ALLAHABAD BANK,KOLKATA vs. D.C.I.T CIR - 6,KOLKATA, KOLKATA

In Grounds No. 1 to 5 the Assessee has challenged the action of the revenue authorities in disallowing a sum of Rs.4,33,45,434/- and adding the said sum to the total income of the Assessee by invoking the provisions of Sec.14A of the Income Tax Act, 1961 (Act) read with Rule 8D of the Income Tax Rules, 1962 (Rules). The assessee is a public sector bank and is governed by the Banking Companies (A&T) Act 1970, Banking Regulation Act, 1949 and various rules and regulations made by RBI from time to time. The original assessment in the case of the Assessee was completed u/s.143(3) of the Act on 30.3.2006. One of the addition to the total income made in such assessment was the addition consequent to disallowance of a sum of Rs.4,98.28,693/- to the total income of the Assessee u/s.14A of the Act. The order of the AO was confirmed by the CIT(A) vide order dated 22.10.2007. On further appeal by the Assessee the Hon’ble ITAT vide its order dated 30.9.2009 in ITA

Pursuant to the order of the ITAT the AO examined the issue in the light of the directions of the ITAT. The exempt income of the Assessee was dividend on shares & units amounting to Rs.10.07,38,161, interest on tax free bonds of Rs.8,31,98,692/- and interest u/s.10(23G) of the Act amounting to Rs.8,47,24,000/-. It is not in dispute that there was no interest expenditure incurred in making investments which yielded tax free income. The only question was disallowance of other expenses in terms of Rule 8D(2)(iii) of the rules. The claim of the Assessee was that a sum of RS.3,00,000 being salary of one employee who was in charge of the concerned activity and another sum of Rs.375/- being bank charges alone ought to be disallowed as other expenses. The AO however was of the view that in view of the directions of the ITAT while setting aside the issue to the AO for fresh consideration, Rule 8D was directed to be applied consequent to the decision of Special Bench in the case of Daga Capital management Pvt.ltd (supra) and therefore applying the formula given in Rule 8D(2)(iii) of the rules, the AO disallowed a sum of Rs.4,33,45,024/-.

Before CIT(A) the Assessee pointed out that the decision of the of Special Bench in the case of Daga Capital management Pvt.ltd (supra) holding application of Rule 8D of the Rules which came into effect only from 24.3.2008 as having retrospective application was no longer valid as the said decision was reversed by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2010) 328 ITR 87(Bom) has meanwhile held that Rule 8D could not be considered as retrospective and the said Rule could be applied only with effect from the Assessment Year 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the

The CIT(A) held that in view of the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce (supra), the decision of Special Bench in the case of Daga Capital Management (supra) was not applicable and therefore the disallowance had to be made in terms of Sec.14A of the Act and not in terms of Rule 8D of the rules. He was however of the view that the disallowance offered by the Assessee was on the lower side. He held that 0.5% of the average value of investments was sound method of disallowance to be made in the case of the Assessee and thus upheld the addition made by the AO.

Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.2 before the Tribunal. We have heard the rival submissions. The learned DR relied on the order of the CIT(A). The learned counsel for the Assessee relied on the submissions made

Himtaj Consultants Pvt. Ltd. vs. I.T.O. (ITA No. 721/Ko1l2007- AY. 2004-05) Order dated 27.04.2007. 2. CHNHS Association vs. ACIT(ITA No.74/KoI/2008-AY.2004-05) Order Dated 19.02.2008. 3. I.T.O. vs. M/s S.P.S. Securities (P) Ltd. (ITA NO.123/KoI/2010- AY.2000-01 Order dated 19.08.2010 He further pointed out that the Hon’ble Calcutta High Court in the case of CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd. in GA No.3019 of 2012 in ITA No.243 of 2012 dated 4.1.2013 held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper.

We have considered the rival submissions. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010J 328 ITR 87(Bom) has held that Rule 8D could not be considered as retrospective and the said Rule could be applied only with effect from the Assessment Year 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could commute the amount to be disallowed in accordance with sub-section (2) of section 14A. The above- referred subsection (2) of section 14A was inserted by the Finance Act, 2006, with effect from the Assessment Year 2007-08. The Assessee’s case being for the Assessment Year 2003-04, there cannot be any applicability of the above-referred sub- section (2) of section 14A or Rule 8D in the Assessee's case for the Assessment Year

