ALLAHABAD BANK,KOLKATA vs. ADDL. CIT, RANGE - 6, KOLKATA, KOLKATA

First we take up the cross appeals for A.Y. 2005-06. The issue involved in Grounds No. 1 & 2 of the assessee’s appeal relates to the disallowance of Rs.19,31,16,000/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A of the Income Tax Act, 1961.

The assessee in the present case is a Government of India Undertaking, which is engaged in Banking business. The return of income for the year under consideration was filed by it on 31.10.2005 declaring a loss of Rs.6,67,27,05,079/- under normal provisions of the Act and the

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly submitted by the ld. counsel for the assessee relying on the several decisions of the Tribunal, the similar disallowance made under section 14A has been restricted by the Tribunal to 1% of the exempt income by treating the same to be fair and reasonable. In the present case, the disallowance offered by the assessee under section 14A is more than 1% of the exempt income and this being the undisputed position, we hold that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A over and above the disallowance offered by the assessee at more than 1% of the exempt income is not sustainable. The same is, therefore, deleted and Grounds No. 1 &2 of the assessee’s appeal for A.Y. 2005-06 are allowed.

The issue involved in Grounds No. 3 & 4 of the assessee’s appeal for A.Y. 2005-06 relates to the disallowance of Rs.11,63,09,158/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of deduction claimed by the assessee under section 36(1)(viii) of the Act.

The deduction claimed by the assessee under section 36(1)(viii) in respect of reserve created from profits earned out of long-term finance provided for industrial, agriculture and infrastructure development was disallowed by the Assessing Officer on the ground that the assessee- company is not a Financial Corporation. On appeal, the ld. CIT(Appeals) followed his appellate order passed in assessee’s case for A.Y. 2004-05 and confirmed the disallowance made by the Assessing Officer on this issue. He also held that the amendment made by the Finance Act, 2007 to section 36(1)(viii) w.e.f. 1st April, 2008 clearly establishes that prior to 1st April, 2008, the Banks were not entitled to deduction under section 36(1)(viii).

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that this issue involved in Grounds No. 3 & 4 of the assessee’s appeal is squarely covered in favour of the assessee by the decision of Mumbai Bench of this Tribunal in the case of Union Bank of India –vs.- ACIT rendered vide its order dated 30.06.2011 passed in ITA Nos. 4702 to 4706/MUM./2010, wherein a similar issue has been decided by the Tribunal vide paragraph nos. 9, 10, 11 & 12, which read as under:-

The issue involved in Ground No. 5 of the assessee’s appeal for A.Y. 2005-06 relates to the disallowance of Rs.2,31,42,83,800/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) by restricting the claim of the assessee for deduction under section 36(1)(viia) of the Act for provision for bad and doubtful debts.

In the return of income, deduction under section 36(1)(viia) on account of provision for bad and doubtful debts was claimed by the assessee to the extent of Rs.2,31,42,83,800/-. As found by the Assessing Officer, a provision for bad and doubtful debts, however, was made by the assessee only to the extent of Rs.40,00,00,000/- in his books of account. He, therefore, allowed the claim of the assessee for deduction under section 36(1)(viia) only to the extent of Rs.40,00,00,000/- and disallowed the balance amount of Rs.2,31,42,83,800/-. On appeal, the ld. CIT(Appeals) confirmed the disallowance made by the Assessing Officer on this issue by following his appellate order passed in assessee’s own case for A.Y. 2004-05.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that a similar issue has been decided by the Hon’ble Punjab & Haryana High Court in favour of the revenue and against the assessee in the case of State Bank of Patiala-vs.- CIT reported in 272 ITR 54, wherein it was held that the deduction allowable under section 36(1)(viia) is in respect of the provision made and, therefore, making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under section 36(1)(vii). Since there is no other decision of any High Court taking a different view on this issue has been brought to our notice, we respectfully follow the decision of the Hon’ble Punjab & Haryana High Court and uphold the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on account of deduction under section 36(1)(viia). Ground No. 5 is accordingly dismissed.

