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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI RAJPAL YADAV & SHRI ABRAHAM P GEORGE
PER SHRI ABRAHAM P GEORGE, AM:
These are cross appeals filed by the assessee and the revenue respectively directed against an order dated 18-07-2013 of CIT(A), Mysore.
2 ITA Nos.1264 & 1352(B)/13
Appeal of the assessee is taken up first for disposal. Assessee has
raised 5 grounds in total of which ground no.1 is general and needs no
adjudication. Through its ground no.2 assessee assails the disallowance
of Rs.386,34,99,765/- claimed by it under section 36(1)(viia) of the IT Act,
1961 (in short ‘The Act’)
Facts apropos are that the assessee a public sector bank had
claimed Rs.423,79,66,948/- as deduction u/s 36(1)(viia) of the Act. The
computation given by the assessee for arriving at this figure was as under;
Calculation of deduction u/s 36(1)(viia) of the IT ACT, 1961
Amount in Rs. 1 Average rural advances A) 2895,05,96,571
2 Total income before deduction u/s B) 1790,54,30,542 36(1)(viia) & chapter VI-A deduction 3 10% of A) 289,50,59,657
4 7.5% of B) 134,29,07,91
5 Total 423,79,66,948
6 Provision for Bad debts made in the 547,75,81,922 books 7 Claim for provision for bad debts 423,79,66,948 restricted to eligibility
Since the total provision for bad debts made for assessee came to
Rs.547,75,81,922/-, the AO called for a break up. The break up furnished
by the assessee read as under;
3 ITA Nos.1264 & 1352(B)/13
Provision for bad and doubtful urban debts as per books Rs.510,31,14,809/- Provision for bad and doubtful rural debts as per books Rs. 37,44,67,183/- Total Rs.547,75,81.992 AO was of the opinion that against the claim of Rs.423,79,66,948/- made
by the assessee under section 36(1)(viia) the actual provision made for
rural debts in the books was only Rs.37,44,67,183/-. Thereafter, relying
on the decision of the Hon’ble Apex Court in the case of Catholic Syrian
Bank Vs CIT 343 ITR 270 and also of the decision of the Hon’ble Punjab &
Haryana High Court in the case of State Bank of Patiala Vs CIT 272 ITR
Learned AO concluded that the claim made under section 36(1)(viia)
had to be restricted to actual provision for bad and doubtful rural debts
made by the assessee in the books of accounts. He therefore, restricted
the claim of the assessee to Rs.37,44,67,183/-.
In its appeal before the CIT(A), argument of the assessee was that
it had made total provision of Rs.547,75,81,922/- and the split up of such
provisioning in the books of accounts was not relevant, as long as the
workout of the provision amount u/s 36(1)(viia) came within the total
amount of the provisions. CIT(A) however, did not accept this contention.
He confirmed the order of the AO.
Now before us learned AR submitted a similar issued had come
up before this Tribunal in the case of DCIT Vs ING Vysya Bank Ltd.(2014)
149 ITD 611. According to him, after considering the decision of the
4 ITA Nos.1264 & 1352(B)/13
Hon’ble Apex Court in the case of Catholic Syrian Bank and also various
amendments made to Section 36(1)(viia) it was held by the Tribunal that
the actual provision made in the books by the assessee for bad and
doubtful debts alone was to be reckoned for considering the threshold
limits and it was not necessary to consider the breakup thereof, while
arriving the allowability of a claim u/s 36(1)(viiia) of the Act.
Per contra, learned DR reiterated the same arguments taken by
the revenue in the case of M/s ING VYsya Bank Ltd (Supra). Stress was
given to the amendment made to section 36(1)(vii) by Finance Act, 2013
whereby explanation 2 was inserted. According to him, this explanation
would show that the provision made u/s 36(1)(viia) had to be first
deducted from the claim of bad debts u/s 36(1)(vii of the Act before
allowing deduction under the latter section to an assessee. As per the
learned DR if the legislature in its wisdom thought it fit to adjust the
provision against the bad debts it was not for the appellate authorities to
give a different interpretation. Reliance was also placed on explanatory
note given by Institute of Chartered Accountants of India (ICAI) with
regard to Finance Act, 2013.
In reply learned AR submitted that the interpretation sought to be
given by the learned DR on Explanation2 to Section 36(1)(vii) was
incorrect. According to him set off of bad debt could be done only against
provisions and not vice-versa.
5 ITA Nos.1264 & 1352(B)/13
We have perused the orders and heard the rival contentions.
There is no dispute that assessee had made total provision for bad debts of
Rs.547,75,81,922/- in its books of accounts. When assessee was
required to given break-up of the above amount, it came out that the
provisioning with respect to rural debts were only Rs.37,44,67,183/-.
However, as per the assessee it would be eligible for deduction u/s
36(1)(viia) for an amount of Rs.423,79,66,948/- which was lower than the
total provisioning entitling it to such a claim. We find that a similar issue
had already came up before the Tribunal in the case of M/s ING Vysya
Bank Ltd.(Supra). The argument made by the department and the
assessee and also final decision given by the Tribunal in the above case
are available at paras 21 to 41 of the said order which are reproduced here
under;
We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned DR relied on the order of the AO. The learned counsel for the Assessee submitted that originally when Sec.36(1)(viia) of the Act was introduced, the requirement of PBDD having to be in relation to advances made by its rural branch was a condition for allowing deduction on account of PBDD. After amendment of Sec.36(1)(viia) by the IT (Amendment) Act, 1985, the requirement that the PBDD should be in relation to rural advances was not a requirement. The PBDD could be in relation to any advance and deduction was allowed only in respect of rural advances since the calculation was mainly based on rural advances. What has to be seen is as to whether the bank had made any provision for bad and doubtful debts. There is no need to bifurcate the same into rural and non-rural
6 ITA Nos.1264 & 1352(B)/13
debts. Once a bank creates provision for bad and doubtful debt, then the deduction is allowed u/s.36(1)(viia) based on the calculation as provided in the section. It was submitted that in AY 03-04, the Assessee made a PBDD of Rs.88,30,47,000. As per the calculation provided in Sec.36(1)(viia) it was entitled to deduction of Rs.25,15,44,262 but it claimed deduction of Rs.23,80,55,247. For AY 04-05, the Assessee made a PBDD of Rs.51,82,00,000. As per calculation provided in Sec.36(1)(viia), it was entitled to claim deduction of Rs.25,89,19,631 and had claimed the said sum as deduction.
