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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Judicial Member
ITA No. 578/Bang/2012 is an appeal by the Revenue, while ITA No.653/Bang/2012 is an appeal by the Assessee. Both these appeals are
directed against the order dated 19.01.2012 of CIT(A), LTU, Bangalore,
relating to AY 08-09.
ITA No.578/Bang/2012 (Appeal by the Revenue)
Grounds Nos. 1, 6 and 7 raised by the Revenue in the grounds of
appeal are general in nature and calls for no specific adjudication.
Ground No.2 raised by the Revenue projects the grievance of the
Revenue against the order of the CIT(A) whereby the CIT(A) allowed the
claim of the Assessee for deduction u/s.36(1)(viia) of the Act of Rs.192,57,72,764/- which according to the revenue was in excess of the
provisions made in the accounts by the Assessee. It is the stand of the revenue that the deduction u/s.36(1)(viia) of the Act ought to be allowed
only to the extent provision is made in the books of accounts for bad and doubtful debts. The Assessee is a banking company carrying on business
of banking. In its return of income the Assessee claimed deduction of a
sum of Rs.200,03,24,219 on account of Provision for Bad and Doubtful Debts in respect of rural advances, u/s.36(1)(viia) of the Act. The provisions
of Section 36(1)(viia)(a) of the Act lays down as follows:
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“viia) in respect of any provision for bad and doubtful debts made by – (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.”
The AO disallowed claim for deduction of Rs. 192,57,72,764/- out of the total claim of the Assessee for deduction of RS.200,03,24,219/- on the ground that the provision for bad and doubtful debts in respect of rural advances was created by debit to profit and loss account of only a sum of Rs.7,45,51,455 whereas the claim for deduction actually made u/s.36(1)(viia) of the Act was a sum of Rs.200,03,24,219/-. The AO was of the view that as laid down by the Hon’ble Punjab and Haryana High Court in the case of State Bank of Patiala Vs. CIT 272 ITR 53 (P & H),
claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. The AO
ITA Nos. 578 & 653/Bang/2012 Page 4 of 49
therefore proposed to disallowed a sum of Rs. 192,57,72,764/- (Difference between Rs.200,03,24,219 and Rs.7,45,51,455). The CIT(A) deleted the addition made by the AO by following the decision of the decision of the ITAT in the case of Syndicate Bank reported in 78 ITD 103 wherein it
was held that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an Assessee is entitled to 10% of the AARA as deduction u/s.36(1)(viia) of the Act. The relevant observations of the Tribunal in the aforesaid decision was as follows:
“20. The learned CIT has also acted under the misconception that deduction under cl. (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is entitled to a deduction which is quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this is a specific deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts.”
The learned DR relied on the decision of the ITAT Bangalore Bench in the case of Canara Bank in ITA No.58/Bang/2004 dated
9.6.2006. In the aforesaid decision this Bench considered the decision of
the ITAT in the case of Syndicate Bank 78 ITD 103(Bang) and the
decision of the Hon’ble Punjab and Haryana High Court in the case of
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State Bank of Patiala (supra) and held that the decision rendered by
the Hon’ble High Court has to be followed. The above decision is the decision brought to our notice on the issue rendered after the decision in Assessee’s own case. Judicial discipline demands that we follow the later decision which has considered both the decisions on the issue. We therefore respectfully following the decision of the Tribunal in the case of
Canara Bank (supra), hold that claim for deduction u/s.36(1)(viia) of the
Act cannot be greater than the amount debited to the profit and loss account as provision.
The learned counsel for the Assessee while conceding that the decision of the Tribunal referred to by the learned DR covers the issue in favour of the Assessee, submitted that the provision for bad and doubtful debts made by the Assessee in the books of account was Rs.100,55,07,213. According to him the AO considered the provision for bad and doubtful debts created in the books of accounts only with reference to the rural advances Rs.7,45,51,455. The AO omitted to consider the Provision for Bad and Doubtful debts(PBDD) of Rs.100,55,07,213/- which included both PBDD for rural as well as non-rural advances. According to him for allowing deduction u/s.36(1)(viia) on account of PBDD what is to be considered is PBDD created in the books of accounts which need not be confined only to rural advances. He brought our notice that this Tribunal in the case of ING Vysya Bank in ITA No.53 &
ITA Nos. 578 & 653/Bang/2012 Page 6 of 49
54/Bang/2013 order dated 25.10.2013 wherein this Tribunal after considering the history of the provisions of Sec.36(1)(viia) of the Act held that there is no requirement in Sec.36(1)(viia) of the Act as it stood for AY 2003-04 and thereafter that the provision should relate to rural advances. As long as the Bank makes any provision for bad and doubtful debts, it is eligible to claim deduction u/s.36(1)(viia) of the Act as per the calculation provided therein.
The learned DR however opposed the alternate prayer made by the learned counsel for the Assessee on the ground that no such submission was made before the lower authorities and the Assessee cannot in proceedings before the tribunal raise the issue. The learned counsel for the Assessee however in rejoinder submitted that the Assessee can raise legal issues which can be decided on facts which are already on record. According to him the powers of the Tribunal in dealing with appeals are expressed in section 254(1) of the Act in the widest possible terms.
“The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.” It was his submission that the word "thereon", of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the Commissioner of Income Tax (Appeals) by section 251 of the Act. Our
ITA Nos. 578 & 653/Bang/2012 Page 7 of 49
attention was drawn to Rule 11 and 27 of the Appellate Tribunal Rules, 1963, which provides as follows :-
Rule-11 provides: "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall not be confined to the grounds set for the in the memorandum of appeal or taken by leave of the Tribunal under this rule : Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground." Rule 27 provides that: "The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him." Reliance was placed by him on the decision of the Hon’ble Gauhati High Court in the case of Assam Company (India) Ltd. Vs. CIT 256 ITR
423 (Gau), where it was held that it is permissible on the part of the
Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor had filed a cross-objection in the appeal filed by the other party.