Grounds No.6 & 7 raised by the Assessee reads as follows: “6. That, on facts as well as on law, the Learned Commissioner of Income Tax (Appeal) - VI, Kol has erred in confirming the application of provision of section 115JB of the Income Tax Act to the case of the appellant bank in disregard of the ratios laid down by the Hon'ble Kerala High Court in the case of Kerala State Electricity Board vs. OCIT 329 ITR 91, Hon'ble ITAT, Mumbai in the case of Maharashtra State Electricity Board vs CIT. 82 ITO 422, Krung Thai Bank PCL vs Joint OIT, International Taxation (ITA No. 3390/Mum/09), Union Bank of India vs ACIT, L TU, Mumbai (ITA No. 4702 to 4706/Mum/2010 dated 30.06.2011) and Hon'ble ITAT, Chennai in the case of Indian Bank vs Additional CIT, Chennai (ITA No. 469 Md/2010 dt. 03.08.2011 ). 7. That, on facts as well as on law, the Learned Commissioner of Income Tax (Appeal) - VI, Kol has erred in disregarding the judgement of Hon'ble ITAT, Mumbai in the case of ICICI Lombard General Insurance Co. Ltd. vs ACIT (2012-TIOL-690-ITAT-MUM) in which it was held that provision of section 115JB will be applicable from assessment year 2013-14 to the banking company in view of the amendment made by the Finance Act, 2012.”

We have already seen that the original assessment in the case of the Assessee was completed u/s.143(3) of the Act on 30.3.2006. The Assessee’s total income was computed in accordance with the provisions of Sec.115JB of the Act apart from the computation of total income under the normal provisions of the Act. The Assessee raised disputes with regard to computation of book profits u/s.115JB of the Act as done by the AO. To the extent the same was not acceptable to the Assessee, the Assessee challenged the same before CIT(A). To the extent the Assessee was not successful before CIT(A), the Assessee preferred further appeal before the Hon’ble

The Hon’ble ITAT vide its order dated 30.9.2009 (vide para-18 & 19) held as follows: “18. In respect of ground No.8 of the appeal, the learned submitted that- (a) claim of Rs.27 lakhs for legal expenses was actual expenses and it was wrongly mentioned as provision. (b) Wealth Tax ofRs.3 lakhs was actual liability of the assessee and it was not a provision; and (c) Rs.16,96,86,145 was the provision for pension on actuarial basis though shown as provision and as such, it was an ascertained liability of the assessee. The learned AR of the assessee submitted that the above amounts should not be added to the book profit while computing profit for the purposes of MAT u/s.115JB of the Act. However, in respect of the other amounts viz, provision for bad & doubtful debts, provision for standard asset, provision for depreciation on investment, provision for fraud & forgery, provision for stationery-wastage, and provision for tangible asset, learned AR of the assessee did not made any submission. The learned DR relied on the orders of the authorities below. He submitted that issue in respect of above three items could be restored to the Assessing Officer to ascertain the exact nature of liabilities of the assessee though shown as provision by the assessee in the balance sheet. The learned AR of the assessee also submitted that the matter could be restored to the Assessing Officer. 19. Considering the above submissions of the learned Representatives of the parties, we restore the matter to the Assessing Officer to consider as to whether the above expenses as claimed by the assessee were actual and ascertained liabilities or they were merely provisions made. In case, the above amounts are ascertained liabilities/expenses, the same should not be added back while computing the book profit for MAT and in case the same are the provisions made, Assessing Officer is justified not to allow deduction while computing book profit u/s.115JB. Therefore, ground No.8 of the appeal as stated herein above is restored to the Assessing Officer to decide the same afresh after considering the details as considering the details as may be furnished before him.”

Before CIT(A), the Assessee raised the following addition ground vide its letter dated 19.7.2011: “Additional Ground of Appeal “That, without prejudice to the Ground Nos.4 and 5 relating to computation of ‘book profit ‘under section 115JB of Income tax Act, 1961 for ascertaining liability in respect of minimum alternate tax, the Learned Assessing Officer has erred in applying the provision of section 115JB of Income tax Act, 1961 in disregard of the referred judicial pronouncements.”

The following were the judicial pronouncements referred to in the grounds of appeal 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 wherein it was held that 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. (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,

Aggrieved by the order of the CIT(A), the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions as were made before the learned CIT(A). 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. 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 all. 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 do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly

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.6 & 7 raised by the assessee are also allowed. In view of the decision on ground No.6 & & the grievance projected in grounds Nos. 8 & 9 do not require adjudication as those grounds are on the manner in which book profits u/s.115JB of the Act were computed. These grounds have become infructuous in view of the conclusion on Gr.No.6 & 7.

In the result, appeal by the Assessee is allowed.