Elaborating further, the learned counsel for the Assessee submitted before us that when Sec.36(1)(viia) was introduced in the year 1979, the PBDD had to be made in relation to advances made by it’s rural branches. When Sec.36(1)(viia) was substituted by the IT(Amendment) Act, 1985, the requirement of the PBDD having to be in relation to advances made by rural branches was dispensed with and that the PBDD need not be in relation to advances made by its rural branches. It was pointed out by him that under the provisions of Sec.36(1)(viia) as substituted by the IT (Amendment) Act, 1986 :-
(a) a scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or
(b) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank,
would get an amount
(i) not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A)
and
7 ITA Nos.1264 & 1352(B)/13
(ii) an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner;
as deduction on account of Provision for Bad and Doubtful Debts whilecomputing its total income.
According to him after the aforesaid amendment, the requirement of the Provision having to be made in respect of advances by rural branches has been dispensed with. As long as the bank makes any provision for bad and doubtful debts, it is eligible to claim deduction u/s.36(1)(viia) as per the calculation provided therein. It was submitted that in AY 03-04, the Assessee made PBDD to the extent of Rs.88,30,47,000 in its books of accounts. Out of which Rs.10,00,000 was PBDD in respect of rural advances and Rs.88,20,47,000 was PBDD in respect of non-rural advances. It was eligible to claim deduction of Rs.25,15,44,262 as per the calculation made u/s.36(1)(viia) of the Act. Since the provision made in the books of PBDD for non-rural and rural advances was much more than the deduction claimed u/s.36(1)(viia)(a) of the Act, the deduction claimed has to be allowed. Similarly for AY 04-05, the Assessee made PBDD in respect of non-rural advances of Rs.51,72,00,000 and in respect of rural advances Rs.10,00,000. The entire provision of Rs.51,82,00,000 debited to the profit and loss account was added to the profit as per profit and loss account in the computation of total income. Bad debt written off in respect of non-rural branches was Rs.88,26,10,825 and non-rural branches was Rs.1,59,60,631. A sum of Rs.50,22,39,369 was claimed as deduction u/s.36(1)(vii) of the Act and a sum of Rs.25,89,19,631 was claimed as deduction u/s.36(1)(viia) of the Act. It was claimed that since the PBDD made both rural and non-rural advances was much more than the amount claimed as deduction u/s.36(1)(viia)(a) of the Act, the deduction claimed by the Assessee has to be allowed. It was submitted that the claim was
8 ITA Nos.1264 & 1352(B)/13
rightly allowed by the CIT(A) and the orders of CIT(A) do not call for any interference.
We have considered the rival submissions. To appreciate the contention put forth by the learned counsel for the Assessee, we need to look into the history of Sec.36(1 )(viia) as it exists in the present form.
Stage-I:
Sec.36(1)(viia) was inserted by the Finance Act, 1979 w.e.f. 1st April, 1980 and at the time of its insertion, this clause read as under :
"(viia) in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches, an amount not exceeding one and a half per cent of the aggregate average advances made by such branches, computed in the prescribed manner.
Explanation : For the purposes of this clause,-
(i) "rural branch" means a branch of a scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
(ii) "scheduled bank" has the same meaning as in the Explanation at the end of cl. (b) of sub-section (2) of section 11, but does not include a co-operative bank."
This clause, as explained in para 13 of the CBDT Circular No. 258, dt. 14th June, 1979, was inserted to promote rural banking and to assist the scheduled commercial banks in making adequate provisions in relation totheir rural advances. The Circular reads thus:-
9 ITA Nos.1264 & 1352(B)/13
"Deduction in respect of provisions made for bad and doubtful debts relating to rural branches of scheduled commercial banks — Sec. 36(1 )(viia)
13.1 Under s. 36(1 )(viia) of the IT Act, a taxpayer carrying on business or profession is entitled to a deduction, in the computation of the taxable profits, of the amount of any debt which is established to have become bad during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debts is not allowed as a deduction in the computation of the taxable profits.
13.2 In order to promote rural banking and 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 has inserted a new cl. (viia) in sub-s. (1) of s. 36 of the IT Act to provide for a deduction, the computation of the taxable profits of all scheduled commercial banks, in respect of provisionsmade by them for bad and doubtful debts relating to advancesmade by the rural branches. The deduction will be limited to 1-1/2 per cent of the aggregate average advances made by the rural branches computed in the manner to be prescribed by rules in the IT Rules, 1962. For this purpose, a "rural branch" means a branch of a scheduled bank situated in a place with a population not exceeding 10,000 according to the last preceding census of which the relevant figures have been published before the first day of the previous year. The expression "scheduled bank" has the same meaning as in the Explanation below s. 11 (2)(b) of the IT Act but does not include a cooperative bank. The expression "scheduled bank" would, therefore, cover the State Bank of India constituted under the State Bank of India Act, 1955, any subsidiary bank of the State Bank of India as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a nationalised bank as specified in s. 3 of the Banking Companies (Acquisition and Transfer of
10 ITA Nos.1264 & 1352(B)/13
Undertakings) Act, 1970 or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934. It may be mentioned that all co-operative banks have been excluded from the purview of this provision in view of the position that under s. 80P(2)(a)(i) of the IT Act, the profits and gains of a co-operative society engaged in the business of banking or providing credit facilities to its members are completely exempt from income-tax.
13.3 It may be relevant to mention that the provisions of new cl. (viia) of s. 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provisions of s. 36(1)(vii) relating to allowance of the bad debts. In other words, the scheduled commercial banks would continue to get the fullbenefit of the write off of the irrecoverable debts under s. 36(1 )(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under s. 36(1)(viia).
13.4 This provision will take effect from 1st April, 1980 and will accordingly apply in relation to the asst. yr. 1980-81 and subsequent years."
By section 10(a) of the Finance Act, 1982 in the opening portion of the word (scheduled bank" was substituted with the words "scheduled bank or a non-scheduled bank." Further in the Explanation to this clause, the existing cl. (i) was renumbered as cl. (ia) and the following clause was inserted as cl(i):
"Non-scheduled bank" means a banking company as defined in cl. (c) of section 5 of the Banking Regulation Act, 1945 (10 of 1949) which is not a scheduled bank".
As explained in para 17 of the CBDT Circular No. 346, dt. 30th June, 1982, the object of the amendment was to extend the benefit of the deduction to advances by rural branches of non- scheduled commercial banks as well.
11 ITA Nos.1264 & 1352(B)/13
Stage-II
Deduction enhanced - Amendment by the Finance Act, 1985
For the portion beginning with the words "in respect of any provision" and ending with the words "in the prescribed manner", the following was substituted w.e.f. 1st April, 1985 :
"in respect of any provision for bad and doubtful debts madebya scheduled bank [not being a bank approved by the Central Government for the purposes of cl. (viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) or an amount not exceeding two per cent of theaggregate average advances made by the rural branches ofsuch banks, computed in the prescribed manner, whichever is higher."