We have considered the rival submissions. In the case of Assam 8.
Company (India) Ltd. (supra) the question before the Court was as to
whether the Tribunal ought to have considered the plea of the applicant-
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company that it was entitled to the benefit of weighted deduction under section 35B(1)(b)(iv) of the Act in the absence of any appeal or any cross- objection filed by it against the order of the Commissioner of Income-tax (Appeals). The Court after considering several judicial pronouncements on the subject held as follows:
“We are therefore of the view that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor had filed a cross- objection in the appeal filed by the other party. We must however hasten to add that in order to enable either the assessee or the Department to urge a ground in the appeal filed by the other side, the relevant facts on which such ground is to be founded should be available on record. In the absence of such primary facts, in our opinion, neither the assessee nor the Department can be permitted to urge any ground other than those which are incorporated in the memorandum of appeal filed by the other party. In other words, if the assessee or the Department, without filing any appeal or a cross-objection seeks to urge a ground other than the grounds incorporated in the memorandum of appeal filed by the other side, the evidentiary facts in support of new ground must be available on record.”
It would be useful to refer to the decision of the Hon’ble Supreme Court in the case of National Thermal Power Corporation 229 ITR
383 (SC). The Hon’ble Supreme Court in the aforesaid decision reframed
question of law for consideration as follows:
"Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same ?"
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Answering the above question, the Hon’ble Supreme Court held as follows:
“3. Under s. 254 of the IT Act the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross- objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier. ………… Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. 6. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee.”
From the aforesaid decision of the Hon’ble Supreme Court, it is clear that:-
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(a) it is the discretion of the Tribunal to admit or not to admit a new ground to be raised before it;
(b) if the Tribunal is required to only consider a question of law arising from the facts which are on record in the assessment proceedings such question should be allowed to be raised; and
(c) that the proceedings before the tax authorities are for correctly assessing the tax liability of an assessee in accordance with law.
In the light of the above legal position on the alternative plea raised by the learned counsel for the Assessee for the first time before the Tribunal, is permitted to be raised even though the Assessee has neither filed a cross-objection nor has raised the issue in the appeal filed by the Assessee.
This Tribunal in the case of ING Vysya Bank (supra) had to 12.
consider the question as to whether there is no requirement in Sec.36(1)(viia) of the Act as it stood for AY 2003-04 and thereafter that for claiming deduction under the said provision that the provision for Bad and Doubtful debts should relate to rural advances or as to whether as long as the Bank makes any provision for bad and doubtful debts, it is eligible to claim deduction u/s.36(1)(viia) of the Act as per the calculation provided therein. The Tribunal analysed the provision of Sec.36(1)(viia) of the Act as it existed at various point of time and concluded as follows:-
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“34. 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 advances made 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 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. 35. 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
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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. 36. 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 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. 37. 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.”
The facts with regard to the PBDD created by the Assessee in the
books of accounts are available on record and therefore there should not
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be any difficulty in deciding the quantum of deduction that the Assessee should be allowed u/s.36(1)(viia) of the Act.
Not content with the above relief, the learned counsel made a further alternate submission that the Assessee should be allowed deduction on account of PBDD u/s.36(1)(viia) of the Act for the entire permissible limit because the provision whatever is the shortfall between the eligible limits and the PBDD made in the books of accounts by the Assessee viz., shortfall of Rs.99,47,57,006 (Rs.200,03,24,219 – Rs.100,55,67,213/-) was made good by providing excess provision in subsequent years and therefore the entire Rs.200,03,24,219/- should be allowed as deduction. In support of the claim that the provision made in subsequent year was much more than the eligible limits u/s.36(1)(viia) of the Act and such excess will take care of the shortfall of PBDD in the books of accounts, the learned counsel for the Assessee filed a chart before us and the same is annexed as Annexure-1 to this order. The learned counsel for the Assessee in
support of the proposition that if there is shortfall in the PBDD made in the books of accounts to the eligible limits and if the shortfall is made good by providing excess provision in subsequent years the upper limit permissible u/s.36(1)(viia) of the Act should be allowed as deduction, referred to decision of the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Punjab State Industrial Development Corporation 323 ITR 495 ( Pun.& Har.) and the Special Bench ITAT Chandigarh Bench in the case of
Punjab State Industrial Development Corporation Ltd. 102 ITD 1
ITA Nos. 578 & 653/Bang/2012 Page 14 of 49
(Chd.)(SB). In the aforesaid decisions the Assessee claimed deduction
u/s.36(1)(viii) of the Act in respect of 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 and gains of business or profession" (before making any deduction under this clause) carried to such reserve account. The Assessee did not create special reserve to the extent of 20% of the profits derived from eligible business. It was held that the Assessee should be afforded an opportunity to assessee to create further reserve. Reference was made to the decision of ITAT Delhi in the case of Power Finance Corporation Ltd. 2008-TIOL-475-ITAT-Del wherein in the context of deduction u/s.32A of the Act, the Tribunal held that the reserve created by holding a second Annual general meeting and where accounts were amended creating reserve required u/s.32A of the Act, the Assessee should be allowed deduction u/s.36(1)(viia) of the Act.
We have considered the submissions and are of the view that the same cannot be accepted. The creation of a special reserve u/s.32A or Sec.36(1)(viii) of the Act cannot be equated with creation of PBDD u/s.36(1)(viia) of the Act. Creation of provision u/s.36(1)(viia) of the Act is governed by certain rules like Rule 6ABA of the rules in respect of rural advances. It cannot be created at the bank’s whims and fancy. Moreover the Assessee is not making a claim for creation of PBDD in the books of accounts of PY relevant to AY 08-09. The excess reserve created in the
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subsequent year cannot be equated to the PBDD created in the books for the present AY. The decisions relied upon by the learned counsel for the
Assessee do not lay down a proposition that excess provision created in the subsequent year can supplement the inadequate created in an earlier
year. The decisions relied upon by the learned counsel for the Assessee
lay down proposition that the Assessee should be given liberty to create a reserve in the books of accounts of the relevant AY. For the reasons given
above, we reject the second alternate submission made by the learned counsel for the Assessee. Thus the Assessee will be entitled to deduction
u/s.36(1)(viia) of the Act of Rs.100,55,67,213/- only. Ground No.2 of the Revenue is allowed to this extent.