Grounds No. 6 to 10 of the assessee’s appeal for A.Y. 2005-06 and additional grounds no. 1 & 2 raised by the assessee and admitted by us involve the issues relating to the various additions made by the Assessing Officer and confirmed by the ld. CIT(Appeals) while computing the book profit under section 115JB of the Act.

We have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the ld. representatives of both the sides, the preliminary issue involved in this context is whether the provisions of section 115JB are applicable to the assessee-Bank and the same is squarely covered in favour of assessee, inter alia, by the decision of the Hon’ble Kerala High Court in the case of Kerala State Electricity Board –vs.- DCIT reported in 329 ITR 91, Mumbai

Now we take up the Revenue’s appeal for A.Y. 2005-06 being ITA No. 2070/KOL/2009, Grounds No. 1 & 2 of which involve a common issue relating to the deletion by the ld. CIT(Appeals) of the addition of Rs.138.83 crores .made by the Assessing Officer on account of provision for salary arrears.

In the return of income filed for the year under consideration, a deduction of Rs.138.83 crores was claimed by the assessee on account of provision for salary arrears. In this connection, it was submitted on behalf of the assessee before the Assessing Officer that the last wage agreement entered into with the employees had already expired on 31.10.2002 and the revision of salary and wages of Officers and workmen was due from 01.11.2002. The negotiation for revision between the Bank

The disallowance made by the Assessing Officer on account of its claim for deduction towards provision for salary arrears was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submission made by the assessee as well as the material available on record, the ld. CIT(Appeals) deleted the said disallowance for the following reasons given in his impugned order:-

The ld. D.R. submitted that there was no basis given by the assesese on which the amount of salary arrears payable to the staff and Officers’ could reasonably be quantified and in the absence of the same as well as any specific event that occurred during the year under consideration showing that the liability on account of salary arrears had crystallized, the provision made by the assesese for salary arrears represented unascertained liability which was not allowable as deduction, as rightly

The ld. counsel for the assessee, on the other hand, submitted that the salary and wage revision was due from 01.11.2002 and it, therefore, cannot be disputed that the liability on account of such wage revision had already accrued. He submitted that the Bi-partite talks between Indian Banks Associations and Employees’ Union were almost at the final stage as on 31.03.2005 and on the basis of negotiations that had taken place and an understanding that had reached, the liability was estimated by the assessee at 13% on account of wage arrears. He contended that the fact that as per the agreement finally entered into in May, 2005, a wage revision of 13.25% was agreed is sufficient to show that the provision made by the assessee at 13% represented a liability, which could be reasonably estimated. He submitted that a similar issue involved in the case of ABP Company Limited –vs.- ACIT has been decided by the Coordinate Bench of this Tribunal in favour of the assesese in similar facts and circumstances vide its order reported in 78 TTJ (CAL) 158.

We have considered the rival submissions and also perused the relevant material available on record. It is observed that the Salary and Wage Revision Agreement entered into by the assessee-Bank with its Staff and Officers earlier had already expired on 31.10.2002 and, therefore, the new revision was due right from 01.11.2002. The liability on account of salary arrears thus had already accrued and the issue that is required to be considered is whether it was possible to ascertain or quantify the same with reasonable certainty in the year under consideration. In this regard, it is observed that the negotiations between Indian Banks Association and Employees’ Union had already taken place and the final understanding was almost reached during the year under consideration, which is evident from the fact that the final agreement for revision was entered into in the month of May, 2005 itself, i.e. immediately after the end of the year under consideration. The fact that the revision was finally settled with 13.25% in May, 2005 also goes to show that the provision made by the assessee for such revision at 13% in the year under consideration was a liability, which could be ascertained with reasonable certainty.

In support of the Revenue’s case on this issue, the ld. D.R. has relied on the decision of the Hyderabad Bench of this Tribunal in the case of Andhra Pradesh Gramin Vikas Bank. It is, however, observed that the same is distinguishable on facts, inasmuch as, the liability on account of salary arrears in the said case had arisen as a result of proceedings held on 24.07.2010, i.e. much later than the closure of the relevant year under consideration and this being the undisputed position, the Tribunal held that the said liability having neither arisen nor discharged during the relevant year was not allowable as deduction.

