DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1)(1), BENGALURU, BENGALURU vs. CANARA BANK, BENGALURU

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

These are cross appeals directed against the order of NFAC dated 8.12.2023 for the assessment year 2015-16. First, we will take up assessee’s appeal in ITA No.111/Bang/2024. 2. The first ground raised by the assessee in this appeal is general in nature, which do not require any adjudication. 3. Next ground Nos.2 to 2.2 are as follows:

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 2 of 23 2. “The learned CIT(A) erred in not deleting disallowance u/s.14A of the Act r.w. Rule 8D amounting to Rs.17,96,20,000/- 2.1. The teamed CIT(A) erred in directing the Assessing Officer to pass a speaking order Un the issue considering the judgment of the Hon'ble Supreme Court of India in the case of South India Bank Ltd and other judicial pronouncements pointed out by the appellant.

2.2. The CIT(A) failed to appreciate the fact that no disallowance can be made u/s 14A in the case of the Bank based on the facts of the case.”

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 3 of 23 him in rei-3tion to income which does not form part of the total income under this Act. Provided that nothing contained in this Section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April 2001. 9. From perusal of Section 14A of the Act, it is evident that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation of the income which does not form part of his total income under the Act. The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word 'incurred' in Section 14A of the Act have to be read in the context of the scheme of the Act and if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the Lax. It i4 equally well settled that expenditure is a pay out. In order to attract applicability of section 14,4 of the Act, there has to be a pay out and return of investment or a pay back is not such a debit item. [See: WALFORT SHARE AND STOCK BROKERS (P) LTD SUPRA as well as M.4XOP INVESTMENTS LTD SUPRA]. In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act. In view of aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favour of the assessee and against the revenue. 10. Learned counsel for parties, have fairly admitted that in case this court frames a substantial question of law that whether provisions of Section 115JA apply to the Banking Companies are not the remaining substantial questions of lay,/ would be reduced otiose. This court has already framed a substantial question of law in this regard today. This court by an order passed on 16.01.2020 passed in ITA No.13/2014 has already held that the provisions of Section 11514 do not apply to the banking companies. Therefore, the substantial questions of law Nos_3, 4 and 5 and substantial question of law framed in ITA 99/2010 are rendered academic and need not be answered. So far as substantial; question of law No.2 in ITA No.97/2010 is concerned, the same is squarely covered by the decision of the Supreme Court in 'CIT VS. ESSAR TELEHOLOINGS LTD.',(2018) 401 ITR 445, wherein it has been held that provisions of Section 114A read with rule 8D of the Income Tax Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of the assessee."

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 4 of 23 5. In this regard, a memo is also filed by the learned counsel for the appellant, which reads as under: "MEMO ON BEHALF OF THE APPELLANT The appellant respectfully submits that in view of the substantial questions of law 2 and 4 having been covered in favour of the assessee in the earlier orders in assessee's own case, it is submitted that substantial questions of law 1 and 3 become academic and need not be answered by this Hon'ble Court. Therefore, it is most humbly prayed that this Hon'ble Court may be pleased to take the memo on record and pass appropriate orders in the interests of justice and equity." 6. As per the Memo, question Nos.1 & 3 would only be treated as academic and hence, not answered. in view of the same, in terms of the order dated 31.01.2020, the substantial questions of law Nos.2 & 4 are answered in favour of the assessee and in terms of the aforesaid judgment.” 6.1 Respectfully following the above judgment, we decide the issue in the above terms of the judgment. The ld. DR has submitted that the Hon’ble Apex court has admitted the SLP filed by the revenue but the status of the same could not be furnished by the ld. DR, accordingly, we are bound by the order of the Jurisdictional High Court 4.1 In view of the above, we allow this ground Nos.2 to 2.2 in favour of the assessee. 5. Next ground for our consideration is ground Nos.3 to 3.3, which reads as follows: 3. “The learned CIT(A) erred in upholding the taxing of the Interest on Income Tax Refund of Rs. ,920/-. 3.1. The learned CIT(A) erred in not accepting the fact that the appellant is accounting the interest on income tax refunds when the same is granted after giving effect to the orders of appellate authority. 3.2. The learned CIT(A) failed to appreciate the fact that the interest received by the Appellant Bank for the impugned Asst Year has been offered to tax in the Asst Year 2019-20 and as such, taxing the same again in this impugned Asst Year amounts to double taxation of the same income. 3.3. Without prejudice to the above the learned Assessing Officer may be directed to delete the interest income offered by the Appellant Bank in the Asst Year 2019-20 if the above grounds of the Appellant Bank are decided against the Bank.”