Ground No.3 raised by the Revenue is with regard to the deduction
of Rs.108,53,62,763 claimed by the Assessee u/s.36(1)(vii) of the Act on account of Bad Debts written off in the books of accounts by the Assessee
which was disallowed by the AO on the ground that the credit balance in
the PBDD relating to non-rural branches have to be adjusted against the debit to the profit and loss account on account of bad debts.
The Assessee claimed deduction of a sum of Rs.108,53,62,763/- u/s.36(1)(vii) of the Act in respect of Bad Debts written off. The Assessee
submitted before the AO that the bad debts written off relating to its rural
branches were adjusted against the provision claimed u/s.36(1)(viia) of the Act, to ensure that there is no double deduction, once as PBDD for rural
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debts u/s.36(1)(viia) and again as bad debts u/s.36(1)(vii) of the Act. The Assessee further brought to the notice of the Bench the decision of Hon’ble
Karnataka High Court dated 19.3.2008 in the case of CIT Vs.
Karnataka Bank, wherein the Hon’ble Karnataka High Court held that
bad debts written off in respect of non-rural branches need not be adjusted against the PBDD of non-rural branches because such provision is not allowed as deduction u/s.36(1)(viia) of the Act. The Assessee gave the break-up of Bad debts written off as under:-
Bad Debts written off Rs.185,53,26,012 LESS: Amount written off in respect of Rural Rs.13,17,13,161 advances for which deduction u/s.36(1)(viia) was claimed in earlier years LESS: Amount written off in respect of Non- rural branches and for which deduction u/s.36(1)(viia) was claimed in earlier years a) NPA accounts in respect of which Rs.2,92,45,322 deduction is claimed u/s.36(1)(viia) @ 7.5% of the total income in the A.Y. 2003- 04 b) NPA account in respect of which Rs.15,91,33,959 deduction is claimed u/s.36(1)(viia) @ 10% of the Bad & Doubtful Debts in the AY 2003-04. c) NPA account in respect of which Rs.22,29,88,026 deduction is claimed u/s.36(1)(viia) @ 7.5% of the total income in the A.Y. 2004- 05 d) NPA account in respect of which Rs.22,68,82,781 deduction is claimed u/s.36(1)(viia) @ 10% of the Bad & Doubtful Debts in the AY 2004-05.
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The AO was of the view that just as how the Assessee has adjusted the PBDD in respect of rural advances, it ought to have adjusted PBDD in
respect of non-rural advances and claimed only the remaining sum, if any, as bad debts u/s.36(1)(vii) of the Act. The AO accordingly tabulated the
figures of PBDD in respect of non- rural branches as under:-
Assessment Optional 7.5% of Optional year deduction 10% total income deduction – of loss and premium on doubtful debts buyback of Govt. Securities 2003-04 50,55,36,813 5,88,05,215 0 2004-05 - 42,86,11,182 70,00,40,702 2005-06 - - - 2006-07 - - - Total 50,55,36,813 48,74,16,397 70,00,40,702
Thereafter the AO tabulated the claim for bad debts u/s.36(1)(vii) of the Act made by the Assessee in various AYs as under:
Assessment Debts written off Debts written off Debts written off Year against optional against the against provision deduction provision allowed allowed in allowed as 10% as 7.5% of total relation to the of loss and income income from doubtful redemption of securities. 2004-05 3,27,58,000 1,07,94,000 - 2005-06 11,00,95,215 3,69,01,418 15,39,76,237 2006-07 12,52,42,584 6,85,80,516 25,60,40,154 2007-08 6,20,48,994 11,78,17,181 9,87,94,655 Total 33,01,44,793 23,40,93,115 50,88,11,046
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According to the AO, section 36(1)(vii) of the Income-tax Act, 1961 (the Act) allows deduction in computing the income referred to in Section
28 subject to the provisions of sub-section (2), the amount of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the
assessee during the previous year. Proviso to Sec.36(1)(vii) provides as
follows:
“Provided that in the case of an assessee to which clause (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. Explanation.—For the purpose of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.”
According to the AO as per the proviso to Sec.36(1)(vii) of the Act, the Assessee was required to set off the bad debts written off against the
provision created u/s.36(1)(viia) of the Act. The AO further held that the credit available in the PBDD of non-rural debts was much more than the
sum of Rs.108,53,62,763 claimed as deduction on account of bad debts
written off by the Assessee hence cannot be allowed.
Aggrieved by the aforesaid disallowance, assessee preferred appeal
before the CIT(Appeals). With regard to deduction u/s.36(1)(vii) of the Act,
the Assessee contended that proviso to Sec.36(1)(vii) is applicable only to bad debts written off of rural debts and not to non-rural debts. Since the
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claim of deduction of Rs.168,97,00,000 made by the Assessee u/s.36(1)(vii) of the Act pertained to bad debts of non-rural debts, the credit
balance in the PBDD account should not be looked into at all. It was contended that bad debts written off under section 36(1)(vii) and provision
for bad and doubtful rural debts under section 36(1)(viia) are two distinct
and separate class of debts. The bad debts referred to in section 36(1)(vii) are urban debts, whereas the bad debts referred to in section 36(1)(viia)
are rural debts. Proviso to section 36(1) provides that rural debts cannot be written off in excess of the provision made for such debts and is applicable
only if the write-off and the provision are in respect of the same class of debts. It was also pointed out that both the allowances envisaged under
section 36(1)(vii) and 36(1)(viia) are admissible deductions in computing
the income of Banks and are independent of each other is confirmed by the Central Board of Direct Taxes (CBDT) Circular No. 258, dated 14.06.1979,
which is still in force. Provisions made under section 36(1)(viia) are in respect of aggregate advances made by rural branches, whereas the write-
off under section 36(1)(vii) is in respect of a separate set of urban
branches’ debts, i.e., other than the rural debts covered by the provision made under section 36(1)(viia). The proviso clearly indicates that the debts
for which provision has been made under section 36(1)(viia), if written off under section 36(1)(vii), would not be allowed to the extent of the provision
made for such debt. The proviso does not apply to debts that are independent of the provisions under section 36(1)(viia), viz., urban debts.
