THE NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT,MUMBAI vs. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 3(2)(1), MUMBAI, MUMBAI
Facts
The assessee debited Rs. 186,13,11,000/- towards provision for standard assets and claimed it as a deduction under section 36(1)(viia) for AY 2018-19, and a similar claim for AY 2019-20. The Principal Commissioner of Income Tax (PCIT) initiated proceedings under section 263, holding that the deduction for standard assets was not allowable under section 36(1)(viia) which pertains to provision for bad and doubtful debts.
Held
The Tribunal held that the allowability of the provision for standard assets under section 36(1)(viia) is a debatable issue. The Assessing Officer (AO) had raised a specific query and allowed the deduction after verifying the details, taking a plausible view. The PCIT's order under section 263 was considered erroneous and prejudicial to the interest of revenue as the AO had conducted an enquiry, and the issue is debatable.
Key Issues
Whether the deduction claimed under section 36(1)(viia) for provision for standard assets is allowable, and if the PCIT's order under section 263, which held the AO's order erroneous for not making sufficient enquiry, is tenable.
Sections Cited
263, 36(1)(viia), 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI SUNIL KUMAR SINGH, JM
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE MS PADMAVATHY S, AM & SHRI SUNIL KUMAR SINGH, JM
I.T.A. No. 2480 /Mum/2024 (Assessment Year: 2018-19) I.T.A. No. 2481 /Mum/2024 (Assessment Year: 2019-20)
The National Bank of Agriculture DCIT, Circle-3(2)(1), and Rural Development Aaykar Bhavan, M.K. Road, C-24, G Block, Bandra Kurla Mumbai-400020. Vs. Complex, Bandra (E), Mumbai-400051. PAN : AAACT4020G Appellant) : Respondent) : Shri J.D. Mistry, Sr. Adv. & Appellant/Assessee by Shri Niraj Sheth & Shri Gunjan Kakkad, AR Revenue/Respondent by : Shri S. Srinivasu, CIT-DR Date of Hearing : 21.08.2024 Date of Pronouncement : 26.08.2024 O R D E R Per Padmavathy S, AM: These appeals by the assessee are against the separate orders of the Principal Commissioner of Income Tax, Mumbai – 3 [in short 'the PCIT'] passed under section 263 of the Income Tax Act, 1961 (the Act) dated 14.03.2024 for
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Assessment Year (AY) 2018-19 and dated 12.03.2024 for AY 2019-20. The common issues contended by the assessee through various grounds for both the AYs are as below: (i) Validity of order under section 263. (ii) Non-allowance of provision for standard assets under section 36(1)(viia) (c) of the Act [without prejudice to (i)]
The assessee company was formed as an autonomous body by an Act of Parliament in 1982. The assessee is engaged in the business of Rural Infrastructure Development and Intuitional Development of the Co-operative Banks and the RRB's. The assessee is engaged in providing and regulating credit, providing grants, subsidiaries and other facilities for the promotion and development of agriculture small scale industries, cottage and village industry, rural infrastructure, handicrafts and other allied economics activities in rural areas with a view to promoting integrated rural development. The assessee filed the return of income for AY 2018-19 on 26.10.2018 declaring a total income of Rs. 3734,06,37,060/-. For AY 2019-20 the assessee filed the return of income on 31.10.2019 declaring a total income of Rs. 4947,65,30,250/-. The return for both the AYs were selected for scrutiny and the Assessing Officer (AO) completed the assessment under section 143(3) of the Act assessing the income of the assessee at Rs. 4538,86,46,740/- for AY 2018-19 and at Rs. 5680,60,07,760/- for AY 2019-20.