In the case of IBP Company Limited (supra), the fact situation involved, on the other hand, was similar to the case of the assessee inasmuch as, the Pay Scale and other benefits of the Officers were due for revision w.e.f. 1st August, 1997 and the exercise to revise the same was already in progress. The basis of such revision was ultimately accepted by the Government and it was on this basis that the assessee-company had worked out the liability in respect of the same. In these facts and circumstances, it was held by the Coordinate Bench of this Tribunal that the provision for increase in salaries and wages made by the assessee on the basis of Bureau of Public Enterprise Guidelines in assessment year 1989-90 was not for contingent liability and the reasonable provision for such liability was required to be taken into account for arriving at the commercial profit. In arriving at this conclusion, the Tribunal relied on the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Limited –vs.- CIT reported in 245 ITR 428, wherein it was held by the Hon’ble Apex Court that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. It was held that what should be certain is the incurring of the liability which should be capable of being estimated with reasonable certainty though the actual quantification may not be possible. It was held that if these requirements are satisfied, the liability is not a contingent one but it is a liability in presenti. In our opinion, the ratio of these judicial pronouncements is clearly applicable to the facts of the present case and respectfully following the same, we uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for deduction on account of provision for salary arrears. Grounds No. 1 & 2 of the Revenue’s appeal are accordingly dismissed.

The issue involved in Ground No. 3 of the Revenue’s appeal relating to the assessee’s claim for deduction on account of provision for salary arrears while computing the book profit under section 115JB has become infructuous as a result of our decision rendered while disposing of the appeal of the assessee holding that the provisions of section 115JB are not applicable in the case of the assessee-Bank. Ground No. 3 of the Revenue’s appeal is accordingly dismissed.

The issue involved in Ground No. 4 of the Revenue’s appeal for A.Y. 2005-06 relates to the deletion by the ld. CIT(Appeals) of the addition of Rs.75,00,00,000/- made by the Assessing Officer by way of disallowance of assessee’s claim for bad debts written off under section 36(1)(vii) of the Act.

In the Profit & Loss Account, a sum of Rs.75,00,00,000/- was debited by the assessee on account of bad debts written off relating to Non-Rural Branches and the same was claimed as deduction under section 36(1)(vii). In this regard, the Assessing Officer noted that the opening balance in the provision for bad and doubtful debts made by the assessee under section 36(1)(viia) was to the extent of Rs.584.04 crores. Since the amount of bad debts written off by the assessee and claimed as deduction under section 36(1)(vii) at Rs.75,00,00,000/- was less than the opening balance of provision made as per section 36(1)(viia), the Assessing Officer held that the assessee was not entitled to any deduction under section 36(1)(vii). On appeal, the ld. CIT(Appeals) allowed the claim of the assessee for deduction on account of bad debts written off under section 36(1)(vii) at Rs.75,00,00,000/- by following the decision of Tribunal in assessee’s own case for A.Y. 2003-04 rendered vide its order dated 30.09.2009, wherein it was held that the proviso to section

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As agreed by the ld. representatives of both the sides, this issue involved in Ground No. 4 of the Revenue’s appeal for A.Y. 2005-06 now stands squarely covered by the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Limited (2012) 3 SCC 784 whereby the view taken by Cochin Special Bench of ITAT has been affirmed by the Hon’ble Apex Court. Respectfully following the said decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Limited, we uphold the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No. 4 of the Revenue’s appeal.

Now we shall take up the appeal of the assessee for A.Y. 2006-07 being ITA No. 2176/KOL/2009, Grounds No. 1 & 2 of which relating to the issue of disallowance of public issue expenses are not pressed by the ld. counsel for the assessee at the time of hearing before us. The same are accordingly dismissed as not pressed.

In Ground No. 3, the assessee has disputed the addition of Rs.45.09 crores made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of the amount transferred from “Contingency Account - General” to the credit of Profit & Loss Account.