Proviso to Sec.36(1)(vii) of the Act, was introduced by the Finance Act, 1985 and it reads thus:
"Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause."
Simultaneously, Sec.36(2)(v) was introduced by the Finance Act, 1985 and it reads thus:
"Sec. 36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply —
(i) to (iv) …………..
12 ITA Nos.1264 & 1352(B)/13
(v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause."
As explained in para 17 of the CBDT Circular No. 421, dt. 12th June, 1985, the benefit of deduction under this clause was enhanced having regard to the increasing social commitments of banks.
"Deduction in respect of provisions made by banking companies for bad and doubtful debts
17.1 Sec. 36(1 )(vii) of the IT Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-s. (2) of s. 36.
17.2 Sec. 36(1 )(viia) of the IT Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 11/2 per cent of the aggregate average advances made by such branches.
17.3 Having regard to the increasing social commitments of banks, s. 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of s. 36(1 )(viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new
13 ITA Nos.1264 & 1352(B)/13
provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher, shall be allowed as a deduction in computing the taxable profits.
17.4 Sec. 36(1 )(vii) of the Act has also been amended to provide that in the case of a bank to which s. 36(1 )(viia) applies, the amount of bad and doubtful debts shall be debited to the provision for bad and doubtful debts account and that the deduction admissible under s. 36(1 )(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account.
17.5 Sec. 36(2) has been amended by insertion of a new cl. (v) to provide that where a debt or a part of a debt considered bad or doubtful relates to advances made by a bank to which s. 36(1 )(viia) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debt account made under cl. (viia) of s. 36(1)."
Stage-III:
The IT (Amendment) Act, 1986 substituted the present cl. (viia) for the one as substituted by the Finance Act, 1985. These provisions came into effect from 1.4.1987.
SECTION 36 - OTHER DEDUCTIONS
The section reads as under :
Other deductions.- (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 -
14 ITA Nos.1264 & 1352(B)/13
(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner;
Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, 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, for an amount not exceeding five per cent. of the amount of such assets shown in the books of account of the bank on the last day of the previous year.
Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and endingbefore the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent.", the words "ten per cent." had been substituted.
Provided also that a scheduled bank or a nonscheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:
Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession".
15 ITA Nos.1264 & 1352(B)/13
Explanation : For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005.
(b) a bank, being a bank incorporated by or under the laws of a country outside India, 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.
(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).
Explanation : For the purposes of this clause-
(i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) which is not a scheduled bank;]
(ia) "rural branch" means a branch of a scheduled bank or a non- scheduled bank situated in a place which has a population of not
16 ITA Nos.1264 & 1352(B)/13
more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
(ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934;
(iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);
(iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951) ;
(v) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956) engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this sub-section;
(vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P"
The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986, was to give the separate deduction, viz., one in respect of rural advances and the
17 ITA Nos.1264 & 1352(B)/13
other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks.
"Modification in respect of deduction on provision for bad and doubtful debts made by the banks.
5.1 Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the IT Act inserted by the Finance Act, 1979, provisions for bad and doubtful debts made by a scheduled or a non-scheduled Indian bank is allowed as deduction within prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent they were being discriminated against. Further, it was felt that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% of the aggregate average advances made by rural branches of the banks concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provision secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by
18 ITA Nos.1264 & 1352(B)/13
such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts."
To complete the sequence of amendments, we may also make a reference to the Amendment to sec.36(1)(viia) of the Act by the Finance Act, 2013. By the Finance Act, 2013, in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, the following Explanation was inserted, namely:—
"Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub- section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;"
It can be seen from the history of Sec.36(1)(viia) of the Act that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advancesmade by its rural branches. At this stage the PBDD had to be linked to the advances made by Bank’s rural branches. At stage-II of Sec.36(1)(viia), the deduction while computing the taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this stage also the PBDD had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank’s rural branches and can be in relation to any debt. PBDD need not be in relation to rural advances but can be in relation to any advances both rural and non-rural advances. The two percent AAA made by rural branches of such banks had to be
19 ITA Nos.1264 & 1352(B)/13
computed and the PBDD made in books has to be in relation to rural advances. The other eligible sum which can be considered for deduction u/s.36(1)(viia) of the Act viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances. Nevertheless the debit of PBDD to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1)(viia) of the Act. If the concerned bank does not have rural branches then they could not claim the deduction. Therefore the deduction was confined only to banks that had rural branches.
At Stage-III of the provisions of Sec.36(1)(viia) of the Act, the deduction allowed earlier was enhanced. The enhancement of the deduction was consequent to representation to the Government that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 5% of total income was available to banks which did not have rural branches.
Therefore after 1.4.1987, scheduled or non-scheduled banks having rural branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by such branches
20 ITA Nos.1264 & 1352(B)/13
and (b) Schedule or non-scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary.
Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) of the Act, PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec.36(1)(viia) of the Act, this condition was done away with and it was only necessary to create PBDD in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s.36(1)(viia) of the Act had to be done.Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s.36(1)(viia) of the Act will not be available to the bank. The second part of the deduction u/s.36(1)(viia) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s.36(1)(viia) of the Act. The actual provision made in the books by the Assessee on account of PBDD (irrespective of whether it is rural or non- rural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the Assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration.
In the present case as far AY 03-04 is concerned, the Assessee debited in the Profit and Loss A/C. on account of PBDD in respect of rural and non- rural advances of Rs.88,30,47,000
21 ITA Nos.1264 & 1352(B)/13
(Rs.88,20,47,000 for non-rural advances and Rs.10,00,000 for rural advances). A sum of Rs.4,36,165 was actually written off out of the PBDD of rural advances. The Assessee wrote off a sum of Rs.88,26,10,825 as bad debts on account of non-rural advances and claimed the same as deduction u/s.36(1)(vii) of the Act. The said claim for deduction was allowed by the AO. The Assessee made a claim for deduction u/s.36(1)(viia)(a) of the Act of Rs.23,80,55,247. This was rejected by the AO for the reason that the deduction u/s.36(1)(viia) of the Act is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. As we have already explained above, this is not a relevant consideration. What has to be seen by the AO is as to whether PBDD is created (irrespective of whether it is in respect of rural or non-rural advances) by debiting the Profit & Loss A/C. To the extent PBDD is so created, the Assessee is entitled to deduction subject to the upper limit of deduction laid down in Sec.36(1)(viia) of the Act. To avoid possible claim for double deduction in respect of one and the same debt first as PBDD and thereafter as Bad Debts, the legislature has already provided in Sec.36(2)(v) of the Act that where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. Further the proviso also limits the claim for deduction u/s.36(1)(vii) of the Act to an Assessee to which Sec.36(1)(viia) of the Act applies to the amount by which such debt or part thereof (written off as Bad debts) exceeds the credit balance in the provision for bad and doubtful debts account made under clause(viia) to Sec.36(1) of the Act. It would be just and fair if the order of CIT(A) is set aside and the AO directed to examine the claim of the Assessee in the light of the discussion made above. Similar order would be just and fair in AY 04-05 also. We hold and direct accordingly by allowing the relevant grounds raised by the Revenue for statistical purpose.