We will first consider the facts pertaining to AY 2018-19 for adjusication. For the said AY from the assessment records the PCIT noticed that the assessee has debited an amount of Rs. 186,13,11,000/- towards provision for standard assets which has been claimed as a deduction under section 36(1)(viia). The PCIT further noticed that similar claim is made for an amount of Rs. 43,04,00,658/- for AY
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2019-20. PCIT was of the view that the deduction under section 36(1)(vii) is towards "provision for bad and doubtful debts" and since in assessee's case the provision made is towards standard assets the same could not be claimed as deduction under section 36(1)(viia). The PCIT invoked the provisions of section 263 stating that the AO failed to make specific enquiries on this issue and accordingly issued a show-cause notice to the assessee. The assessee submitted that during the course of assessment, the AO has raised specific query regarding the provision for bad and doubtful debits and that the AO based on the relevant details submitted by the assessee allowed the deduction. The assessee relied on various judicial pronouncements with regard to the order of the AO not being erroneous and prejudicial to the interest of the revenue where the AO has taken a plausible view after considering the submissions of the assessee. The assessee further submitted that the provision is made by the assessee as per the RBI Master Circular dated 01.07.2015 at 0.4%. The assessee further submitted that section 36(1)(viia) does not lay down any restriction except that the provision shall not exceed 5% of the total income and that the deduction shall not be allowed in the year in which the assessee has incurred losses. The assessee also submitted that since section 36(1)(viia) does not distinguish the provision towards standard assets or non-performing assets, the assessee is entitled to claim deduction provided the other conditions are satisfied. Accordingly, the assessee submitted that even on merits the order of the AO allowing the deduction claimed by the assessee under section 36(1)(viia) is not erroneous and prejudicial to the interest of the revenue.
The PCIT after considering the submissions of the assessee held that
“10. The submissions of the assesse and the case laws relied upon have been considered very carefully. The submissions of the assessee is in two parts. One part of the assessee's submission deals with how the order u/s 143(3) r.w.s
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144B is not erroneous and prejudicial to the interests of the revenue and other part of the assessee's submission on the merit of the case, i.e. how assessee is eligible for deduction u/s 36(1)(viia) on standard assets as well. 11. The assessee's submissions are countered part wise. The First part is how the order is erroneous and prejudicial to the interests of the revenue. 12. Section 263 has been enacted to empower the PCIT to exercise power of revision and revise any order passed by the AO, if two cumulative conditions are satisfied. Firstly, the order sought to be revised should erroneous and secondly, it should be prejudicial to the interest of the revenue. The order u/s 143(3) r.w.s 144B is erroneous as the AO has not made enquiries into the issue of claim of deduction u/s 36(1)(viia) on the standard assets. The AO has not specifically enquired into the allowability of the claim of the deduction on standard assets u/s 36(1)(viia) of the Act, therefore, there is lack of enquiry on this specific claim of the assessee. It is observed that the AO has passed the order u/s 143(3) r.w.s 144B on incorrect assumption of fact and law that the deduction u/s 36(1)(viia) is allowable on standard assets. Therefore, the order u/s 143(3) r.w.s 144B dated 25.9.2021 is erroneous to that extent. 13. As stated above, the order u/s 143(3) r.w.s 144B dated 25.9.2021 is erroneous in so far as it is prejudicial to the interest of the revenue. The phrase prejudicial to the interests of the Revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. v. S.P. Jain [(1957) 31 ITR 872 (Cal)), the High Court of Karnataka in CIT v. T. Narayana Pai ((1975) 98 ITR 422 (Kant)), the High Court of Bombay in CIT v. Gabriel India Ltd. [(1993) 203 ITR 108 (Bom)) and the High Court of Gujarat in CIT v. Minalben S. Parikh [(1995) 215 ITR 81 (Guj)) treated loss of tax as prejudicial to the interests of the Revenue. The High Court of Madras in Venkatakrishna Rice Co. v. CIT [(1987) 163 ITR 129 (Mad)] interpreting "prejudicial to the interests of the Revenue". The High Court held: "In this context, (it must) be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be sorne. grievous error in the order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration."