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 5 of 23 6. The issue in these grounds relating to taxing of the interest on income tax refunds. The contention of the ld. A.R. is that though assessee has received the interest on refund of tax vide intimation u/s 143(1) of the Act, however, it has been withdrawn by passing the assessment order u/s 143(3) of the Act. Thus, there was no real accrual of interest refunds to the assessee in the assessment year 2015-16. As such it was finally offered for taxation when the assessee has actually received it in assessment year 2019-20. Thus, he submitted that in the assessment year under consideration i.e. 2015-16, it should not be taxed. 7. We have heard the rival submissions and perused the materials available on record. On this issue, the assessee is following mercantile system of accounting from year to year. The assessee cannot be allowed to follow the hybrid system of accounting in respect of interest of income tax refunds. Accordingly, we hold that it should be taxed on the accrual basis when it was received by the assessee vide intimation u/s 143(1) of the Act. However, we make it clear that if the assessee has offered for taxation in assessment year 2019-20 on actual receipt basis that cannot be taxed in the assessment year 2019-20 on receipt basis, otherwise it amounts to double taxation. The due credence to be given on this regard and ordered accordingly. This ground of the assessee is allowed subject to above observations. 8. Next ground Nos.4 to 4.2 which reads as follows: 4. “The learned CIT(A) erred in upholding the decision of the learned Assessing Officer with regards to applicability of the provisions of Section 115JB of the Act to the Appellant Bank.

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 6 of 23 9. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case in ITA Nos.391 & 392/Bang/2023 for the assessment yar 2019-20 & 2020-21 vide order dated 22.12.2023 wherein it has been held as under: “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 ITA No. 530/Bng/2010 & 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

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 7 of 23 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 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. " 53. 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." 54. For the AY 2013-14 and onwards, vide ground no. ground no. 3 of ITA no. 1582/Del/2Q17 (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. 55. 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]].

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 8 of 23 (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:] 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. " 56. 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. 57. 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.

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 9 of 23 (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 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." 58. However, the plea of the assessee with respect to non- applicability of section 115JB to the Banking Companies was rejected by the ITAT Mumbai "B" Bench in ITA No. 1767/Mum/2019 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.”

9.1 In view of the above order of the Tribunal, this ground of appeal is allowed on similar lines.

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 10 of 23 10. In the result, appeal of the assessee in ITA No.111/Bang/2024 is partly allowed. ITA No.716/Bang/2024 (AY 2015-16) Revenue’s appeal: 11. First ground of appeal of the revenue is general in nature, which do not require any adjudication. 12. Next ground No.2 of the appeal, which reads as follows: “The Ld. CIT(A) has not appreciated the fact that the Explanation 2 of 36(1)(vii) clarifies that for the purpose of36(l)(viia) r.w.s 36(2)(v), there shall be only 'one' provision account with respect to bad and doubtful debts and such accounts relates to all types Of advances including advances made by Rural Branches.”

