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Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI KESHAV DUBEY
PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER:
This is an appeal filed by the revenue against order passed by the CIT(A) vide order dated 18.04.2024 DIN & Order No.ITBA/NFAC/S/250/2024-25/1064199467(1) for the AY 2014-15 on the following grounds of appeal:
Brief facts of the case are that the assessee is a banking company and carrying on business of banking. This is a second round of proceedings before us and the revenue has challenged only on two issues, which are clear from the above grounds that whether the applicability of section 115JB of the Income Tax Act, 1961 (in short “The Act”) to the assessee and next the penalty paid to the Reserve Bank of India (In short “RBI”) at Rs.3,00,10,000/- is in violation of provisions/explanation of section 37 of the Act. During the course of second round of proceedings, the AO noted that the assessee has Canara Bank, Bangalore Page 3 of 17 not computed tax liability on its book profit u/s 115JB in the Income Tax return. On enquiry, the assessee submitted that the assessee is a public sector bank and it is not a company covered under proviso to section 211(2) of the Companies Act, 1956. Therefore, Public sector banks are not covered by clause (b) of section 115JB(2) of the Act. Hence, the book profit was not computed. The AO noted that the section 115JB(2) of the Act amended vide Finance Act, 2012 and this amendment made as consequent upon the decision of High Court and Tribunal to the effect that the provisions of section 115JB of the Act are not applicable to the banking companies who do not prepare profit & loss account as per provisions of Companies Act, 1956 and the necessary amendments were referred by the AO. The AO noted that the amendment in section refers to Companies, which prepare profit & loss account as pre provisions of Companies Act, 1956 and other companies to which the proviso to section 211 of the Companies Act, 1956 applies and the said proviso is applied to the banking companies, insurance companies, etc. As per section 5(c) of Banking Regulation Act, 1949, banking company in which it transacts the business of banking in India. Thus, the assessee falls under the sub-clause (b) of section 115JB (2) of the Act. Therefore, the assessee was required to compute the profit under the said proviso and the AO referred to various other judgements as quoted in order and computed book profit u/s 115JB of the Act at Rs.6,724.47 crores.
Canara Bank, Bangalore Page 4 of 17 Further, the AO noted that the assessee has paid penalty for infringement of RBI guidelines amounting to Rs.3,00,10,000/- and claimed as allowable expenditure u/s 37(1) of the Act. The auditor has certified in Form No.3CD report that it is covered under the explanation of section 37(1) of the Act being the penalty for non- compliance with RBI instructions under Banking Regulation Act, 1949. In this regard, a notice u/s 142(1) of the Act dated 03.08.2016 was issued to the assessee and the assessee replied vide dated 21.11.2016 and 01.12.2016. The assessee submitted that the penalty imposed by RBI as per FEMA guidelines for non- compliance of certain guidelines, however, this penalty does not cover by explanation to section 37(1) of the Act. The AO observed that the penalty for violation of FEMA guidelines of RBI and non-compliance of Banking Regulation Act, 1949 is not compensatory in nature and it is not for any contractual obligation. It is a violation of law. Hence, it is covered under explanation of section 37(1) of the Act and he relied on the following judgement of Hon’ble High Court of Karnataka in the case of CIT Vs. Syndicate Bank reported in 261 ITR 528 and decision of ITAT Bangalore in the case of Vijaya Bank in & 653/Bang/2012 dated 27.2.2015 and accordingly, he disallowed and added back into the total income of the assessee and AO also made other additions. 2.1 Aggrieved from the above order of the AO, the assessee filed appeal before the first appellate authority Canara Bank, Bangalore Page 5 of 17 and the ld. CIT(A) deleted the above two additions. Aggrieved from the order of ld. CIT(A)’s order, the revenue filed appeal before us. 3. The ld. D.R. relied on the order of AO and submitted that the ld. CIT(A) has wrongly allowed the appeal of the assessee on these grounds and he has filed a written synopsis which is as under:
On the other hand, the ld. A.R. of the assessee relied on the order of the ld. CIT(A) and submitted that the ld. CIT(A) has passed a good reasoned order and it does not require any interference and the case law relied by the ld. CIT(A) are squarely applicable to the present facts of the assessee. The ld. AR. Further referred to the order passed by the RBI dated 15.07.2013 in respect of 27 banks and submitted that the penalties have been imposed in exercise of powers vested in the RBI provisions and section 47(A)(1)(c) r.w.s. 46(4)(i) of the Banking Regulation Act, 1949. He further submitted that the Reserve Bank of India has carried out scrutiny of the books of accounts, internal control compliance systems and RBI revealed violation of certain regulations and instructions issued by the RBI, which are listed in the bullet points of the order and he further submitted that the RBI Chief General Manager has specifically passed order observing that (the investigation did not reveal any prima facie evidence of money laundering, however, in conclusive inference in this regard can be drawn only by an end to end investigation of the transactions by tax and enforcement agencies but till the date of passing of order there is no violation of money laundering, therefore, there is no violation of the FEMA guidelines. The AO has wrongly noted that it is a violation of FEMA guidelines. In support of his argument, he relied on the following judgements:
Canara Bank, Bangalore Page 9 of 17 1. Stock and Bond Trading Company (2011) (10) TMI 172 – Bombay High Court 2. Bapunagar Mahila Co Op Bank Ltd. (2015) (7) TMI 472 ITAT Ahmedabad 4.1 He further submitted that the judgement of Bapunagar Mahila Co-operative Bank Ltd. in CO No. 269/Ahd/2010, the coordinate bench ITAT Ahmedabad has observed that in this case, the penalty levied is not a punishable offence and relying on the judgement of Hon’ble Kerala High Court in the case of Catholic Syrian Bank and just it is a violation of routine works in nature and it is a compensatory in nature there is no punishable offence for violating the above provisions and the assessee has paid penalty to the RBI and the RBI has not taken any further action for violating as per the investigation made by the RBI. Therefore, the ld. CIT(A) order is correct. Further, in respect of applicability of MT provision to the banking company (the assessee), the ld. A.R. of the assessee strongly relied on the judgement of Union Bank of India the decision of coordinate bench of ITAT Mumbai in ITA No.424/Mum/2020 and 3740/Mum/2018 in the case of Union Bank of India Vs. DCIT, LTU of Mumbai and the issue has been settled down in favour of the assessee and the Hon’ble Tribunal has also considered the amendment made by the Finance Act, 2012 w.e.f. 1st April, 2013 and he also relied on the decision of assessee’s own case of the coordinate bench of Tribunal in ITA Nos.391 & 392/Bang/2023 & ITA Canara Bank, Bangalore Page 10 of 17 No.663/Bang/2023 for the AY 2019-20 order dated 22.12.2023, the Bench has decided the issue in ground No.4 in favour of the assessee.
Considering the rival submissions here the revenue has raised two issues, the first is penalty paid by the assessee to RBI of Rs.3,00,10,000/- is covered under explanation of section 37(1) of the Act and applicability of MAT provisions to the assessee. We noted from the assessment order that the auditor has reported in Form No.3CD that it is covered under explanation to section 37(1) of the Act for non-compliance of RBI instructions under the Banking Regulation Act and in response to the notice u/s 142(1) of the Act, the assessee has itself submitted that the penalty imposed by RBI as per FEMA guidelines for non-compliance of certain guidelines. However, we noted from the order passed by the RBI dated 15.07.2013 placed by the assessee during the course of hearing, the penalties have been imposed in exercise of powers vested in the RBI under the provisions of section 47(A)(1)(c) r.w.s. 46(4)(i) of the Banking Regulation Act, 1949 and mentioned that the investigation did not reveal any prima facie evidence of money laundering. Therefore, it is necessary to refer to above sections which are as under: “1[47A. Power of Reserve Bank to impose penalty.--(1) Notwithstanding anything contained in section 46, if a contravention or default of the nature referred to in 2[sub-section (2) or sub-section (3) or sub-section (4)] of section 46, as the case may be, is made by a banking company, then, the Reserve Bank may impose on such banking company-- Canara Bank, Bangalore Page 11 of 17 3[(a) where the contravention or default is of the nature referred to in sub- section (3) of section 46, a penalty not exceeding twenty lakh rupees in respect of each offence if the contravention or default persists, a further penalty not exceeding fifty thousand rupees for everyday, after the first day, during which the contravention or deafult continues; (b) where the contravention is of the nature referred to in sub-section (3) of section 46, a penalty not exceeding twice the amount of the deposits in respect of which such contravention was made; (c) where the contravention or default is of the nature referred to in sub- section (4) of section 46, a penalty not exceeding one crore rupees or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where such contravention or default is a continuing one, a further penalty which may extend to one lakh rupees for everyday, after the first day, during which the contravention or default continues.]”.
Penalties.—(1) … (2)…… (3)………. [(4) If any other provision of this Act is contravened or if any default is made in— (i) complying with any requirement of this Act or of any order, rules or direction made or condition imposed thereunder; or (ii) ……….. by any person, such person shall be punishable with fine which may extend to 2 [fifty thousand rupees or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where a contravention or default is a continuing one, with a further fine which may extend to two thousand and five hundred rupees] for every day, during which the contravention or default continues].