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It has to be noted that for the AY 2017-18, the claim of deduction u/s 36(1)(viia) on the standard asset have been disallowed. Therefore, applying the ratio of the decision of the Hon'ble high Court of Madras in the Venkatakrishna Rice Co(supra), the order u/s 143(3) r.w.s 144B sets a bad trend or pattern for the same issue for the subsequent years on the issue of the claim of deduction u/s 36(1) (viia) on standard assets. Therefore, the order u/s 143(3) r.w.s 1448 dated 25.9.2021 is erroneous so far as it is prejudicial to the interests of revenue. 15. It is pertinent to mention that the Hon'ble SC in the case of CIT Vs Paville Projects P Ltd(2023) 149 taxmann 115(SC) held that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. It is further observed that if due to an erroneous order of the Income- tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. 16. Therefore, considering the facts, the judicial pronouncements, it is held that the order u/s 143(3) r.ws 1448 dated 25.9.2021 is erroneous so far as it is prejudicial to the interests of revenue. 17. With regard to the merits of the case, the assessee has taken a plea that the assessee company is a public financial institution in terms of section 4A of the companies Act, 1956(now section 2(72)) of the companies act, 2013 as per the notification dated 17.4.2002 and has stated that the RBI's master circular dated 1.7.2015 on "Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances" is applicable to it 18. With regard to the merits, the assessee has relied upon the following case laws a. Model Co-operative Bank Ltd Vs DCIT(ITA No. 5522/Mum/2017) b. ACIT Vs Jila Sahakari Kendriya Bank (2024)158 taxmann.com 40(Indore- Trib) c. Virudhunagar District central Co-operative Bank Ltd Vs PCIT(2023) 152 taxmann.com 61(Chennai- Tribunal) 19. The case laws relied upon by the assessee have been perused very carefully. The facts of the instant case are distinguishable from the facts of the cases that have been relied upon. The Model Co-operative Bank Ltd, Jila Sahakari Kendriya Bank and Virudhunagar District Central Co-operative Bank are co-operative banks and the applicable section is 36(1)(viia) (a)
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whereas the assessee is a Public Financial Institution and the applicable section is 36(1)(viia) (c) of the Act. The RBI circular for co-operative banks are different from the circular issued for the Public Financial Institution and Banks. Therefore, the case laws relied upon are not applicable to the facts of the case. 20. For the AY 2018-19, the assessee had as per books of accounts debited Rs. 184,50,00,000/- as provision for standard assets. This provision for standard assets is fully included in the deduction of Rs. 186,13,11,000/- allowed u/s 36(1)(viia) which is otherwise not allowable in view of relevant clauses of section 36(1)(viia). 21. It is observed the assessee has claimed deduction u/s 36(1)(viia)(c). The section 36(1)(viia)(c) is reproduced herewith- 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (viia) in respect of any provision for bad and doubtful debts made by- (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year The subsection (viia) of section 36 starts with in respect of any provision for bad and doubtful debts (emphasis supplied). Therefore, it is clear that the deduction is allowable only for the bad and doubtful debts, whereas, the assesse has claimed the deduction on standard assets as well. Further, the
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proviso to clause(c) to subsection (vila) of section 36 clearly states that the deduction shall be allowable only on the assets that have been classified as doubtful or loss assets in accordance with the guidelines issued by RBI. Therefore, the proviso strengthens the view that the deduction on provision for standard asset is not allowable deduction. 22. Further, the RBI Master circular dated 1.7.2015, in para 5 titled as provisioning norms has classified the assets into Loss assets (Para 5.2), doubtful assets (Para 5.3), substandard assets (Para 5.4) and standard assets (Para 5.5). The para 5.5 of the Master Circular is reproduced herewith- 5.5 Standard assets (i) The provisioning requirements for all types of standard assets stands as below. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis: 1. Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent. 2. advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; 3. advances to Commercial Real Estate - Residential Housing Sector (CRE-RH) at 0.75 per cent 4. housing loans extended at teaser rates and restructured advances as indicated in Para 5.9.13 and 12.4 respectively; 5. all other loans and advances not included in (a) (b) and (c) above at 0.40 per cent (ii) The provisions on standard assets should not be reckoned for arriving at net NPAs. (iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet. The RBI Circular in Para 5.5 (iii) clearly states that the provisions towards standard assets should be shown separately as Contingent Provisions". Therefore, in combined reading of the proviso to clause (c) to section 36(1)(viia) clearly shows that the deduction is allowable for the provision on doubtful and loss asset and the provision for the standard asset is only