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 11 of 23 DCIT (ITA No.450/Hyd/2015, ITA No.498 and 499/Hyd/2015 dated August 14, 2015), wherein the Tribunal has not accepted the above said view expressed by Ld CIT(A). The relevant observations made by the Tribunal are extracted below:- “19. We have considered the rival submissions and perused the materials on record as well as the orders of revenue authorities. As could be seen from the finding of AO as well as ld. CIT(A), only reason for which claim of deduction for Rs. 209,07,50,831 representing actual write off of bad debts relating to non-rural advances u/s 36(1)(vii) was denied is, assessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds the provision made u/s 36(1)(viia). If we examine the facts of the present case in the context of aforesaid statutory provision, it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the actual deduction claimed u/s 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to nonrural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created u/s 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon'ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience. "26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 12 of 23 the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent this mischief. The contention of the Revenue, in our opinion, was rightly rejected by the Special Bench of the Tribunal and it correctly held that the Board itself had recognized the position that a bank would be entitled to both the deductions. Further, it concluded that the proviso had been introduced to protect the Revenue, but it would be meaningless to invoke the same where there was no threat of double deduction. 27. As per this proviso to cl. (vii), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances." Concurring with the aforesaid majority view, Hon'ble CJI, S.H. Kapadia, as the then he was, held as under: "2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation or taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 13 of 23 Section 36(11(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said 1 proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 14 of 23 affected, controlled or limited in any way by the proviso to clause (vii)." Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to nonrural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT (supra). Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to nonrural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non- rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A).” 6.5 Following the above said decision, we hold that the view expressed by Ld CIT(A) is not legally correct. Accordingly, we set aside the order passed by Ld CIT(A) with regard to his alternative decision, i.e., the view that the proviso to sec. 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also. Accordingly, we direct the AO to delete the disallowance of Rs.1258.47 crores.” 12.4 In view of the above co-ordinate Bench order of the Tribunal in assessee’s own case for assessment year 2013- 2014 (supra), we hold that the view expressed by the CIT(A) is not correct. Therefore, the alternative decision taken by the CIT(A) (i.e. the proviso to section 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also) is hereby set aside. Hence, we direct the A.O. to delete the disallowance made by the CIT(A). It is ordered accordingly.” 11.1 Similar issue has also been decided by the coordinate Bench of the Tribunal in the case of Bank of Baroda v. Addl. CIT, LTU, in ITA No.321/Bang/2019 dated 25.4.2023 in favour of the assessee. The ld. DR has submitted that the Hon’ble Apex court has admitted the SLP filed by the revenue but the status of the same could not be furnished by the ld. DR, accordingly, we are bound by the order of the Jurisdictional High Court. Accordingly respectfully following the above decisions, we delete the addition made u/s. 36(1)(vii). This ground is allowed.”

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 15 of 23 13.1 Being so, the issue is already decided by the Tribunal in assessee’s own case in favour of the assessee and against the department. This ground of appeal of the revenue is dismissed. 14. Next ground Nos.3, which reads as follows: “Whether deduction under section 36(l)(viia) of the Income Tax Act, 1961 r.w.r. 6ABA of the Income Tax Rules; 1962 is to be allowed on the total outstanding advances including opening balances upon which the assessee bank has already claimed such deduction in earlier years or the same has to be allowed in respect of incremental advances made during the year?” 15. After hearing both the parties, we are of the opinion that similar issue came for consideration in assessee’s own case for the assessment year 2013-14 before Hon’ble jurisdictional High Court, reported in (2023) 147 taxmann.com 171 (Karnataka), wherein held as under: 6. In so far as question No.4 is concerned, adverting to Section 36(1)(viia) of the Income Tax Act, 1961, Shri Aravind submitted that the word used in the statute is aggregate average advances "made" by the rural branches. To quote an example, he submitted that for A.Y. is 2013-14 (F.Y. 2012-13) if the bad debt as on 31.03.2012 is considered to be as Rs.l Crore by virtue of making provisions subsequently, the assessee will be entitled for double benefit because provisions in respect of 10% of the bad debt of provisions of Rs.l Crore towards bad debt was already made as on 31.03.201'. Therefore, if the same amount is carried forward for the next F.Y., the assessee will be entitled for the double benefit because would be making a provision for Rs.l Crore in addition to the 10% to the bad debt made in the relevant F.Y. 7. Shri Suryanarayana, adverting to the Para 7 of the impugned order, submitted that in identical circumstances, in assessee's own case, the assessee had made provision in similar manner as made n A-Y. 2013-14. A co-ordinate bench of the Tribunal had accepted the provision made by the assessee benefit in Canara Bank Vs. JCIT (2017) 60 ITR (Trib) 1. He further submitted that the said order has been followed by the Tribunal in Vijaya Bank and Others vs. Joint Commissioner, Bangalore ITA No.915 & 845/Bang/2017 dated 05.01.2018 and the said method of making provision has been approved by the Calcutta High Court in Uttarabanga Kshetriya Gramin Bank case. 8. We have carefully considered the rival contentions and perused the records. 9. In Para 7.2 of the impugned order, the Tribunal has recorded thus, "7.2 Before us, the learned Authorised Representative for the assessee reiterated the submission that the language of Rule 6ABA is very clear and does not mandate that only incremental