22 ITA Nos.1264 & 1352(B)/13
We may also clarify that the decision rendered by the Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra) has no relevance to the present case. The facts of the case before the Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra) was that the Assessee claimed deduction on account of bad debts written off in respect of non-rural branches u/s.36(1)(vii) of the Act. The AO noticed that there was already credit balance in the Provision for Bad and Doubtful Debts Account u/s.36(1)(viia)(a) of the Act, which was in excess of the claim of the assessee for deduction on account of bad debts. The AO after making reference to proviso to Sec.36(1)(vii) of the Act and also Sec.36(2)(v) of the Act was of the view that the Assessee could not be allowed the deduction claimed because (i) the amount claimed as deduction on account of bad debts was not the excess available in the credit of the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act and;(i) that u/s.36(2)(v) of the Act the amount of bad debts written off should first be debited in the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act. The stand of the Assessee was that since the claim of deduction of Bad debts made by the Assessee was u/s.36(1)(vii) of the Act and pertained to bad debts of non-rural advances,the credit balance in the PBDD account should not be looked into at all.The Hon’ble Supreme Court held:
(i) The provisions of Section 36(1)(vii) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other.
(ii) Clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to s. 36 demonstrate that the deduction on account of provisions for bad and doubtful debts under s. 36(1)(viia) is distinct and independent of the provisions of s. 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to
23 ITA Nos.1264 & 1352(B)/13
encourage rural advances and the making of provisions for bad debts in relation to such rural branches.
(iii) The language of s. 36(1)(vii) is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to s. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) on the one hand and that it satisfies the requirements stated in s. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under s. 36(1)(viia). The Explanation to s. 36(1)(vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of s. 36(1)(vii) simpliciter.
(iv) As per the proviso to cl. (vii) of s. 36(1), 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 ruraladvances 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.
Thus, it can be seen that in the case of Catholic Syrian Bank (supra), the case made out by the AO was that PBDD is one account and whenever claim for deduction is made u/s.36(1)(vii)
24 ITA Nos.1264 & 1352(B)/13
the same should be debited to the PBDD account. Further the law laid down by the Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra) has to be understood in the context of its assumption that Banks would maintain separate PBDD A/C. in respect of rural branches and non-rural branches and therefore it is possible to discern PBDD as one in respect of rural branches and non-rural branches and therefore there is no basis for the assumption that Bank’s would get double benefit of deduction by way of Provision for Bad and Doubtful Debts and also by way of Bad Debts written off. The following observations of the Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra) would be relevant in this regard.
"30. The scope of the proviso to cl. (vii) of s. 36(1) has to be ascertained from a cumulative reading of the provisions of cls. (vii), (viia) of s. 36(1) and cl. (v) of s. 36(2) and only shows that a double benefit in respect of the same debt is not given to a scheduled bank. A scheduled bank may have both urban and rural branches. It may give advances from both branches with separate provision accounts for each.
It was neither in dispute earlier, nor disputed before us, that the assessee bank is maintaining two separate accounts, one being a provision for bad and doubtful debts other than provisions for bad debts in rural branches and another provision account for bad debtsin rural branches for which separate accounts are maintained. This fact is evinced by the entries in the P&L a/c, balance sheet and break up details. We need not deliberate this aspect with reference to records at any greater length as this is not a matter in issue before us. It was contended on behalf of the Revenue that the Revenue is only concerned with the assessee as a single unit and not with how many separate accounts are being maintained by the assessee and under what items. The Department, therefore, would assess an assessee with reference to a single account maintained in the head office of the concerned
25 ITA Nos.1264 & 1352(B)/13
bank. This, according to the learned counsel appearing for the Department, would further substantiate the argument of the Department that the interpretation given by the Full Bench of the High Court is the correct interpretation of s. 36(1 )(vii). This argument has to be rejected, being without merit.
In the normal course of its business, an assessee bank is to maintain different accounts for the rural debts for non-rural/urban debts. It is obvious that the branches in the rural areas would primarily be dealing with rural debts while the urban branches would deal with commercial debts. Maintenance of such separate accounts would not only be a matter of mere convenience but would be the requirement of Accounting Standards.
It is contended, and rightly so, on behalf of the assessee bank that under law, it is obliged to maintain accounts which would correctly depict its statement of affairs. This obligation arises implicitly from the requirements of the Act and certainly under the mandate of Accounting Standards.
Inter alia, following are the reasons that would fully support the view that a bank should maintain the accounts with separate items for actual bad and irrecoverable debts as well as provision for such debts. It could, for valid reasons, have rural accounts more distinct from the urban, commercial accounts :
(a) It is obligatory upon each bank to ensure that the accounts represent the correct statement of affairs of the bank.
(b) Maintaining the common account may result in overstating the profits or the profits will shoot up which would result in accruing of liabilities not due.
(c) Accounting Standard (AS) 29, issued in 2003, which concerns treatment of 'provisions, contingent liabilities andcontingent
26 ITA Nos.1264 & 1352(B)/13
assets'. Under the head 'Use of Provisions', cls. 53 and 54 state as under :
"53. A provision should be used only for expenditures for which the provision was originally recognised.
Only expenditures that relate to the original provision are adjusted against it. Adjusting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events."
The above clauses justify maintenance of distinct and different accounts.
Merely because the Department has some apprehension of the possibility of double benefit to the assessee, this would not by itself be a sufficient ground for accepting its interpretation. Furthermore, the provisions of a section have to be interpreted on their plain language and could not be interpreted on the basis of apprehension of the Department. This Court, in the case of Vijaya Bank vs. CIT &Anr. (2010) 231 CTR (SC) 209 : (2010) 37 DTR (SC) 401 : (2010) 5 SCC 416, held that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the P&L a/c of the head office, which is what ultimately matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Therefore, in order to prevent such mismatch and to be in conformity with the accounting practice, the banks should maintain separate accounts. Of course, all accounts would ultimately get merged into the account of the head office, which will ultimately reflect one account (balance sheet), though containing different items.
Another example that would support this view is that, a bank can write off a loan against the account of 'A' alone where it has
27 ITA Nos.1264 & 1352(B)/13
advanced the loan to party 'A'. It cannot write off such loan against the account of 'B'. Similarly, a loan advanced under the rural schemes cannot be written off against an urban or a commercial loan by the bank in the normal course of its business."