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contingent in nature. Therefore, it is not allowable as per the provisions of the Act. 23. Therefore, considering the facts, the order u/s 143(3) r.w.s 144B dated 25.9.2021 for the AY 2018-19 is set aside as it is erroneous and prejudicial to the interests of revenue and the AO is directed to conduct the enquiries into the allowability of deduction u/s 36(1) (viia)(c) on the standard assets and pass the assessment order after giving opportunity of being heard to the assessee.” 5. The ld. Authorized Representative (AR) drew our attention to the details called for by the AO with regard to deduction claimed by the assessee under section 36(1)(viia) during the course of assessment and the reply filed by the assessee (page 162 and 165 of Paper Book). The ld. AR submitted that based on the said details furnished by the assessee the AO has allowed the deduction after application of mind. The ld. AR further submitted that the PCIT cannot substitute his view with regard to the allowability of deduction under section 36(1)(viia) where the AO has taken one plausible view on the said reason. The ld. AR also submitted that it is a settled position that when two views are possible and that the AO was taken one plausible view, the provisions of section 263 cannot be invoked holding the order of the AO as erroneous and prejudicial to the interest of the revenue. On merits, the Ld. AR submitted that the assessee is required to make a provision towards standard assets as per the RBI Circular (supra) and that section 36(1)(viia) does not provide for any condition that the deduction under the said section should be claimed only towards non-performing assets. The ld. AR further submitted that the PCIT has erroneously held that the master direction non-banking financial company – systemically Important Non-Deposit taking company and deposit taking company (Reserve Bank) Directions, 2016 updated as on 17.02.2020 is applicable to the assessee. The ld. AR in this regard submitted that assessee is not a Non-Banking Financial Institution and therefore, the said
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directions are not applicable in assessee's case and that master circular dated 01.07.2015 on Prudential Norms and Income Recognition, Asset Clarification and Provisioning pertaining to advances is applicable in assessee's case. The ld. AR submitted that the assessee has made a provision as per the said Circular which is less than 5% of the total income of the assessee thereby complying with the conditions prescribed under section 36(1)(viia) of the Act. It is therefore, argued by the ld. AR that even on merits the assessee is eligible for deduction under section 36(1)(viia) towards provision made for standard assets and therefore, the PCIT is not correct in holding the order of the AO could be erroneous and prejudicial to the interest of the revenue on this count.
The ld. DR on the other hand argued that the provisions of section 263 are invoked by the PCIT for the reason that the AO has not conducted full enquiry towards a deduction claimed by the assessee under section 36(1)(viia). The ld. DR further submitted that the AO called for details pertaining to the claim and the assessee has furnished the details without providing any further details as to why the deduction is allowable. The ld. DR also submitted that the AO has allowed the claim without examining the details furnished by the assessee and therefore, the PCIT has correctly invoked the provisions of section 263 on the ground that AO has not properly made enquiries.
We heard the parties and perused the material available on record. The assessee has made a provision as per the RBI Circular dated 01.07.2015 and has claimed the same as deduction under section 36(1)(viia) of the Act. The AO during the course of assessment called for details pertaining to the claim and the assessee submitted the relevant details. The AO while completing the assessment did not make any disallowance towards the same based on the details submitted by the
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assessee. The PCIT invoked the powers under section 263 for the reason that the deduction under section 36(1)(viia) has been erroneously allowed by the AO without verification / examination of the claim and accordingly the order of the AO is prejudicial to the interest of the revenue. The reasons quoted by the PCIT for the claim by the assessee not being allowable are that the AO has not specifically enquired into the allowability of the claim of the deduction on standard assets u/s 36(1)(viia) of the Act, and therefore, there is lack of enquiry on this specific claim of the assessee. The PCIT further held that the AO has passed the order u/s 143(3) r.w.s 144B on incorrect assumption of fact and law that the deduction u/s 36(1)(viia) is allowable on standard assets. The PCIT also held that even on merits The provision is made towards standard assets whereas the deduction under section 36(1)(viia) is claimed for provision for bad and doubtful debts.
