 30.8.2016 which was very general in nature and did not address the specific points raised by the ld CITA. The second remand report was submitted by the ld AO vide letter dated 17.1.2017 , the ld AO stated that the assessee had filed certain details vide its letter dated 18.9.2014 before the ld AO, but had not bothered to present himself before him to explain the same. Accordingly he concluded that the claims made by the assessee were not supported by documentary evidences and hence supported the order of the ld AO. However, no submissions were given by the ld AO with regard to addition made in the computation of book profits u/s 115JB of the Act. The assessee stated that it had duly represented before the predecessor AO and explained the entire contents of its submissions to prove its contentions. However, that AO after hearing the assessee did not proceed to issue any remand report. It was submitted that even the present AO at the time of remand proceedings, called the assessee which was duly complied with and explanations together with relevant documents were indeed submitted before the ld AO again in the remand proceedings. The assessee specifically objected to the findings of the ld AO in the remand report that the relevant documents were not furnished before the ld AO as factually incorrect. Hence the assessee again submitted all the relevant documents before the ld CITA. The assessee also submitted that for the Asst Year 2004-05 , the ld AO had not reduced the written back provisions and the ld CITA confirmed the said action of the ld AO. Subsequently, the tribunal vide its order dated 30.6.2009 had restored the matter back to the ld AO for fresh examination and the ld AO after due verification had vide his order dated 31.3.2015 reduced the written back provisons as claimed by the assessee. Copies of the relevant 4

5 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 orders were also placed by the assessee. The assessee also stated that the entire details of provisions made and written back party wise were furnished before the ld AO which were completely ignored by the ld AO both in the original assessment as well as in remand proceedings. The ld CITA deleted the addition towards write back of provisions in the sum of Rs 151,82,11,000/- both under normal provisions of the Act as well as under section 115JB of the Act by observing as under:-

“I agree with the argument of the AR as mentioned above. The AO in his remand report dated 17.01.2017 has stated that prima facie nothing clear from the details filed by the appellant during the remand proceeding that when such provision were disallowed. By stating this the AO has not dispute the allowability of the claim of the appellant but the only dispute was non-submission of the relevant documents. In that case, he should have asked more details to understand the issue from the appellant. The AO has further used the word ‘prima facie’, it appears that he has not applied his mind, reason best known to him. As regards to allowability of claim of the appellant, the issue has also already been considered in the case of appellant for assessment year 2004-05 in favour of the appellant and as regards to submission of the relevant document twice before the AO during remand proceedings. Keeping in view of above, the AO is directed to delete the addition and this ground of appeal is allowed. I agree with the argument of the AR as mentioned above. The AO in his remand report dated 17.01.2017 has replied the issue with ground nos. 4 and 5 stating that prima facie nothing clear from the details filed by the appellant during the remand proceeding that when such provision were disallowed. By stating this the AO has not dispute the allowability of the claim of the appellant but the only dispute was non-submission of the relevant documents. In that case, he should have asked more details to understand the issue from the appellant. The AO has further used the word ‘prima facie’, it appears that he has not applied his mind, reason best known to him. As regards to submission of the relevant document and whether such provision were disallowed in earlier years, the AR has submitted the relevant document twice before the AO during remand proceeding. As regards to allowability of claim of the appellant, I find that the claim of reduction of Rs. 151,82,11,000/- had been made as per the provisions of Explanation 1(i) to section 115JB(2), accordingly the Assessing Officer is directed to reduce the said written back provisions of Rs. 151,82,11,000/- while computing the Book Profit u/s 115JB(2) for the Assessment Year 2012-13. This ground of appeal is allowed.”

3.4. Aggrieved, the revenue is in appeals before us. 5 3.5. We have heard the rival submissions. The facts stated hereinabove are not reiterated herein for the sake of brevity. We find that the ld AO even though had chance to verify the documents filed by the assessee to ascertain the fact whether the assessee had already disallowed the provisions for these subject mentioned assets in the year of making provisions in the computation under normal provisions of the Act as well u/s 115JB of the Act. Various details and documents were indeed furnished by the assessee but the same had not been properly verified and appreciated. We find that the ld CITA had also not bothered to examine the details with the relevant evidences and records and the relief was granted on the ground that the ld AO had not made proper verification of the same and non-application of mind on the part of the ld AO. Hence it is clear that both the authorities below had not given any finding on facts of the issue in their respective orders. Hence in the interest of justice and fairplay, we deem it fit and appropriate, to give one more chance to the ld AO, to examine the veracity of the claims made by the assessee. If it is found that in the year of making provisions, the assessee had duly disallowed the same in the computation of income both under normal provisions as well as u/s 115JB of the Act, then in the year of writing back of those provisions , i.e the years under consideration, the same should not be taxed again. This aspect requires factual verification by the ld AO. Accordingly, the grounds raised by the revenue for Asst Years 2012-13 , 2010-11 and 2011-12 in this regard are allowed for statistical purposes subject to directions contained hereinabove.