In the present case, according to the AO, the deduction u/s.36(1)(viia)(a) is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. According to him, the limits upto to which such deduction is allowed alone is laid down in Rule 6ABA of the Rules. According to the Assessee, it is entitled to deduction of the irrespective of considerations whether PBDD created in the books of accounts is in respect of rural advances or non-rural advances, subject to the upper limits laid down in Sec.36(1)(viia)(a) of the Act. Thus the case made out by the AO stands on a totally different footing. Therefore the decision in the case of Catholic Syrian Bank (supra), in our view, is not relevant to the issue in the present case.
For the reasons given above, we allow for statistical purposes Gr.No.3 to 5 raised by the Revenue in ITA No.53/B/13 and the grounds raised in ITA No.54/B/13 and restore the issue to the AO for fresh consideration in accordance with the directions given in this order.
All the arguments now raised by the learned DR including the effect
of explanation2 to section 36(1)(vii) by Finance Act 2013, were considered
in the above order. Accordingly, in the case of assessee also we set aside
the orders of the authorities below and direct the AO to examine the claim
of the assessee in the light of the discussion of the Tribunal in the case of
28 ITA Nos.1264 & 1352(B)/13
M/s ING Vysa Bank Ltd (Supra). Ground no.2 of the assessee is therefore
allowed for statistical purposes.
Vide its ground no.3 assessee is aggrieved on a disallowance of
Rs.10,04,77,356/- made under section 14A of the Act.
Facts apropos that assessee had claimed exempt dividend
income of Rs.10,93,02,392.50. The above exempt income was arrived at
after deducting Rs.57,52,757.50 from the gross exempt income of
Rs.11,50,55,150/-. The deduction was towards cost of earning the exempt
income. Through a revised return assessee changed the claim of
expenditure to Rs.52,88,281.90. AO required the assessee to explain why
a disallowance under rule 8D of Income-tax Rules, 1961 should not be
made. Reply of the assessee was that it as having total interest free funds
at Rs.21,208.59 Crores against which the value of investment that could
give rise to tax free income was only Rs.1444.02 Crores. As per the
assessee in order to cover the over head expenditure it had itself made a
disallowance of expenditure calculated at 5% of the tax free income. As
per the assessee there was no question of any further disallowance u/s
14A, in addition to what was suomoto done by it. However, the AO took
section 14A a presumptive in nature and made a workout of the
disallowance at Rs.10,57,65,638/-applying Rule 8D. After deducting the
suomotu disallowance of Rs.52,88,282/- made by the assessee the
29 ITA Nos.1264 & 1352(B)/13
addition came to Rs.10,04,77,356/-. Assessee’s appeal before the CIT(A)
did not meet with any success.
Now before us, learned AR relying on a copy of the decision in
ITA No.1310 & 1393(B)/2012 dated 19-09-2014, in assessee’s own case
for assessment year 2010-11, placed at paper book pages 18 -40
submitted that a similar disallowance stood deleted in assessment year
2010-11. According to him, the fact situation remained very same for the
impugned assessment year also.
Per contra, learned DR supported the orders f the authorities
below.
We have perused the orders and heard the rival contentions. It
is not disputed that assessee had interest free funds of Rs.21,280.59
Crores with it. Against this, investments that could give rise to tax free
income was Rs.1444.02 Crores. This has not been disputed. Assessee
had itself made a disallowance of Rs.52,88,281.90 being 5% of the exempt
income for covering the over head expenditure in relation to earning of the
exempt income. In assessee’s own case for assessment year 2010-11 a
similar issue had come up before this Tribunal. At paras 12 to 12 of the
order dated 19-09-2014 in ITA Nos.1310 & 1393(B)/ 2012 it was held as
under;
30 ITA Nos.1264 & 1352(B)/13
We have considered the rival submissions. On a perusal of the order of assessment as well as the order of the CIT (A), it is clear that the factum of the assessee's own funds available as Rs.19,227.86 crores, whereas the value of investments in tax-free securities was only to the tune of Rs.496.56 crores has not been disputed. Factually, there can be no dispute that the interest-free funds far exceeded the investment in tax free securities. Therefore, one has to come to a conclusion that investments in tax-free securities was made out of own funds and therefore, no disallowance in terms of Rule 8D(2)(i) or (ii) of the Rules can be made on account of interest expenditure. Therefore the addition of Rs.21,03,21,812 made by the AO by invoking the provisions of Rule 8D(2)(ii) of the Rules has to be deleted following the decision of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd. (supra).
With regard to disallowance under Rule 8D(2)(iii) of the Rules, it is seen that even in assessee's own case in the past, the disallowance of 5% of the exempt income was considered as appropriate disallowance u/s.14A of the Act. The Hon'ble ITAT in A. Ys. 2001-02 and 2003-04 has upheld such disallowance as reasonable. The Assessing Officer has however proceeded to apply the provisions of Rule 8D without having regard to the claim of the assessee that provisions of Rule 8D(2)(iii) of the Rules could not be applied. As laid down by the Hon'ble Bombay High Court in the case of
31 ITA Nos.1264 & 1352(B)/13
Godrej & Boyce Manufacturing Co. Ltd., (328 ITR 81), a claim made by the assessee with regard to disallowance u/s.14A of the Act had to be objectively examined by the Assessing Officer. It is not necessary for the Assessing Officer to resort to Rule 8D of the Rules when a reasonable and proper basis for disallowance u/s.14A of the Act exists. In the present case, such basis existed in the form of acceptance of the similar claim of the assessee in the past by the Tribunal. The Assessing Officer has not brought on record any facts to justify a higher disallowance than what is claimed by the assessee. The Bangalore Bench of the ITAT in the case of Bharatiya Reserve Bank Note Mudran Private Ltd (supra) has taken the view that resort to Rule 8D(2) cannot be had as a matter of course and it is only when no reasonable and proper parameter for making disallowance u/s.14A of the Act exists, resort to Rule 8D(2) can be had by the Assessing Officer. We are of the view that in the present case, the Assessing Officer has completely ignored the submissions made by the assessee in this regard and has blindly applied Rule 8D(2)(iii) of the rules and made disallowance u/s.14A of the Act. In our view, such an action cannot be sustained. We are also of the view that the basis of disallowance made by the assessee in the light of explanation provided by the assessee before the Assessing Officer is reasonable and the same deserves to be accepted. For the reasons given above, we
32 ITA Nos.1264 & 1352(B)/13
delete the disallowance made by the Assessing Officer u/s.14A of the Act.
Respectfully following the above order, we allow ground no.3 of the
assessee.
Vide its ground no.4 grievance raised by the assessee is that
claim of Rs.50.21 Crores made by it u/s 36(1)(viii) of the IT Act was
disallowed and such disallowance was confirmed by the CIT(A).