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 16 of 23 advances has to be considered and nothing can be read into it as has been done by the authorities below. It was submitted that this issue has been considered and decided in favour of the assessee by the co-ordinate bench of this Tribunal in the case of Canara Bank vs. JCIT (2017) 60 ITR (Trib) 1 ['TAT (Bang)l" 10. It is further held that the said decision has been followed in Vijaya Bank case. The manner in which the computation has been made has been given in the case of Vijaya Bank Case. Order passed by the Tribunal in Canara Bank's case followed in Vijaya Bank case has attained finality and the Revenue has not challenged the said order. Further, the High Court of Calcutta, while considering an identical situation as recorded thus, "Mr. Khaitan, learned senior Advocate appeared on behalf of the assessee and submitted that the computation to be made as prescribed by Rule 6ABA is for the purpose of fixing the limit of the deduction available under section 36(1)(viia). Clauses (a) and (b) in Rule 6ABA cannot be given the restricted interpretation. The amounts of advances as outstanding at the last day of each month would be a fluctuating figure depending on the outstanding as increased or reduced respectively by advances made and repayments received. The assessee might provided for bad and doubtful debts but the deduction would only be allowed at the percentage of aggregate average advance, computation of which is prescribed by Rule 6ABA. We find from the amended direction made by the Tribunal that such direction is in terms of Rule 6ABA. The ITO has made the computation of aggregate monthly advances taking loans and advances made during only the previous year relevant to assessment year 2009-10 as confirmed by CIT(A). The Tribunal amended such direction, in our view, correctly applying the rule." 11. In view of the above, these appeals with regard to question No.4 must fail and t s also answered in favour of the assessee and against the Revenue. Appeals dismissed. No costs 15.1 In view of the above judgement of Hon’ble High Court, we dismiss the above ground taken by the revenue.

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 17 of 23 Taxmann.com 171 (Karn), wherein the issue is decided in favour of the assessee in question No.3. Further, coordinate bench of the Tribunal in ITA No.1881, 1882, 1889 & 1900/Bang/2017 dated 28.9.2018 in assessee’s own case considered similar issue and held as under: 8.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that this issue has been considered and held in of the assessee and against Revenue; both by the decision of the Hon'ble Karnataka High Court for a-d those of the co-ordinate benches in the assessee's own case (supra) and that of Vijaya Bank (supra). We find that a co-ordinate bench, while dismissing Revenue's ground raised on this issue in re case of Vijaya Bank (supra) at paras 11.4.1 & 11.4.2 thereof has held as under :- "11.4.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that this issue has been considered and held in favour of assessee and against Revenue both by the decisions of the Hon'ble Karnataka High Court and those of the co-ordinate bench of this Tribunal in the assessee's own case. We find that a co-ordinate bench, whilé dismissing Revenue's ground on this issue in the assessee's own case for Assessment Year 2008-09 in its order in ITA No.578 & 653/Bang/2012 at paras 33 & 34 thereof has held as under:- "33. We have considered the rival submissions. Similar issue as to whether depreciation f the on investments held under the category "Held to Maturity" or "Available for Sale" can be 8 as allowed as deduction came up for consideration in Assessee's own case in AY 10- 11 in wing ITA No. 1310/Bang/2012 and this Tribunal upheld similar order of CIT(A). The following were the relevant observations of the Tribunal:- "21. We have considered the rival submissions. Similar issue as to whether depreciation peal, on investments held under the category "Held to Maturity" can be allowed as deduction came up for consideration in the case of Syndicate Bank (supra) before the I TAT Bangalore Bench. The Tribunal on the issue held as follows: "58. We have heard the submissions of the Id. DR and the Id. counsel for the assessee. ed in The Id. DR relied on the decision of the Hon'ble High Court of Karnataka in the case of Bank CIT v. ING vysya Bank Ltd. in ITA No.2886/2005 dated 06.06.2012. In the aforesaid f the decision, the Hon'ble High Karnataka took a view that the guidelines issued by Jltant the RBI will not be relevant while computing income under the Income-tax Act. The i that Hon'ble Court further took the view that every investment held by a bank cannot be Court considered as stock-in-trade. The Hon'ble High Court finally concluded that 30% of the rised investments can be clothed to the character of stock-in-trade and