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The restriction laid down by the proviso is to prevent double claims for deduction under both sections 36(1)(vii) and 36(1)(viia) in respect of rural debts. It was also brought to the notice of the CIT(A) that the Hon’ble High
Court of Karnataka has held in DCIT (Asst.) Special Range, Bangalore,
Vs. The Karnataka Bank Ltd. [2008 175 Taxman 325, that deduction
under section 36(1)(vii) is allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to the advances of the rural branches, subject to the limitation that an amount should not be deducted twice under section 36(1) (vii) and 36(1) (via) simultaneously. The facts in that case were that the appellant bank had, in the return for assessment year 1993-94 filed on 30-12-1993, claimed a sum of Rs. 38,28,836 as bad debts actually written off. It had also claimed provision for bad and doubtful debts under section 36(1)(via) in a sum of Rs. 1,10,94,360. The assessing officer did not allow the claim for deduction of debts amounting to Rs. 38,28,836 actually written off. The CIT(A) rejected the assessee’s claim and upheld the order of Assessing Officer and the ITAT held that deduction under section 36(1)(vii) was allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to advances of rural branches, subject to the imitation that an amount should not be deducted twice under section 36(1)(vii) and 36(1)(viia) simultaneously. It was pointed out that the Hon’ble jurisdictional High Court considered the questions of law answered by two judgments of Kerala and Madras High Courts in South Indian Bank
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Ltd. Vs. CIT [2003 262 ITR 579], and in CIT Vs. City Union Bank Ltd. [20071 291 ITR 144]. The ratio of the case of Kerala High Court, after
considering the provisions of section 36(1)(vii) and (viia), was that a scheduled bank might be having both urban and rural branches and
advances were given from both branches. Having regard to the hazards
involved in realising the advances made by rural branches, particularly to agriculturists, certainly the assessee-bank would prefer to make provision
for bad debt in respect of advances made in the rural branches. If an assessee made a provision under clause (viia) in respect of bad debts
relating to rural advances only, to deny such an assessee the benefit provided under clause (vii) which was available to all other assessees who
were engaged in money lending business would result in discrimination
without reason. The Legislature could not be presumed to have intended such a result in the case of scheduled banks. The intention of the
Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously was only to see that a double
benefit in respect of the same bad debt is not being given to a scheduled
bank. It was only for the said purpose that the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from
April 1, 1985. The scope of the proviso to clause (vii) of section 36(1) of the Act was only to deny the deduction to the extent of bad debt written off in
the books with respect to which provision was made under clause (viia) of the Act. If the bad debt written off related to debts other than for which the
ITA Nos. 578 & 653/Bang/2012 Page 22 of 49
provision was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in
respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction
to the extent of the difference between that part of debt written off in the
previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). If the bad debt written off related
to debts other than those for which provision was made under section 36(1)(viia), such debts would fall squarely under the main part of sub-
section (vii) and would be entitled to the deduction. In respect of that part of debt with reference to which a provision was made under clause (viia), the
Proviso would operate to limit the deduction to the extent of the difference
between that part of the debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under
clause (viia). The Assessee also relied on the decision of the ITAT in its own case in ITA No.150 & 151/Bang/2001 order dated 9.6.2006 for AY
1999-2000 & 2000-01 wherein on identical issue, the Tribunal allowed
deduction as claimed by the Assessee.
The ld. CIT(Appeals) agreed with the contentions put forth by the
Assessee and directed the AO to allow the claim for deduction on account of bad debts as made by the Assessee.
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Aggrieved by the order of the CIT(Appeals), the revenue has raised grounds No. 3 before the Tribunal. The ld. DR relied on the order of the AO. The ld. counsel for the assessee relied on the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank v. CIT, 343 ITR
270 (SC), wherein the Hon’ble Supreme Court has clearly held that
deduction u/s. 36(1)(vii) of the Act is an independent deduction and the provision for doubtful debts made u/s. 36(1)(viia) of the Act has nothing to do with the claim for deduction u/s. 36(1)(vii) of the Act.
We have considered the rival submissions. Identical issue raised by the Revenue in ground No.3 had come for consideration before the Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra). 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
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Debts Account created u/s.36(1)(viia)(a) of the Act and (ii) 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 debts, the credit balance in the PBDD account should not be looked into at all because it pertains only to Rural Branches. 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 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
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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 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.
The Hon’ble Chief Justice, His Lordship, Mr. S.H. Kapadia, in his concurring judgment had summed up the position in the following words:
“The provisions of cl. (viia) of s. 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 s. 36(1)(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under s. 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under s. 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 cl. (viia) and also on the basis of actual write off under cl. (vii). This situation is taken care of by the proviso to cl. (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
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account created under cl. (viia). CBDT itself has recognized the position that a bank would be entitled to both the deductions, one under cl. (vii) of s. 36(1) on the basis of actual write off and another, on the basis of cl. (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to cl. (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 cl. (viia). Thus, the proviso to cl. (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of cl. (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which cl. (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 affected, controlled or limited in any way by the proviso to cl. (vii).”