5.1 From the order passed by the RBI dated 15.07.2013 it clearly says that there is no prima facie evidence of money laundering. The assessee has itself accepted before the AO that there were non-compliance of FEMA guidelines. The violation of FEMA guidelines and money laundering may be different and it depends upon the facts of each case, The Section 13 of the FEMA Act provides penalties clause for violation of FEMA Act. The RBI has imposed penalty u/s 47(A)(1)(c) r.w.s. 46(4)(i) of the Banking Regulation Act, 1949. The section says if any Canara Bank, Bangalore Page 12 of 17 person has contravened or if any default is made in any other provision of this act he shall be punishable with fine, accordingly the assessee has paid penalty. The assessee has not provided the detail of the penalty in terms of 47A(1)(c) r.w.s. 46(4)(i). The assessee had sufficient opportunities to produce the details of the calculation of the penalties. The penalty order passed by the RBI comes under the explanation 37(1) of the Income Tax Act, since the assessee is unable to demonstrate that it is compensatory in nature. The case law relied by the ld. AR of the assessee in respect of Bapunagar Mahila Co Operative Ltd. noted supra which has referred the judgement of the CIT Vs Catholic Syrian Bank Ltd. (2003) 130 taxmann 447 (Ker.) is not applicable in the case of the assessee, since in this case the RBI passed order u/s 47A(1)(b) r.w.s 46(4)(i) of the Banking Regulation Act. Here the case of the assessee is different on facts. In the result the appeal of the revenue is allowed on this issue.
The next issue involved is applicability of provisions of 115JB in the case of assessee and this issue has been decided by the coordinate bench of the Tribunal in assessee’s own case for the assessment year 2019-20 in dated 22.12.2023, wherein it was held as under:
Canara Bank, Bangalore Page 13 of 17 “11. Ground No.4 raised by assessee is on applicability of provisions of section 115JB of the Act. The Ld.AR submitted that, the assessee does not fall within definition of banking company as defined under Companies Act, 1956 and therefore it is not covered by proviso to section 211(2) of the Companies Act. The Ld. AR thus submitted that provisions of s. 115JB are not applicable to assessee. In support of this submission, he placed reliance on decision of Hon’ble Delhi High Court in the case of CIT v Punjab National Bank Ltd. (successor of erstwhile Oriental Bank of Commerce) in ITA 594/2023 by order dated 20/10/2023, wherein the question of law considered by the court is proposed in question (e) has been dismissed. The said order of Hon’ble Delhi High Court in the case of CIT v Punjab National Bank Ltd. (successor of erstwhile Oriental Bank of Commerce) (supra) is placed at page 35-37 of the PB. The Ld.AR further relied on decision of Hon’ble Delhi Tribunal in the case of Oriental Bank of Commerce v. ACIT reported in [2022] TIOL 331 ITAT-DEL. The Ld.AR submitted that, the provisions of section 115JB, as it stood prior to its amendment by virtue of Finance Act, 2012, would not be applicable to a banking company. He submitted that coordinate Bench of Delhi Tribunal considered this issue by observing as under:- “51. This issue is no longer res-judicata following judgments of the tribunals and the High Courts wherein it is categorically held that MAT provision u/s 115JB will not apply to a Banking Company: - Canara Bank vs JCIT, LTU in & other dtd. 30.03.2016 = 2016-TIOL-1120-HC-P&H-IT - M/s. Canara Bank vs CIT(LTU) In ITA No. 305/Bang/2011 dtd. 18.06.2012 - Krung Thai Bank PCI vs Joint Director of Income Tax (ITAT) (Mumbai) in ITA No.3390/Mum/09 dtd. 30.09.2010 reported in (2010) 45 DTR 218 - Union Bank of India vs ACIT, LTU (ITAT) (Mumbai) in ITA Nos.4702 to 4706/Mum/2010 dtd. 30.06.2011 - Indian Bank vs Addl. CIT (ITAT) (Chennai) in ITA No.469/Mds/2010 dtd. 03.08.2011 - Union Bank of India (ITAT Mumbai) in ITA Nos. 4155 to4161 of 2011 dtd. 27.03.2012 - Oriental Insurance Co. Ltd. vs. DCIT I ITA No.447/2015 dtd 30.08.2017 = 2017-TIOL-1714-HC-DEL-IT - CIT vs Union Bank of India (2019) 308 CTR 797 (Bom) HC 52. In the above referred judgment of the Bombay High Court, at relevant page 8, para no.11 (paper book page no.13) the court has held as under: "This legal dichotomy emerging from the provisions of subsection (2) of Section 115JB particularly having regard to the first proviso contained therein in case of banking company, would convince us that machinery provision provided in sub- section (2) of section 115JB of the Act, would be rendered wholly unworkable in such a situation. In a Canara Bank, Bangalore Page 14 of 17 well known judgment the Supreme Court in case of Commissioner of Income-Tax, Bangalore vs B.C. Shrinivasa Setty, Vo. 128 ITR 294 = 2002-TIOL-587-SC-IT-LB, had observed that in the Income Tax Act, a charging section and the computing provisions together constitute an integrated code. In a case where the computation provision cannot apply, it would be evident that such a case was not intended to fall within the charging section. It was a case of charging a partnership firm for transfer of a capital asset in the nature of goodwill. The Supreme Court was of the opinion that it would not be possible to envisage a cost of acquisition of goodwill. Since computation of capital gain cannot be done without ascertaining the cost of acquisition, it was held that no capital gain tax can be levied. "
Concluded at page 12 para 21 as under: "27. In the result, we hold that sub-section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012, would not be applicable to a banking company. We answer the question No. 2 in favour of the assessee and against the revenue. In view of this, question of correctness of the order of rectification passed by the Assessing Officer becomes unimportant. Question No. 1 is therefore not answered. All the appeals are dismissed."