Before proceeding further it is apposite to take note of the relevant extract of section 263 of the Act, which read as under :-
“Revision of orders prejudicial to revenue. 263. (1) The [Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, [including,— **** 9. Thus, from close scrutiny of the provisions of section 263, it is evident that twin conditions are required to be satisfied for exercise of revisional jurisdiction under section 263 of the Act i.e., firstly, the order of the Assessing Officer is
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erroneous; and secondly, it is prejudicial to the interests of the revenue on account of error in the order of assessment. There is no dispute that u/s. 263 of the Act, the PCIT does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary and the assessment order is prejudicial to the interests of the Revenue. However, in doing so, the PCIT must have some material which would enable to form a prima facie opinion that the order passed by the AO is erroneous, insofar as it is prejudicial to the interests of the Revenue. The reason of the PCIT for holding the AO's order to be erroneous is that the AO has allowed the deduction under section 36(1)(viia) of the Act. There is no dispute that the assessee has made the provision as per the Master Cirular of RBI and that the provision is made towards standard assets. The PCIT is of the view that section 36 starts with in respect of any provision for bad and doubtful debts and therefore, the deduction is allowable only for the bad and doubtful debts, whereas, the assesse has claimed the deduction on standard assets as well. During the course of hearing the ld AR presented case laws where it has been held that deduction under section 36(1)(viia) is allowable for the entire provision made as per RBI circular including the provision towards standard assets. The ld DR also fairly submitted that the allowability of the deduction as claimed by the assessee is a debatable issue. In this regard it is relevant quote the following observations of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd vs CIT [2000] 243 ITR 83 (SC) – 9. The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law.
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Considering the ratio laid down by the Hon'ble Supreme Court, we are of the view that there is merit in the contention that whether the provision made by the assessee towards standard assets is allowable under section 36(1)(viia) is a debatable issue and that the AO while allowing the deduction the order passed has taken a possible view upon verifying the details available on record.
On the contention of the PCIT that the AO has not specifically enquired into the allowability of the claim of the deduction on standard assets u/s 36(1)(viia) of the Act, we notice that the AO has raised a specific query on the same (page 162 and 165 of Paper Book) and the assessee has filed the relevant reply for the same. Therefore, it cannot be stated that the AO has not made enquiry into the issue of allowability of the claim of the deduction on standard assets u/s 36(1)(viia). The assessee has no control over the way an assessment order is drafted and generally, the issues which are accepted do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/ disallowances are made. In our considered view the error envisaged by section 263 of the Act should actually be an error either of fact or of law and in the given case the PCIT has not brought anything on record to show that the deduction claimed by the assessee has been erroneously claimed under the law or any material to show that there been an error in the order that is prejudicial to the interest of the revenue. In view of above discussions and applying the ratio laid down by the Apex court in the case of Malabar Industrial Co. Ltd (supra) we hold that the conclusion of the PCIT that the order passed by the AO is erroneous is not tenable and liable to be quashed.
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We notice that for AY 2019-20 also the PCIT has invoked the provisions of section 263 for the same reasons and therefore in our considered view, our decision on the identical facts taken in AY 2018-19 is mutatis mutandis applicable to AY 2019-20 also. Accordingly the revision order passed under section 263 of the Act for AY 2019-20 is also held as not tenable and quashed.
In the result, the appeals of the assessee for AY 2018-19 and AY 2019-20 are allowed.
Order pronounced in the open court on 26-08-2024.
Sd/- Sd/- (SUNIL KUMAR SINGH) (PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,
(Dy./Asstt. Registrar) ITAT, Mumbai