Facts apropos are that the assessee had claimed deduction of
Rs.141.21 Crores u/s 36(1)(viii) of the IT Act being income earned by it on
long term finance. AO on verification of the account found that assessee
had created special reserves of Rs.91.00 Crores only. According to him,
only the amounts carried to the special reserves not exceeding 20% of the
profits derived from eligible business could be allowed as a deduction u/s
36(1)(viii) of the Act. Though, assessee had claimed the deduction of
Rs.141,21 Crores what was carried to the reserves was only Rs.91.00
Crores. He thus, restricted the claim to Rs.91.00 Crores. Assessee’s
appeal before the CIT(A) did not meet with any success.
Now before us learned AR strongly assailing the order of the
authorities below submitted that what was necessary was creation of
reserves and it was not essential for the reserve to be created in the very
same year. As per the learned AR assessee had created further reserves
33 ITA Nos.1264 & 1352(B)/13
of Rs.50.21. Crores in the succeeding year in addition to a sum of
Rs.91.00 Crores created in the impugned assessment year. Therefore,
according to him, assessee was eligible for Rs.141.21 Crores, in the
impugned assessment year itself. Reliance was placed on the decision of
the Delhi Bench of the Tribunal in the case of M/s Power Finance
Corpn.Ltd (PFCL) Vs JCIT(2008) 16 DTR 519. According to him, it was
held by the Delhi Bench that reading of Section 36(1)(viii) did not put any
time limit for creation of any special reserves so as to claim a deduction
under that section.
Per contra, learned DR supported the orders of the authorities
below.
We have perused the orders and heard the rival contentions.
Section 36(1) (viii) is reproduced hereunder;
“(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head ‘Profits & gains of business or profession” (before making any deduction under its clause) carried to such reserve account”
We find that Delhi Bench in the case of M/s PFCL (Supra) had considered
the very same issue as to whether the special reserve was required to be
created in the very same year of the claim of deduction of whether it could
34 ITA Nos.1264 & 1352(B)/13
be created in a succeeding year. In its order dated 31-07-2008 it was held
as under at paras 18 to 24.
We have considered the rival contentions of both the parties, perused the records and carefully gone through the orders of the tax authorities below.
We would first like to reproduce the relevant section referred to by both the parties in their arguments :
Sec. 36(1) Other deductions
(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 s. 28.
Sec. 36(1)(viii)
in respect of any special reserve created (and maintained) by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account :
Sec. 28(1)
Profits and gains of business or profession
The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—
35 ITA Nos.1264 & 1352(B)/13
(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
Sec. 2(34)
"Previous year" means the previous year as defined in s. 3;
Sec. 3
"Previous year" defined
3 For the purposes of this Act, ‘previous year’ means the financial year immediately preceding the assessment year :
Sec. 4
Charge of income-tax
4 (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person.
A plain reading of s. 36(1)(viii) does not indicate any time-limit for creation of special reserve for claiming deduction under s. 36(1)(viii) of the Act, hence, the contention of learned Departmental Representative for the Revenue that this provision does not permit the deduction in case the special reserve is created in subsequent year, has no force as it does not find support from the plain language of s. 36(1)(viii) of the Act. Perhaps, the words "......... (before making any deduction under this clause) carried to such reserve account" prompt such inference by the learned Departmental Representative for the Revenue but to our mind answer to such inference drawn by the learned Departmental Representative for the Revenue is that before making any deduction
36 ITA Nos.1264 & 1352(B)/13
does not mean before making any claim but means at the time of considering such deduction claimed by the assessee.
Hon’ble jurisdictional High Court of Delhi while interpreting similar wordings in the context of s. 32A of the Act in the case of CIT vs. Orient Express Co. (P) Ltd. (supra) while dealing with creation of reserve required under s. 32A of the Act at p. 896 held that section prescribes no point of time by which the reserve should be created and in this regard accepted that a reserve created after the closure of the accounts of the year qualifies by observing as under :
"The second question which is raised only in ITC Nos. 44 and 45 of 1986 is whether the assessee is disentitled to the investment allowance scheme because no requisite reserve has been created by the assessee company before the close of books of the relevant previous year. On this, the finding is that the requisite ‘reserve’ has been created by holding a second annual general meeting of the members of the company and that the accounts had been duly amended so as to provide for the reserve before the assessment was completed. In view of the fact that the section prescribes no point of time by which the reserve should be created and in view of the various decisions also referred to by the Tribunal, we think, no question of law arises in regard to this aspect. We, therefore, decline to refer this question."
The observation made by the Hon’ble Delhi High Court in this regard is thus clearly applicable to the instant case under consideration also.
We further find that the Special Bench of Tribunal (Chandigarh) in the case of Punjab State Industrial Development Corporation Ltd. (supra) also clearly held that in case of claim under s. 36(1)(viii) of the Act further reserve could be created after closure of the account and AO should offer an opportunity to the assessee
37 ITA Nos.1264 & 1352(B)/13
to do the same for claiming the deduction under s. 36(1)(viii) of the Act.
Similar view as taken by the apex Court in the case of Karimjee (P) Ltd. (supra) wherein while dealing with deduction under s. 80HHC of the Act, their Lordships observed that creation of reserve after closure of the accounts was construed as complying with the requirement of granting deduction under s. 80HHC of the Act and in this case the timing of creation of reserve was while the matter was being dealt with by the apex Court.
Respectfully following the case law (supra) as discussed hereinabove, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee’s claim of deduction made under s. 36(1)(viii) of the Act.
Whether assessee had indeed made a further creation of special
reserve in the succeeding year and also whether such reserves were
created before finalization of the grant of deduction u/s 36(1)(viii) had not
been verified by any of the authorities below. We therefore, set aside the
orders of the authorities below and remand the issue to the file of the AO
for fresh consideration in accordance with law. Ground no.4 of the
assessee is allowed for statistical purposes.
In its last ground assessee assails the disallowance of
Rs.1,35,01,835/- u/s 40a(ia) of the Act which was confirmed by the
CIT(A).
38 ITA Nos.1264 & 1352(B)/13
Facts apropos are that the assessee had claimed deduction of
Rs.273,76,25,645/- under the head “Other expenditure”. From the break-
up of this sum provided by the assessee, AO found that a payment of
Rs.1,35,01,835/- was made towards ATM user charges of other banks.
As per the AO such payments which were made to National Financial
Switch and Cash tree (NFS in short) consortium fell within the ambit of
Section 194H of the Act. As per the AO assessee having not deducted tax
at source on the amount paid to NFS Section 40a(ia) of the Act stood be
attracted. A disallowance of Rs.1,35,01,835/- was made. Assessee’s
appeal on this issue before the CIT(A) did not meet with any success.