The ratio laid down by the Hon’ble Supreme Court can be summed up as follows:-
(1) Deduction under Section 36(1)(vii) of the Act is available for deduction on account of Bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actually written off in the books and debited to Profit & Loss account. Deduction cannot be claimed for creating Provision for Bad and Doubtful Debts of Non-rural branches. It is like any other bad debt written off which is allowed as deduction in the case of Assessees who are not in banking business.
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(2) Deduction u/s.36(1)(viia)(a) is allowed when a Provision for bad and doubtful debts relating to rural advances is made in the books of account subject to the limit laid down therein. (3) When a deduction is allowed u/s.36(1)(viia)(a) of the Act by way of provision, there will be no deduction under clause (vii) for actual write off of bad debts relating to rural advances, until or unless there is a balance lying in the provision account made under clause (viia). This so because of the Proviso to Section 36(1)(vii) of the Act which provides that in the case of an assessee to which clause (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. Thus the proviso ensures that there is no double deduction, i.e., firstly getting a deduction when a provision is created and secondly getting a deduction when bad debts are written off.
In view of the aforesaid decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra), we are of the view that the
CIT(A) was right in directing the AO to allow the claim for deduction made u/s.36(1)(vii) of the Act. We therefore dismiss Gr.No.3 raised by the Revenue.
Ground No.4 raised by the Revenue is with regard to the action of the CIT(A) in directing the AO to allow the claim for deduction made by the Assessee on account of depreciation in the value of investments held by the Assessee in the category of HTM (Held to Maturity) holding that even such investments are stock-in-trade of business of banking and therefore they have to be valued at cost or market price whichever is lower and consequent deduction allowed.
ITA Nos. 578 & 653/Bang/2012 Page 28 of 49
The assessee claimed deduction of a sum of Rs.171,29,30,664 in respect of Diminution in the value of Investments held by the Assessee in the “Held to Maturity” (HTM) category of Investments. According to the Assessing Officer, as per the RBI's Master Circular – Prudential norms for classification, valuation and operation of Investment Portfolio by banks – RBI/2010-11/50 revised as on 1.7.2010, investment portfolio of banks cannot be treated as stock in trade where the investments are held on the basis of "Held to Maturity" category or “Available for Sale” category. The Assessing Officer was also of the view that for IT purposes the Assessee had chosen to treat all investments as stock in trade and claimed diminution in value of stock in trade (closing stock) as loss. According to Assessing Officer, such a course of action cannot be permitted. The AO also referred to CBDT Circular No.665 dated 5/10/93 wherein the CBDT had clarified that whether a particular investment constitutes Investment or stock-in-trade is a question of fact and the AO’s should be guided by RBI Circulars issued from time to time in this regard. The Assessing Officer accordingly held that Master Circular issued by the RBI had to be followed. Accordingly, the loss on diminution value of investments was disallowed by the AO.
On appeal by the assessee; the CIT (A), following the decision of
the Hon'ble Supreme Court in the case of UCO Bank 240 ITR 355(SC)
and decision of ITAT in Assessee’s own case in AY 03-04 in ITA
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No.253/Bang/2007 dated 24.1.2008, deleted the disallowance made
by the Assessing Officer. Aggrieved by the order of the CIT (A), Revenue has preferred the present appeal before the Tribunal.
The learned DR relied on the order of the Assessing Officer.
The learned counsel for the assessee brought to our notice the decision of the Hon'ble ITAT, Bangalore Bench on similar issue in the case of Syndicate Bank v. DCIT (2013) 38 taxmann.com 25
(Bangalore – Trib.) and the decision of the Hon'ble Karnataka High
Court in the case of Karnataka Bank Ltd., v. ACIT (356 ITR 549).
We have considered the rival submissions. Similar issue as to whether depreciation on investments held under the category “Held to Maturity” or “Available for Sale” can be allowed as deduction came up for consideration in Assessee’s own case in AY 10-11 in 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 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 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
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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. 59. 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 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
ITA Nos. 578 & 653/Bang/2012 Page 31 of 49
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 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. 60. 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
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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 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. 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.”
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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.
Ground No.5 raised by the revenue is with regard to the action of the CIT(A) in deleting the disallowance of penalty paid by the Assessee of Rs.90,94,829. The AO disallowed the claim of the Assessee for deduction of the aforesaid sum as they were in the nature penalty for infraction of law and could be allowed as deduction in view of explanation to Sec.37(1) of the Act. The CIT(A) deleted the addition on the reasoning that the sums in question were not in the nature of penalty for infraction of law.
It is not in dispute before us that the nature of the penalty in the present case is identical to the penalty that was disallowed on similar
grounds in the case of CIT Vs. Syndicate Bank 261 ITR 528 (Kar).
The Hon’ble Karnataka High Court held that the penalty was not to be allowed as deduction. The question before the Hon’ble Court was as to whether penal interest to RBI for non-compliance with provisions of s. 24 of Banking Regulation Act, 1949, is in the nature of penalty for infraction of law and hence to be disallowed under explanation to sec.37(1) of the Act. The Hon’ble Court observed that if a payment is a penalty for infraction of law it does not qualify for deduction. The Hon’ble Court thereafter found that the Assessee-bank paid ‘penalty’ though termed as "penal interest"
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under s. 24(4)(a) and 24(4)(b) of the 1949 Act for non-compliance with the requirement stipulated under s. 24(2A). The Hon’ble Court found that Sub-
s. (6) of s. 24 clearly indicates that the penal interest payable under sub-ss. (4) and (5) is a "penalty" and if the penalty amount is not paid it can be
enforced as a decree made by a Civil Court. Further, an opportunity is also
provided to the defaulting banking company to satisfactorily explain the non-compliance and to avoid the penalty. According to the Hon’ble Court
that shows that the amount in question is not compensatory in nature but definitely penal and that the said amount paid by way of penalty though
called penal interest cannot be treated as legitimate item of expenditure. The Hon’ble Court held that permitting penalty paid for the nature of such
violations as an item of deductible expenditure under s. 37 of the IT Act will
only amount to placing a premium on the commission of infraction of the assessee. Therefore, penalty payable under s. 24(4)(a) and 24(4)(b) could
not be allowed as deductible expenditure.