7 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 Exceptional Items before arriving at the figure of profit before tax. The assessee replied in this regard by furnishing the details as under:-

Fees paid to Deloitte - Rs 94.26 lakhs Trust Investment - Rs 9.00 lakhs B.K.Ramesh, Arrear Salary - Rs 1.25 lakhs ----------------------- Rs 104.51 lakhs Less: Rectification entry on account of bank charges Rs 0.11 lakhs ----------------------- Rs 104.40 lakhs ------------------------ From the above, the ld AO observed that exceptional items includes items related to prior period adjustment i.e expenditures relating to earlier financial year and hence the said items are not deductible from the profit of the assessee bank for the year under consideration. The ld AO observed that in the earlier assessment year, similar item was added back voluntarily by the assessee in the computation of income, but in the instant year, the same was not done. Accordingly, the ld AO disallowed the prior period expenditure of Rs 104.40 lakhs in the assessment.

4.1. The assessee submitted that expenses aggregating to Rs 94.26 lakhs related to charges made by M/s Deloitte Touchematsu India Pvt Ltd for the financial advices and assistance provided by them in the matter of the assessee’s decisions, as approved by the Government of India, to sell its loan assets and investments. All the relevant invoices giving particulars about the services rendered, were submitted before the ld AO. It was submitted that since the total expenses of Rs 94.26 lakhs had been finalized during the Asst Year 2012-13, the aggregated expenses of Rs 94.26 lakhs was provided as expenditure and claimed as deduction being the year of crystallization. The assessee submitted that the said sum was also duly paid to the said party during the next financial year. The assessee submitted that an agreement entered into on 20.12.2007 between the 8 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 assessee and M/s Deloitte Touchematsu India Pvt Ltd , whereby Deloitee was to provide financial advices and assistance in the matter of assessee’s decisions, as approved by the Government of India, to sell its loans (assets) and investments. In the above mentioned agreement, the detailed particulars of the services to be rendered by Deloitte were specifically mentioned. In accordance with the said agreement, Deloitte rendered the necessary services to the assessee. The ld CITA duly appreciated these facts and deleted the disallowance made in the sum of Rs 94.26 lakhs towards fees paid to Deloitte.

4.2. Aggrieved, the revenue is in appeal before us.

4.3. We have heard the rival submissions. It is not in dispute that the payment of Rs 94.26 lakhs has been made by the assessee to Deloitte Touchematsu Pvt Ltd pursuant to an agreement entered into on 20.12.2007 for rendering financial advices in respect of assessee’s decision, as approved by the Government of India, to sell its loan assets. It is not in dispute that Deloitte had indeed rendered due services to the assessee. The ld CITA had observed that Deloitte had submitted bills from time to time and after checking of the concerned bills, the assessee debited Rs 94,26,049/- of the fees which had related to the sales effected in the earlier years as prior period expenses and simultaneously Rs 10,25,749/- having been in relation to current year as ‘consultancy fees and expenses’ on 31.3.2012. It is not in dispute that the payment of Rs 94.26 lakhs was made by the assessee to Deloitte on 31.8.2012 for an aggregate sum of Rs 1,04,51,798/- which included prior period expenses of Rs 94,26,049/- and other outstanding fees of Rs 10,25,749/- after deducting taxes of Rs 10,45,180/- at source therefrom. We find that the assessee had given proper explanation that the bills payable to Deloitte together with its quantum got settled and crystallized only during the year under appeal and accordingly the same becomes the expenditure of the year for the purpose of income tax. It is not the case of the revenue that the assessee had also made 8