For the AY 2013-14 and onwards, vide ground no. ground no. 3 of (AY 13-14), ITA no. 1583/Del/2017 (AY 14- 15) and ground no. 6 of ITA no. 1199/Del/2018 (AY 15-16), the assessee has contended that provisions of section 115JB (MAT) will not apply as the assessee is a Nationalized Bank under the Banking Company (Acquisition and Transfer of Undertaking) Act, 1980.
The provisions of section 115JB as amended by the Finance Act, 2012 w.e.f. 1.4.2013, inserting clause (a) and clause (b) in sub- section (2) to section 15JB are as under: "115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, [2012], is less than [eighteen and one-half per cent] of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of incometax at the rate of [eighteen and one-half per cent]]. (2) [Every assessee,- (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956); or (b) being a company, to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 (1 of 1956) is applicable, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company:] Canara Bank, Bangalore Page 15 of 17 Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. "
Thus, the understanding of the above amendment to section 115JB is where a company which are not required u/s 211 (129) of the Companies Act to prepare their P&L account in accordance with Schedule - VI of the Companies Act, 1956 profit & loss account prepared in accordance with the provisions of their Regulatory Acts shall be taken as a basis for computing the book profit u/s 115JB.
The assessee's contentions for non-applicability of 115JB provisions are: "(i) It is a case of Nationalized Bank, under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980. (ii) Assessee is not a company incorporated under the Companies Act, 1956, nor recognized under section 3 of the Companies Act. (iii) The second proviso to sub-section (1) of section 129 (earlier provision 211) of the Companies Act, 2013 is not applicable to the assessee. (iv) Under section 11 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980 provides that "for the purposes of the Income-tax Act, 1961, every corresponding new bank shall be deemed to be Indian company and a company in which public is substantially interested". (v) It is settled principle of law where deeming fiction is created by the legislature it has to be confined to the purpose for which it is created. CIT, Panji vs Dempo Company Limited reported in (2016) 74 TAXMAN.com 15 (SC) = 2016-TIOL-164-SC-IT. Therefore, the Canara Bank, Bangalore Page 16 of 17 Income-tax Act must recognize such banking company for the purpose section 115JB in order to make the provisions applicable. (vi) When the charging section and the computing provision together would constitute an integrated code. In case charging section does not apply then the computation section fails. CIT vs B C Shrinivas Setty 128 ITR 294 = 2002-TIOL-587-SC-IT- LB."
However, the plea of the assessee with respect to nonapplicability of section 115JB to the Banking Companies was rejected by the ITAT Mumbai "B" Bench in for the A.Y. 2015-16 in the case of Bank of India vs ACIT Mumbai vide order dated 11th December, 2020. 59. There is no jurisdictional High Court decision or for that matter any other High Court decision against the assessee. In view of the fact that two use are possible, the view that favour the assessee may kindly be considered, more so in the case of a Nationalized Bank as held by the Hon'ble Supreme Court in the case of CIT vs Vegetable Products Ltd. 88 ITR 192 = 2002TIOL-574-SC-IT-LB.”
The Ld. DR though could not controvert the above observation by Hon’ble Delhi Tribunal in the above own case, placed reliance on the decision of Ld.CIT(A).
We have perused submissions advanced by both sides in light of record placed before us. We note that decision of Hon’ble Delhi Tribunal in Oriental Bank(supra) has been upheld by Hon’ble Delhi High Court wherein Hon’ble High Court has categorically observed that the revenue in case of Punjab National Bank did not raise this issue which are identical to facts of the present assessee before us. In view of the same, Ground No.4 raised by the assessee deserves to be allowed. “
6.1 The issue involved before us is similar as decided above by the coordinate bench of this Tribunal in assessee’s own case. Accordingly, respectfully following the above judgement, we dismiss the appeal of the revenue on this ground.
Order pronounced in the open court on 16th Oct, 2024 Sd/- Sd/- (Keshav Dubey) (Laxmi Prasad Sahu) Judicial Member Accountant Member Bangalore, Dated 16th Oct, 2024. VG/SPS Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order Asst. Registrar, ITAT, Bangalore.