Respectfully following the aforesaid decision of the Hon’ble Karnataka High Court, we hold that the sum in question is not allowable as
a deduction. The order of the CIT(A) on this issue is accordingly reversed and the order of the AO restored. Ground No.5 raised by the revenue is
allowed.
The Revenue has filed the following additional grounds of appeal and seek admission of the same on the ground that the issues raised
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therein are legal issues relating to allowance of deduction of PBDD u/s.36(1)(viia) & 36(1)(vii) of the Act. The additional grounds sought to be raised in this regard read thus:
“(1) Assessee’s claim of deduction u/s. 36(1)(vii) of Rs.108.53 Cr is not in accordance with the provisions under the Act where bad debts written off was not debited into the profit & loss account. (2) The provision of NPA for both rural and non rural branches debited into the profit and loss account was only Rs.100.56 Cr, whereas the bad debt written off of Rs.108.53 Cr was claimed as a deduction in computation of income u/s. 36(1)(vii) of the IT Act over and above the provisions for band and doubtful debts of Rs.200.03 Cr claimed u/s. 36(1)(vii) of the IT Act ought to be disallowed. (3) The bad debt write off claimed in computation of income was prudential write off and it is a balance sheet adjustment and not profit and loss adjustment that has lead to double deduction.”
As far as additional ground No.1 is concerned, the same was not the case made out by the AO. In the order of assessment, the AO never disputed the fact that the sum of Rs.108.53 crores claimed as deduction u/s.36(1)(vii) of the Act was not actually written off in the books of accounts of the Assessee. As far as ground No.2 is concerned, it proceeds under a misconception that deduction u/s.36(1)(vii) of the Act is linked with the PBDD for non-rural debts. This is absolutely incorrect as has been brought out while deciding ground No.3 raised by the Revenue. Ground No.3 is again a claim which was never the case made out by the AO. We are of
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the view that the additional grounds sought to be raised by the revenue is
devoid of any merit. They are therefore dismissed as without merit, not
arising out of the order of the AO and not based on the facts as borne out
by the records. The additional grounds are thus dismissed.
In the result, the appeal by the revenue is partly allowed.
ITA NO. 653/Bang/2012 (Assessee’s Appeal)
Ground No.1 raised by the Assessee is general in nature and calls
for no specific adjudication. Ground No.2 & 3 raised by the Assessee is
with regard to the action of the CIT(A) in confirming the order of the AO
rejecting the claim of the Assessee for deduction u/s.36(1)(viii) of the Act of
Rs.25,00,00,000/-. The provisions of Sec.36(1)(viii) of the Act reads as
follows:
“Section 36:- 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— (i) to (vii)……
(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 and gains of business or profession" (before making any deduction under this clause) carried to such reserve account:
Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess.
Explanation: In this clause,—
(a) "specified entity" means,—
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(i) a financial corporation specified in section 4A of the Companies Act, 1956 (1 of 1956);
(ii) a financial corporation which is a public sector company;
(iii) a banking company;
(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank;
(v) a housing finance company; and
(vi) any other financial corporation including a public company;
(b) "eligible business" means,—
(i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for-
(A) industrial or agricultural development;
(B) development of infrastructure facility in India; or
(C) development of housing in India;]
(ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and
(iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India;
(c) "banking company" means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
(d) "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;
(e) "housing finance company" means a public company formed or 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;
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(f) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956);
(g) "infrastructure facility" means—
(i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed;
(ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and
(iii) an undertaking referred to in sub-section (10) of section 80- IB;
(h) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;”
The computation of deduction u/s.36(1)(viii) of the Act as made by
the Assessee was as follows:
S.No. & Particulars Amount in Rs. 1. Interest earned from advances made to industrial, 815,24,34,678 agricultural and infrastructure activities 2. Total Income for the year ended 31.3.08 4420,56,84,509 3. % of Interest earned from advances made to 18.44% industrial, agricultural and infrastructure activities to total interest income (Sl.No.1/Sl.No.2) 4. Operating Profit for the year ended 31.3.2008 660,87,65,493 5. Profits from activities specified u/s.36(1)(viii) 121,87,91,872 (Sl.No.4 x Sl.No.3 x 100) 6. 20% of the profits derived from activities specified 24,37,58,374 u/s.36(1)(viii) 7. Amount transferred to special reserve 25,00,00,000 8. Amount eligible for deduction u/s.36(1)(viii) (lower 24,37,58,374 of amount under Sl.No.6 or Sl.No.7)
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The AO held that the Assessee is not an entity eligible for deduction u/s.36(1)(viii) of the Act. Without prejudice to the above stand of the AO,
he also found fault with the method of computation of deduction u/s.36(1)(viii) of the Act done by the Assessee. The loss under the head
“Income from Business or profession” declared by the Assessee in the
return of income was Rs.118,71,25,119. After reducing the deduction of Rs.25,00,00,000/- claimed u/s.36(1)(viii) of the Act, the loss as per the
return of income under the head “Income from Business or Profession” was a sum of Rs.93,71,25,119. According to the Assessee since the income
earned from the activities mentioned in Sec.36(1)(viii) of the Act was 18.44% of the total income as per Table given above, the profit from such
activities under the head “Profits and gains of Business or Profession” was
18.44% of 93,71,25,119 viz., Rs.17,28,05,872. 20% of the above according to the AO was -3,45,61,174/-. Since the Assessee declared a
loss and not profits, the AO held that the Assessee was not entitled to claim deduction u/s.36(1)(viii) of the Act.