9 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 a claim of this expenditure in the earlier year. It is not in dispute that the said payment of Rs 94.26 lakhs is wholly and exclusively incurred by the assessee for the purpose of its business. In these circumstances, the subject mentioned expenditure though categorized as prior period expenditure to be in consonance with Accounting Standard – 5 issued by ICAI, cannot be deprived of the deduction from its total income. Our views also draw support from the following decisions :- a) Hon’ble Delhi High Court in the case of CIT vs Jagatjit Industries Ltd reported in (2011) 339 ITR 382 (Del) b) Co-ordinate Bench of Delhi Tribunal in the case of Sony India (P) Ltd vs DCIT reported in (2008) 118 TTJ 865 (Del Trib) c) Hon’ble Delhi High Court in the case of CIT vs Modipon Ltd reported in 334 ITR 102 (Del) d)Co-ordinate Bench of this Tribunal in the case of Hindustan Gum & Chemicals Ltd vs ITO reported in 23 SOT 143 for Asst Year 2003-04 4.4. In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the aforesaid judicial precedents, we hold that the ld CITA had rightly deleted the disallowance and his order in this regard does not require any interference. Accordingly, the Ground No. 3 raised by the revenue for Asst Year 2012- 13 is dismissed.

10 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 of this dividend income which was claimed as exempt. The ld AO resorted to work out the disallowance as per the computation mechanism provided in Rule 8D(2) of the Rules by applying the third limb thereon and made disallowance of Rs 35,78,175/- and Rs 23,09,387/- for the Asst Years 2010-11 and 2011-12 by calculating 0.5% of average value of investments of the respective years. This disallowance was made by the ld AO both under normal provisions of the Act as well as u/s 115JB of the Act.

5.1. The ld CITA deleted the disallowance u/s 14A of the Act both under normal provisions of the Act as well as u/s 115JB of the Act by observing that the assessee is a government company and moreover the assessee is a financial institution, so by its very mandate of operations, subscription / investment in shares is nothing but part and parcel of its normal business activities. Accordingly, he held that provisions of section 14A of the Act cannot be invoked on the assessee.

5.2. Aggrieved, the revenue is in appeal before us.

5.3. We have heard the rival submissions. We find that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd vs CIT reported in 402 ITR 640 (SC) had held that provisions of section 14A of the Act are applicable even for investments held as stock in trade. Hence this issue is now settled and provisions of section 14A of the Act are to be applied in the instant case. We find that this tribunal in the case of REI Agro Ltd reported in 144 ITD 141 (Kol Trib) had held that only those investments which had yielded dividend income need to be considered while working out the disallowance under third limb of Rule 8D(2) of the Rules. Hence we direct the ld AO to rework the disallowance accordingly for Asst Years 2010-11 and 2011-12 under normal provisions of the Act.

11 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 5.4. With regard to disallowance u/s 14A of the Act while computing the book profits u/s 115JB of the Act , we find that the same is squarely covered by the decision of Hon’ble Calcutta High Court in the case of CIT vs Jayshree Tea & Industries Ltd vide GA No. 1501 of 2014 , ITAT 47 of 2014 dated 19.11.2014 wherein the similar question arose which reads as under:-

“2. Whether on the facts and in the circumstances of the case the Ld.Tribunal has erred in law in upholding the order of CIT(Appeals) that disallowances under Section 14A of the I.T.Act, 1961, amounting to Rs 2,20,15,787/- is not to be considered for book profit for calculation of book profit under section 115JB of the I.T.Act, 1961?”

On this question, the Hon’ble High Court has observed as under:-

“We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 u/s 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal.”

5.4.1. We also note that the Special Bench of Delhi Tribunal in ACIT vs Vireet Investment (P) Ltd (2017) 82 taxmann.com 415 (Delhi.Trib.)(SB) has held as under:-

“6.22. In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (f) Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income-Tax Rules, 1962.”

5.4.2. Respectfully following the orders of Hon’ble High Court and Special Bench supra, we restore the matter to ld AO to calculate the book profit u/s 115JB of the Act. It is reiterated that the disallowances made under the provisions of Rule 8D of the Rules cannot be applied to the provisions of Sec. 115JB of the Act. Therefore, the ld AO shall work out the disallowance in terms of the clause (f) to Explanation 1 of Sec. 115JB of 12 M/s Industrial Investment Bank of India A.Yrs. 2010-11, 2011-12 & 2012-13 the Act independently after considering the expenses debited in the profit & loss account as mandated under the provisions of law.

5.4.3. Accordingly, the Ground No. 1 raised by the revenue for Asst Years 2010-11 and 2011-12 are partly allowed for statistical purposes .

Order pronounced in the Court on 04.07.2018