Assailing the orders of the authorities below learned AR
submitted that the issue stood squarely covered by the judgment of
Hon’ble Deli High Court in the case of CIT Vs JDS Apparels Pvt.Ltd. 370
ITR 454.
Per contra, learned DR supported the orders of the authorities
below.
We have perused the orders and heard the rival contentions.
Section 194H of the Act deals with commission and brokerage. AO has
not specified in its order as to under what head he classified the
payments made by the assessee to M/s NFS. He simply stated that the
payments were in respect of service used by the account holders of the
39 ITA Nos.1264 & 1352(B)/13
bank and therefore, Section 194H of the Act stood attracted. Whether
Section 194H of the Act was attracted on banking services provided by
bank to its clients was an issue had came up before the Hon’le Delhi High
Court in the case of JDS Apparels Pvt.Ltd (Supra) Their Lordship’s held as
under;
Section 194H of the Act reads as under:-
"Commission or brokerage. 194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent : Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed five thousand rupees : Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial
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year in which such commission or brokerage is credited or paid, shall be liable to deduct income-tax under this section: Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees. Explanation.--For the purposes of this section,-- (i) "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities; (ii) the expression "professional services" means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA; (iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ; (iv) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly."
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Section 194H of the Act applies to income by way of commission or brokerage excluding insurance commission referred to in Section 194D of the Act. Tax at source is to be deducted at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by way of cheque/draft or any other mode. The explanation clause
(i) states that for the purpose of this section, commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person, (i) for services rendered, not being in the nature of professional services; (ii) any service rendered in the course of buying or selling of goods; and, (iii) in relation to any transaction relating to any asset, valuable article or thing, not being securities. The expression „securities� has been defined clause (iii) to the Explanation.
The High Court of Gujarat in Ahmedabad Stamp Vendors Association versus Union of India [2002] 257 ITR 202 examined clause
(i) of the explanation and whether it would be applicable to persons carrying on the business of stamp vendors who purchase stamps from the government treasury and sell them to the public. The Gujarat High Court drew a distinction between a contract of sale and a contract of agency by which an agent is authorized to buy or sell on behalf of the principal. In a case of agency, the agent is not the owner of the property and does not sell the same of his own accord but as per the directions and instructions of the principal, who is the owner of the property. The profit and loss is that of the principal, and what is paid to the agent is the commission or brokerage. The expressions
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"commission" and "discount" were distinguished after making reference to the definitions in the Black�s Law Dictionary. The expression "discount", it was observed, is an allowance or deduction made from the gross sale on any account whatsoever. A "deduction" normally represents a reduction in the original price or a debt such as in case of securities (e.g. treasury bills), which are issued below the face value and are redeemed at the face value. Commission, it was held, is a reward paid to an agent as well as to a salesman, executor, trustee, broker or bailee and is calculated as a percentage of the amount of the transaction or on the profit of the principal. It is a fee paid to an agent or an employee for generating a piece of business or performing a service. In such cases, normally, there exists a fiduciary duty, which has to be discharged by the person to whom commission is paid. The following excerpt from the decision of the Bombay High in Harihar Cotton Processing Factory versus CIT, (1960) 391 ITR 594 (Bom.) was referred to with approval:-
"The expression "commission" has no technical meaning but both in legal and commercial acceptation of the term it has definite signification and is understood as an allowance for service or labour in discharging certain duties such as for instance of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders some service to another. Mostly it is a percentage on price or value of upon the amount of money involved in a transaction. It can be for a variety of services and is of the nature of recompense or reward for such services. "Rebate", on the other hand, is a remission or a payment back and of the nature of a deduction from the gross amount. It is sometimes spoken of as a
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discount or a draw-back. The dictionary meaning of the term includes a refund to the purchaser of a thing or commodity of a portion of the price paid by him. It is not confined to a transaction of sale and includes any deduction or discount from a stipulated payment, charge or rate. It need not necessarily be taken out in advance of payment but may be handed back to the payer after he has paid the stipulated sum. The repayment need not be immediate. It can be made later and in case of persons who have continuous dealings with one another it is nothing unusual to do so."
Importantly, the Gujarat High Court held that there should be an element of agency in all the three situations as envisaged in clause (i) of the Explanation to Section 194H of the Act.
On appeal before the Supreme Court, the decision was upheld by a short order, which is reported as (2012) 348 ITR 378 (SC), observing that the stamp vendors had purchased stamps in bulk and had received a cash discount. The Supreme Court concurred with the judgment of the High Court that the transaction was of sale and Section 194H of the Act had no application. Thus, holding that a contract of agency did not exist.
Similar view has been expressed by the Kerala High Court in Kerala State Stamp Vendors Association versus Office of the Accountant General and Others (2006) 282 ITR 7 (Kerala), wherein it held:-
"No doubt, payment of commission or brokerage in relation to sale or purchase of goods also would attract deduction of tax at source under section 194H of the Act. However, such situation arises only when there is involvement of services of a third
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party on payment other than the seller and the purchaser of goods or when the recipient of the benefit markets goods as "agent" of the owner and not as independent dealer."
Allahabad High Court in Chief Treasury Officer versus Union of India (2013) 355 ITR 484 has held that the words "by a person acting on behalf of another person" imply element of agency and must be present in all such services or transactions in order to fall within the expression "commission" and "brokerage". Reference was made to definition of the term "agent" in the Indian Contract Act and the implication thereof and it was observed that the contract between a principal and an agent primarily is a contract of employment to bring about a legal relationship with a third party and the agent either actually or by law is held to be authorized or employed by the first i.e. the principal, whom he represents. Representative character and derivative authority are distinguishing features of an agent. It was accordingly held that provisions of Sections 194H of the Act were not attracted in the case of stamp vendors.
The expressions "commission" or "brokerage" are words of general and common parlance used both commercially and by the common man on the street. Clause (i) expressly seeks to define the expression "commission" or "brokerage" but states that it will include payments received or receivable, directly or indirectly by a person acting on behalf of another if they fall in the three categories. A definition may be exhaustive or restrictive of its common meaning or may be an extensive one. Indeed, there are decisions which observe that use of the word "includes" in the clause can show legislative intent to enlarge the meaning of the words or phrases occurring so as to not only mean and comprehend such things as they signify according to
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their nature and import, but also things which the interpretation clause declares that they shall include. (see CIT versus Taj Mahal Hotel, (1971) 3 SCC 550). But, this may not always be the case and in certain cases, the expression "includes" has been construed as "equivalent to" and, therefore, given a narrower meaning (see South Gujarat Roofing Tiles Manufacturers Association versus State of Gujarat and Others AIR 1977 SC 90). Thus, the word "includes" can be used in the sense of the word "means". The definition clause in such cases is treated as an exhaustive one (see Reserve Bank of India versus Peerless General Finance and Investment Company Ltd. (1987) 1 SCC 424). Thus, in a particular context the word "includes" when used, may only mean "comprise of" or "consist of".