On appeal by the Assessee, the CIT(A) accepted the contention of
the Assessee that it was an entity eligible for deduction u/s.36(1)(viii) of the Act. That finding is not in challenge by the revenue before the Tribunal in
the appeal filed by it against the order of CIT(A) and has now become final. Therefore the discussion of the CIT(A) in this regard is not discussed.
ITA Nos. 578 & 653/Bang/2012 Page 40 of 49
As far as the methodology adopted by the AO for rejecting the claim of deduction u/s.36(1)(viii) of the Act is concerned, the CIT(A) concurred
with the view of the AO. Aggrieved by the order of the CIT(A), the Assessee has raised ground No.2 & 3 before the Tribunal.
We have heard the submission of the learned counsel for the
Assessee. The learned counsel for the Assessee submitted that the AO and CIT(A) erred in considering the loss declared by the Assessee under
the head “Income from Business or Profession” as the basis on deduction u/s.36(1)(viii) of the Act has to be computed. He pointed out that the
provisions of sec.36(1)(viii) of the Act provide that a special reserve has to
be created and maintained by a specified entity. Then an amount not exceeding twenty per cent of the profits derived from eligible business
computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to
such reserve account will be allowed as deduction. According to him it is
the profits derived from eligible business computed under the head “profits and gains of business or profession” that has been seen and not that of the
entity as a whole, as has been done by the AO and CIT(A). The learned DR relied on the order of the CIT(A).
We have considered the rival submissions. A plain reading of the
provisions of Sec.36(1)(viii) of the Act clearly shows that what is relevant is profits derived from eligible business computed under the head "Profits and
ITA Nos. 578 & 653/Bang/2012 Page 41 of 49
gains of business or profession" and not the profits derived by the entity as a whole as has been done by the AO and CIT(A). We therefore hold that
the method of computation of deduction as done by the AO and CIT(A) is incorrect. The profits derived from eligible business computed under the
head “Profits and gains of business or profession” as done by the
Assessee has been accepted by the AO and CIT(A). There should be no difficulty in accepting the claim made by the Assessee for deduction
u/s.36(1)(viii) of the Act. The Assessee has also filed before us an alternate method of computation of deduction u/s.36(1)(viii) of the Act to
demonstrate that such alternate method will result in claim for deduction being made at Rs.37,14,84,183/-. The said computation is given as Annexure-2 to this order. We deem it appropriate to direct the AO to
examine the computation given as annexure-2 to satisfy himself that the claim as made originally was correct. The AO is thereafter directed to
consider the claim of the Assessee for the correct amount of eligible deduction u/s.36(1)(viii) of the Act. The relevant grounds are thus treated
as allowed.
Ground No.4 & 5 raised by the Assessee is with regard to the computation of disallowance u/s.14A of the Act. The Assessee earned
interest and dividend income of Rs.2,14,32,814 and Rs.13,83,53,278 respectively which was exempt u/s.10(15) and 10(34) of the Act and does
not form part of the total income under the Act. In view of the provisions of
Sec.14A of the Act which provides that no deduction shall be allowed in
ITA Nos. 578 & 653/Bang/2012 Page 42 of 49
respect of expenditure incurred by the Assessee in relation to income, which does not form part of the total income. The Assessee claimed that it
had not incurred any direct expenditure in the form of interest expenditure or other expenditure in making the investments which yielded tax-free
income. The AO also does not dispute the claim of the Assessee. The AO
disputed only general and administration expenses (other expenses) incurred by the Assessee which had to been apportioned as attributable to
earning of the exempt tax free income. The claim of the Assessee in this regard was that tax free income for the bank is mainly from investments
held by the bank. The investment activities of the bank are carried out by the Treasury Department at Head Office. Even without earning any free
income, these expenditure would have been incurred by the bank since the
bank has to hold SLR securities to carry on the business and the expenditure is of fixed in nature. Therefore, there is no expenditure
incurred directly by the bank for earning any tax free income. Since the expenditure would have been incurred by the bank even without the
earning of tax free income, no part of the expenditure can be related to
earning the tax free income. Therefore no disallowance u/s.14A of the Act is warranted.
The AO did not agree with the above contention. According to him expenditure relatable to exempt income has to be determined and in the
absence of any other acceptable basis on which the same is determined,
Rule 8D of the Income Tax Rules, 1962 (Rules) have to be applied.
ITA Nos. 578 & 653/Bang/2012 Page 43 of 49
Thereafter the AO invoked Rule 8D(iii) of the Rules and determined a sum of Rs.2.14 crores as expenditure incurred in relation to income which does not form part of the total income under the Act.
On appeal by the Assessee, the CIT(A) confirmed the action of the AO. The CIT(A) however proceeded on the basis that the Assessee had incurred direct expenditure also in the form of interest expenses in earning the tax free income. We have already seen that the AO did not raise such issue in the order of assessment. The disallowance by the AO was only with reference to other expenses under Rule 8D(iii) of the Rules. Therefore the observations of the CIT(A) in his order on applicability of Sec.14A of the Act to both direct and indirect expenses, are without any basis.
Before the Tribunal, the learned counsel for the Assessee placed reliance on the decision of the Hon’ble Karnataka High Court in the case of
CCI Ltd. Vs. JCIT (2012) 20 Taxmann.com 196 (Kar.)/(2012)
250 CTR (Kar) 291. The substantial question of law for consideration
before the Hon’ble Karnataka High Court in the aforesaid case was as to whether the provisions of Section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation?. The Hon’ble Court held that when the assessee has not retained shares with the
ITA Nos. 578 & 653/Bang/2012 Page 44 of 49
intention of earning dividend income and the dividend income is incidental to his business of sale of shares, which remained unsold by the assessee,
it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be
disallowed from deductions. The learned DR relied on the order of the
CIT(A).
We have given a very careful consideration to the rival submissions.