During the year under consideration, the assessee-Bank had transferred old outstanding balances aggregating to Rs.104.63 crores from “Contingency Account - General” to the credit of the Profit & Loss Account under the head “other income” as per the decision taken by its Board of Directors. On verification of the same, it was found by the Assessing Officer that the amounts transferred by the assessee from flabby accounts (i.e. bills payable, Debit Note payable, etc.) to the extent of Rs.43.12 croes and from sundry creditors to the extent of Rs.1.97 crores were in the nature of cessation of liability as covered by the provisions of section 41(1) of the Act. He, accordingly, invoked the said provision and made addition of Rs.45.09 crores to the total income of the assessee. On appeal, the ld. CIT(Appeals) confirmed the said addition made by the Assessing Officer for the following reasons given in his impugned order:-

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Although the ld. D.R. has relied on the decision of Pune Bench of this Tribunal in the case of Vaidyanath Urban Cooperative Bank Limited (ITA No. 413/Pune/2014 & others dated 31.03.2015), wherein a similar issue has been decided in favour of the Revenue after having found that the unclaimed creditors representing trading liability for expenditure incurred having been allowed as deduction in the assessment for any year, the transfer of credit balance of such unclaimed creditors by the assessee himself to the Reserve Account clearly attracted the provisions of section 41(1), the ld. counsel for the assessee has submitted that the facts involved in the present case are altogether different, inasmuch as, no deduction was claimed by the assessee in any year while computing its total income on account of the amounts in question representing flabby accounts and sundry creditors, the balances of which were credited to the Profit & Loss Account. He has contended that the Assessing Officer as well as the ld. CIT(Appeals) have proceeded on the presumption that these amounts might have been debited by the assessee to the Profit & Loss Account in the earlier years. He has urged that an opportunity may, therefore, be given to the assessee to establish that the said amounts had not been claimed by it as deduction in any of the earlier years and the provisions of section 41(1) thus are not applicable. Although the ld. D.R. has strongly opposed to this request of the ld. counsel for the assessee, we consider it fair and reasonable and in the interest of justice to accede to the said request. Accordingly, the impugned order of the ld. CIT(Appeals) on this issue is set aside and the matter is restored to the file of the Assessing Officer for the limited purpose of giving the assessee an opportunity to

As regards Ground No. 4 of the assessee’s appeal for A.Y. 2006-07, it is observed that the issue involved therein relating to the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee’s claim for deduction under section 36(1)(viia) to the extent of Rs.235,71,80,000/- in the absence of provision made for bad and doubtful debts in the books of account is similar to the one involved in Ground No. 5 of the assessee’s appeal for A.Y. 2005-06, which has already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2005-06, we uphold the impugned order of the ld. CIT(Appeals) on this issue and dismiss Ground No. 4 of the assessee’s appeal.

As regards the issue involved in Grounds No. 5 & 6 of the assessee’s appeal for A.Y. 2006-07 relating to the disallowance of Rs.3,72,18,000/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A read with Rule 8D of the Income Tax Rules, the ld. representatives of both the sides have agreed that Rule 8D is applicable only from A.Y. 2008-09 and the disallowance under section 14A for the years prior to 2008-09 is required to be made on some reasonable basis. In this regard, it is observed that a similar issue was involved in Ground No. 10 of the assessee’s appeal for A.Y. 2005-06 and while deciding the same, we have already held that the disallowance offered by the assessee under section 14A being more than 1% of the exempt income, is fair and reasonable. Following our conclusion drawn in A.Y. 2005-06, we hold that

As regards Grounds No. 7 & 8 of the assessee’s appeal for A.Y. 2006- 07 as well as the additional grounds raised by the assessee, it is observed that the issues involved therein relating to the additions made by the Assessing Officer and confirmed by the ld. CIT(Appeals) while computing the book profit of the assessee under section 115JB are similar to the issues involved in Grounds No. 6 to 9 as well as additional grounds involved in the appeal of the assessee for A.Y. 2005-06, which have already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2005-06, we hold that the provisions of section 115JB are not applicable in the case of the assessee- Bank and accordingly allow these grounds of the assessee’s appeal for A.Y. 2006-07.

In the result, the assessee’s appeals for A.Y. 2005-06 and 2006-07 are partly allowed and the Revenue’s appeal for A.Y. 2005-06 is dismissed.