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 18 of 23 that the remaining Einate amounts will be investments and therefore diminution in their value cannot be allowed as ink in a deduction. 59. The Id. counsel for the assessee, however, submitted that in the assessee's own on case for the A. Y. 2005-06, this Tribunal has confirmed the order of the CIT(A), deleting identical addition made by the AO. Our attention was also drawn to the order of the e the Tribunal in assessee's own case in ITA No.492/Bang/2009 for—the A. Y. 2005-06, order also dated 13.01.2012, wherein the Tribunal had to deal with identical issue as to whether the lid be CIT(A) was correct in deleting the addition made by the AO on account of profit on sale of investments of Rs.200,77,13,662/- and deleting the action of the AO in disallowing loss claimed on treating investments as stock-in-trade by drawing the investment trading account of Rs.775,96,55,047. The Tribunal had "16. We have heard both sides and find that the Supreme Court in the case of IJCO Bank in 240 IT R 355 has held as under : "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-intrade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower: That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed term and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case." The Bangalore Bench of ITAT in Corporation Bank (supra) has also followed the above decision of the Hon'ble Supreme Court as also the I TAT, Mumbai and ITAT, Chennai. Following the above decisions, we are deciding this issue in favour of the assessee. This ground of appeal by the Revenue is dismissed.

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 19 of 23 the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT, 240 1 TR 355 (SC). He brought to our notice that the Hon'ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act, following mercantile system of accounting both for book keeping as well for income-tax purposes. The Hon'ble Apex Court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income-tax purposes. The Hon'ble Court took the view that all investments held by a bank are to be regarded as stock-in-trade. 61. The Id. counsel for the assessee further drew our attention to a very recent decision of the Hon'ble High Court of Karnataka rendered on 11.03.2013 in the case of CIT v. Vijaya Bank, ITA No.687/2008. The Hon'ble High Court of Karnataka in the aforesaid case followed its own decision rendered in the case of Karnataka Bank Ltd. v. CIT in ITA No. 172/2009 rendered on 11.01.2013, wherein the Court took the view that depreciation claimed on investments 'held on maturity' by a bank has to be treated as stock- in-trade in accordance with RBI guidelines and CBDT Circular. It was his submission that the later decision of the Hon'ble Karnataka High Court haye to be followed. 62. We have given a careful consideration to the rival submissions and are of the view that the contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in assessee's own case on an identical issue for the A. Y. 2005-06 has upheld the claim of the assessee. The later decision of the Hon'ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the revenue in its appeal is without merit. Consequently, the same is dismissed." 22. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue." 34. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant ground of appeal No.4 of the Revenue." 11.4.2 We find that the decision of the learned CIT (Appeals) in the impugned order is in line with the aforesaid decision of the Hon'ble Karnataka High Court and the co-ordinate bench of this Tribunal in the assessee's own case (supra). In this view of the matter, we do not find any reason to, interfere with the finding of the learned CIT (Appeals) on this issue and consequently finding no merit in grounds at S.Nos.1 & 2 (supra) raised by revenue, dismiss the same."

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 20 of 23

8.5.2 Respectfully following the aforesaid decision of the co-ordinate bench in the case of Vijaya Bank which is in line with the decision of the Hon'ble Karnataka I- High Court, we delete the / additions made by the Assessing Officer and allow ground NÖ.4 raised by the Since this issue is decided in favour of the assessee, the Assessing Officer is directed to the amortisation of premium allowed by the learned CIT (Appeals) at para 12.1 of the order.”

17.1 Same view was taken by Hon’ble Karnataka High Court in the case of CIT Vs. Canara Bank reported in 147 Taxmann.com 171 (Karn.)

17.2 In view of the above order of the Tribunal, we decide this issue in favour of the assessee and against the revenue. This ground of revenue is dismissed. 18. Next ground No.6 & 7 of the revenue’s appeal reads as follows: “6. The I-d. CIT(A) has erred in law by deleting addition of Rs. 2,03,00,000/- made by the A.O. being expenditure prohibited in law, as per Explanation 1 to section37 7. Whether in the facts and circumstances of the case, the ld. CIT(A) is correct in holding that penalties levied under section 46 of the Banking Regulation Act are allowable expenditure.”