In the present case, the claim of the Assessee before the AO that tax free income for the bank is mainly from investments held by the bank. The
investment activities of the bank are carried out by the Treasury
Department at Head Office. Even without earning any free income, these expenditure would have been incurred by the bank since the bank has to
hold SLR securities to carry on the business and the expenditure is of fixed in nature. Therefore, there is no expenditure incurred directly by the bank
for earning any tax free income. Since the expenditure would have been
incurred by the bank even without the earning of tax free income, no part of the expenditure can be related to earning the tax free income. In the light
of the above undisputed fact and in view of the decision of the Hon’ble Karnataka High Court in the case of CCI Ltd. (supra), we are of the view
that no disallowance can be made u/s.14A of the Act. The addition made in this regard is directed to be deleted. The relevant grounds of appeal of
the Assessee are allowed.
ITA Nos. 578 & 653/Bang/2012 Page 45 of 49
In ground No.6 & 7 the Assessee has challenged the action of the CIT(A) in confirming the action of the AO in rejecting the claim of the Assessee that provisions of Sec.115JB of the Act are not applicable to banking companies and in further rejecting the claim of the Assessee to ascertain book profits as per recasted profit and loss account prepared by the bank as per the provisions of Companies Act, 1956.
We have heard the parties on the above issues. The provisions of Sec.115JB of the Act are not applicable to banking companies as held by this Tribunal in the case of Syndicate Bank ITA No.668 & 669/Bang/2010 order dated 19.6.2013. The relevant observations of the Tribunal in this regard are as follows:
“95. At the time of hearing, it was submitted by the ld. DR that the issue can be remanded for fresh consideration as was done by the Tribunal in A.Y. 2005-06 in ITA No.504/Bang/2009, order dated 13.01.2012. The ld. counsel for the assessee, however, submitted that the Tribunal in its earlier order though noted direct judgments on the point viz., (1) Order dated 30.09.2010 in ITA No.3390/2009 passed by ITAT ‘G’ Bench, Mumbai in the case of Krung Thai Bank; (2) Order dated 30.06.2011 in ITA Nos.4702 to 4706/2010 passed by the ITAT, Mumbai ‘F’ Bench in the case of Union Bank of India; and (3) Order dated 03.08.2011 in ITA No.469/2010 passed by the ITAT ‘C’ Bench, Chennai in the case of Indian Bank, did not adjudicate on the applicability of section 115JB, but following an earlier order in the assessee’s own case for earlier years (at which point of time the above Tribunal’s decisions were not available), restored the matter to the Assessing Officer to compute book profits based on recast P & L account prepared in accordance with the Schedule-VI of the Companies Act.
ITA Nos. 578 & 653/Bang/2012 Page 46 of 49
The learned counsel for the Assessee also submitted that the provisions of Sec.115JB of the Act were amended with effect from 01.04.2013 making it obligatory, inter alia, for banks to prepare P & L account in accordance with the Banking Regulation Act is clearly indicative of legislative understanding that upto and including A.Y. 2012-13, section 115JB had no application to banks and insurance companies. It was so held by ITAT, Hyderabad in the case of State Bank of Hyderabad dated 07.09.2013 in ITA No. 578/Hyd/2010 and ITAT Mumbai in the case of ICICI Lombard General Insurance Co. Ltd. dated 10.10.2012 in ITA No.2398/Mum/2009. 97. The learned DR relied on the order of the CIT(A).
We have considered the rival submissions of the ld. counsel for the assessee. We find that this issue was considered by the Mumbai Bench of the Tribunal in the case of Krung Thai Bank (supra) and on the above issue held as follows:- “5. Learned counsel for the assessee, however, contends that the provisions of MAT do not apply to the assessee, and , for this reason, very foundation of impugned reassessment proceedings is devoid of legally sustainable merits. His line of reasoning is this. The provisions of MAT can come into play only when the assessee prepares its profit and loss account in accordance with Schedule VI to the Companies Act .It is pointed out that , in terms of the provisions of Section 115JB(2),every assessee is required to prepare its profit and loss account in terms of the provisions of Part II and II I of Schedule VI to the Companies Act . Unless the profit and loss is so prepared, the provisions of Section 115 JB cannot come into play at al l. However, the assessee is a banking company and under proviso to Section 211 (2) of the Act , the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act , and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act . It is thus contended that the provisions of Section 115 JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act . Since the provisions of Section 115 JB
ITA Nos. 578 & 653/Bang/2012 Page 47 of 49
do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient . We are urged to quash the reassessment proceedings on this short ground.
Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of the learned counsel, according to the departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute.
The plea of the assessee is indeed well taken, and it meets our approval. The provisions of Section 115 JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and I II of Schedule VI to the Companies Act . The starting point of computation of minimum alternate tax under section 115 JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211 (2) of the Companies Act . The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act . The provisions of Section 115 JB cannot thus be applied to the case of a banking company.”
We are of the view that in the light of the decision of the Mumbai Bench of the Tribunal, we have to necessarily hold that provisions of section 115JB of the Act are not applicable to the assessee which is a banking company. The decisions relied upon by the ld. counsel for the assessee, clearly support the plea of the assessee in this regard. Consequently, ground No.3 raised by the assessee is also allowed.”
ITA Nos. 578 & 653/Bang/2012 Page 48 of 49
Since the provisions of sec.115JB of the Act are not applicable to banking companies as held by the Tribunal, we are of the view that the computation of books profits made by the AO cannot be sustained. Consequently ground No.6 raised by the Assessee is allowed. Ground No.7 does not require adjudication in view of the conclusion on ground No.6 that provisions of Sec.115JB of the Act do not apply to banking companies.
In the result the appeal by the Assessee is allowed.
In the result appeal by the revenue is partly allowed, while the 56.
appeal by the Assessee is allowed.
Pronounced in the open court on this 27th day of February, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 27th February, 2015.
Encl: Annexures I & II
D S/
ITA Nos. 578 & 653/Bang/2012 Page 49 of 49
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.