It is apparent from the decision of the Supreme Court in the case of Ahmedabad Stamp Vendors Association (supra) that clause (i) of the Explanation to Section 194H of the Act has been read as exhaustive and not as expansive. This is the reason why the Supreme Court in the short order drew distinction between a transaction of sale and a contract of agency and also between discount and commission/brokerage. Otherwise, the expression "any service rendered in the course of buying or selling of goods" possibly would have encompassed and included the "discount" given to the stamp vendors, who render service during the course of buying and selling of goods, i.e. the stamp papers.
Contention could be raised that payment received or receivable directly or indirectly for any services in course of buying or selling of goods need not arise out of a contract of agency or from a relationship of a principal and an agent. The said contention has to be rejected in view of the aforesaid
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judgments, which positively hold that the three separate conditions when tax at source is required to be deducted would only apply provided the recipient is acting on behalf of another, i.e. relationship of a principal and an agent exists and not otherwise. This interpretation has been consistent and uniformly applied while interpreting clause (i) of the Explanation to Section 194H of the Act. Appropriate in this regard would be to refer to the decision of the High Court of Delhi in Commissioner of Income Tax versus Idea Cellular Limited, (2010) 325 ITR 148 (Delhi) wherein Explanation clause (i) to Section 194H of the Act had come up for consideration and on interpretation it was held that it would apply only if payment was received or receivable directly or indirectly by a person acting on behalf of another person for (i) services rendered (not being professional) and (ii) for any services in the course of buying or selling of goods or in relation to any transaction relating to an asset, valuable article or thing. The judgment records that the counsel for both the parties, i.e. the Revenue and the assessee, had agreed that the element of agency was to be established in all the aforesaid circumstances (see page 156 placitum 9 of the ITR citation). Thus, this contention if raised would not stand judicial scrutiny on the principles of consistency and certainty. Even otherwise, the view expounded and accepted is plausible, besides being reasonable.
Applying the above cited case law to the factual matrix of the present case, we feel that Section 194H of the Act would not be attracted. HDFC was not acting as an agent of the respondent- assessee. Once the payment was made by HDFC, it was received and credited to the account of the respondent-assessee. In the
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process, a small fee was deducted by the acquiring bank, i.e. the bank whose swiping machine was used. On swiping the credit card on the swiping machine, the customer whose credit card was used, got access to the internet gateway of the acquiring bank resulting in the realisation of payment. Subsequently, the acquiring bank realised and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on "behalf" of the respondent-assessee. The relationship between HDFC and the respondent-assessee was not of an agency but that of two independent parties on principal to principal basis. HDFC was also acting and equally protecting the interest of the customer whose credit card was used in the swiping machines. It is noticeable that the bank in question or their employees were not present at the spot and were not associated with buying or selling of goods as such. Upon swiping the card, the bank made payment of the bill amount to the respondent- assessee. Thus, the respondent assessee received the sale consideration. In turn, the bank in question had to collect the amount from the bankers of the credit card holder. The Bank had taken the risk and also remained out of pocket for sometime as there would be a time gap between the date of payment and recovery of the amount paid.
We are of the opinion, that the payments made by the assessee to M/s
NFS could not be considered as commission or brokerage, in any sense all
these terms. Assessee was therefore,not bound to deduct tax on such
payments u/s 194H of the Act. Disallowance u/s 40a(ia) of the Act is not
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warranted. Such disallowance stands deleted. Ground no.4 of the
assessee is allowed.
In the result, appeal of the assessee is allowed pro-tanto.
Now we take up the cross appeal of the revenue. The only issue
raised by the revenue is that assessee’s claim of depreciation on its
investment portfolio by treating the investment as stock in trade was
allowed by the CIT(A). When the matter came up learned counsel for the
assessee submitted that the issue stood squarely covered by the decision
of this Tribunal in assessee’s own case for assessment year 2010-11, in
ITA No.1310(B)/2012 dated 19-09-2014. Relying on paras- 21 & 22 of
the order dated 19-09-2014, learned AR submitted that this Tribunal had
held such claim to be allowable. As per the learned AR the CIT(A) had
rightly followed the above decision and given relief to the assessee.
Per contra, learned AR fairly admitted that the issue at this
point of time stood in favour of the assessee.
We have perused the orders and heard the contentions. In
assessee’s own case for the assessment year 2010-11 in ITA No.1310 &
1393(B)2012 dated 19-09-2014 it was held as under at paras-21 to 22 of
its order;
21.We have considered the rival submissions. Similar issue as to whether depreciation on investments
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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 ITAT Bangalore Bench. The Tribunal on the issue held as follows:
“58. We have heard the submissions of the ld. DR and the ld. counsel for the assessee. The ld. DR relied on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. in ITA No.2886/2005 dated 06.06.2012. In the aforesaid decision, the Hon’ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing income under the Income-tax Act. The Hon’ble Court further took the view that every investment held by a bank cannot be considered as stock-in-trade. The Hon’ble High Court finally concluded that 30% of the investments can be clothed to the character of stock-in- trade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction.
The ld. counsel for the assessee, however, submitted that in the assessee’s own 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 Tribunal in
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assessee’s own case in ITA No.492/Bang/2009 for the A.Y. 2005-06, order dated 13.01.2012, wherein the Tribunal had to deal with identical issue as to whether the 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 held
“16. We have heard both sides and find that the Supreme Court in the case of UCO Bank in 240 ITR 355 has held as under :
"In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade 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
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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 form 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 ITAT, 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.
Apart from the above, the ld. counsel for the assessee also submitted that the decision rendered by the Hon’ble High Court of Karnataka in the case of ING Vysya Bank (supra) is per incuriam the decision of the Hon’ble Supreme Court in the case of UCO Bank v. CIT, 240 ITR 355 (SC). He brought to our notice that the Hon’ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act,
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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.
The ld. 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 has to be followed.
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.
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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.”
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.
Accordingly, we hold that the CIT(A) was justified in allowing the claim of the assessee.
In the result, appeal of the revenue stands dismissed.
To summarize the appeal of the assessee allowed pro-tanto whereas the appeal of the revenue stands dismissed.
Order pronounced in the open Court on the 11th March, 2015.
Sd/- Sd/- (RAJPAL YADAV) (ABRAHAM P GEORGE) JUDICIAL MEMBER (ACCOUNTANT MEMBER) Place: Bangalore: D a t e d : 11-03-2015 am*
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Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file
AR, ITAT, Bangalore