18.1. After hearing both the parties, we are of the opinion that similar issue was considered by coordinate bench in the case of Bank of Baroda in ITA No.321/Bang/2019 and ITA No.528/Bang/2019 reported in (2023) (4) TMI 1169 (ITAT Bang.) dated 25.4.2023, wherein held as under: “33. Ground No.5 : During the course of assessment proceedings, on perusal of Form 3CD audit report, the AO noted that “no sum in the form penalty in nature is debited to Profit & Loss Account” but AO observed from the published report that Rs.5.16 lakhs is in the nature of penalty levied by RBI paid during the year, therefore the AO did not allow it u/s. 37(1) observing that it is a violation of any law for the time being in force. The assessee filed appeal before the CIT(A) and submitted that Rs.5.16 lakhs as penalty to RBI was paid for deficiencies in exchange of notes and coins / remittance sent to RBI / operations of currency chest etc. It is further submitted that levy of penalty by RBI is not due to any offences prohibited by law or for infringing of any statute. It is only an additional burden imposed on the bank branches to provide better customer services to members of

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 21 of 23 public with regard to exchange of notes and coin, therefore it is not in the nature of penalty and hence the addition made by the AO should be deleted. 34. The ld. CITA) after examining the submissions noted that the assessee is a bank and governed by Banking Regulation Act, 1949 and it is controlled by the RBI and the assessee has to follow RBI guidelines as well as directions issued periodically. Any contravention of its provisions/directive is made punishable under the provisions of Banking Regulation Act. He also relied on the judgment of Hon’ble Supreme Court in the case of Bank of India Finance Ltd. v. Custodian (1997) 10 SCC 488 in which it has been held that directions of RBI are binding on the branch; such violations are punishable under the provisions of Banking Regulation Act, hence, any payment in violation of the RBI directions is not allowable as deduction u/s. 37(1) read with Explanation. He also relied on the judgment of Hon’ble Karnataka High Court in the case of Syndicate Bank 261 ITR 528 in which penalty has been confirmed for violation of section 24(4)(a) and 24(4)(b) of the Banking Regulation Act and the penalty paid by the assessee bank for violation of above section was not allowed.

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 22 of 23 18.2 In view of the above order of the Tribunal, we decide this issue in favour of the assessee and against the revenue. Ground taken up by the revenue is dismissed. 19. Next ground Nos.8 & 9 of the revenue’s appeal reads as follows: “8. The ld. CIT(A) has erred in law by deleting addition and thereby allowing deduction u/s 36(1)(viii). 9. The ld. CIT(A) has not appreciated the fact that on the same set of facts the jurisdictional ITAT, Bangalore has restored the case to the file of ld. AO in the ITA Nos.321 & 528/Bang/2019 dated 25.4.2023 in the case of Bank of Baroda.”

ITA No.111/Bang/2024 & 716/Bang/2024 M/s. Canara Bank, Bangalore Page 23 of 23 79,39,000 whereas deduction to the extent of 14,21,432 has been allowed to assessee, hence, assessee remains eligible to claim deduction u/s 36(1)(viii) to the extent of 65,17,568. On a perusal of section 36(1)(viii) of the Act. it is clear that deduction not exceeding twenty percent of the profits derived from eligible business can be allowed in respect of any special reserve created. The expression 'special reserve' has not been defined u/s 36(1)(viii). The only restriction imposed as per proviso to section 36(1)(viii) is aggregate of amount carried to such reserve account should not exceed twice the amount of paid up share capital and general reserve. Therefore, it cannot be said that the items appearing in the miscellaneous reserve cannot be treated as special reserves as there is nothing in the provision to suggest that only statutory reserves can be treated as special reserve. In view of the above, considering the fact that assessee is eligible to claim deduction u/s 36(1)(viii)to the extent of 79,39,000 out of which an amount of 14,21,432 has already been allowed, assessee is entitled to claim deduction of the balance amount of 65,17,568. Accordingly, we direct the AO to allow deduction to assessee to that extent. This ground is allowed.”

20.1 In view of the above order of the Tribunal, we are inclined to decide the issue in favour of the assessee and against the revenue. 21. In the result, revenue’s appeal in ITA No.716/Bang/2024 is dismissed. Order pronounced in the open court on 10th June, 2024

Sd/- Sd/- (Keshav Dubey) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 10th June, 2024. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.