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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT BEFOREMRS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER Year: 2017-18 Shri Rajkot District Co-operative Vs. The Principal Commissioner of Bank Limited, Income-Tax, Jilla Bank Bhavan, Rajkot-1, Kasturba Road, Rajkot-360001 Rajkot PAN :AAAAR 0546 K अपीलाथ�/ (Appellant) �� यथ�/ (Respondent) Assesseeby : Shri D.M. Rindani, AR Revenue by : Shri Shramdeep Sinha, CIT-DR सुनवाई क� तार�ख/Date of Hearing : 29.11.2022 घोषणा क� तार�ख /Date of Pronouncement: 27.02.2023 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order of learned Principal Commissioner of Income-Tax, Rajkot-1 [hereinafter referred to as “Ld. Pr. CIT” for short] dated 24.01.2022 passed in exercise of his revisionary jurisdiction under Section 263 of the Income-Tax Act, 1961 [hereinafter referred to as "the Act" for short] for Assessment Year (AY) 2017-18.
2. The assessee has raised following grounds:-
“1. The learned Principal Commissioner of Income-tax-1, Rajkot erred in assuming jurisdiction u/s 263 of the Act, particularly in the light of reasons stated by him in the show cause notice and in the order passed u/s 263 of the Act and hence the impugned order is bad in law.
2. The learned Principal Commissioner of Income-tax-1, Rajkot failed to appreciate that necessary inquiries were made by the assessing officer during assessment proceedings u/s 143(3) in respect of claim of deduction u/s Shri Rajkot Dist Coop Bank Ltd Vs. PCIT 36(1)(viii) of the Act and hence the order could not have been considered as erroneous u/s 263. 3. The learned Principal Commissioner of Income-tax-1, Rajkot erred in holding that the A.O. has erroneously allowed excess claim of deduction u/s 36(1)(viii) of the Act and that there was incorrect application of law and therefore erred in setting aside the assessment order.”
As transpires from the order of the Ld. Pr. CIT before us, the error noted in the assessment order passed in the case of the assessee under Section 143(3) of the Act for the impugned year i.e. AY 2017-18 was that the assessee’s claim of deduction for creation of special reserve from the profit of “eligible business” as per Section 36(1)(viii) of the Act had been allowed in excess by the Assessing Officer without properly examining the calculation of the claim submitted by the assessee.
As per the Ld. Pr. CIT, the computation furnished by the assessee of the profits of its business eligible to claim deduction u/s 36(1)(viii) of the Act had several anomalies and contradictions including: • the apportionment of indirect cost to different segments of the assessee’s business being without any cogent basis and • the distribution of profits to the different segments being based on the basis of the funds deployed, in contradiction to the assessee’s claim that the distribution of profits could not be made on the basis of funds deployed.
Thus, the Ld. Pr. CIT concluded that the assessee’s computation of profits of “eligible business” furnished to the Assessing Officer was not correct and ought to have been rejected by him. The Ld. Pr. CIT thereafter proceeded to compute the claim of the assessee for special reserve as per Section 36(1)(viii) of the Act, computing the same at Rs.2.26 crores as opposed to Rs.4.94 crores claimed by the assessee. He accordingly found
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT that that an amount of Rs.2.68 crores had been excess claimed by the assessee and the Assessing Officer having not examined the issue, the assessment order allowing the assessee’s claim of deduction under Section 36(1)(viii) of the Act had resulted in excess claim being allowed to the assessee to the tune of Rs.2.68 crores causing prejudice to the Revenue. Paragraph No.2 of the Ld. Pr. CIT ‘s order brings out the above facts as under:- “2. On particular examination of the records, it was noticed on perusal computation of income of the assessee bank, that the assessee bank has claimed a deduction of Rs. 4,94,94,107/- u/s 36(1)(viii) for creation of special reserve from profit of "eligible business" as mentioned in the section.
Further, the assessee bank vide submission dated 10.12.2019 has furnished exhibit-1 showing the calculation of segment wise computation of profit from "eligible business". However, the computation furnished by assessee bank calculating the profit from "eligible business" is not correct on following grounds; The assessee bank in para 2.1 of its submission dated 10.12.2020 has contended that the profit from the eligible business has to be computed by applying section 28 to 43D of the Act to its business of long term finance, further, it has contended in para 2.3 that the apportionment of cost to the Income centers should be based on foots and reasons as also on equitable and scientific basis. Having stated that, the assessee bank Summarily allocated the Indirect cost in the ratio of 5:3.5:1.25:0.25 to its business of short term finance, long term finance, treasury activities and investing activities, the reason for such attribution has been mentioned as its own experience, however, no cogent evidences has been furnished by the assessee bank in support of its claim of such apportionment of indirect expenses. Further, the same also contradicts its own contention that such apportionment should be based on equitable and scientific basis. It Is also pertinent to mention that no separate books of accounts have been made by the assessee bank for computation of such profit of eligible business.
As the assessee bank has done arbitrary apportionment of its cost as per the weightage decided by its experience, the same has resulted in arbitrary reduction of profit in short term finance (resulting in loss) and arbitrary increase in long term finance (resultantly increasing the eligibility for amount of deduction u/s 36(1) (viii) and accordingly, the result of its segment wise profit computation cannot be relied upon.
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT Further, the assessee bank has contended that the distribution of profit in different segmentscannot be made on the basis of fund deployed in respective segments, however, on the other hand, as mentioned in para 4.1 of exhibit-1 of letter dated 10.12.2019 the assessee bank itself has computed eligible profit from total profit from long term finance on the basis of funds deployed in eligible and non-eligible business.
The assessee bank in para 2.4.5. of letter dated 10.12.2019 has submitted that the very method of computing profit of eligible business adopted by the assessee bank has also been upheld by CIT(A)-1, Rajkot for earlier years, however, it is pertinent to mention that as noticed from NJRS, the department has preferred appeal in ITAT Rajkot bench against the decision of CIT(A) for AY 2014-15 vide appeal dated 30.07.2018/31.07.2018 and the same is pending before ITAT, Rajkot Bench.
In view of the above discussion, it can be concluded that the computation of deduction for special reserve u/s 36(1)(viii) as furnished by the assessee bank is not correct and should have been rejected. Further, the eligible amount of deduction should have been recomputed by distributing the total profit on the basis of funds deployed in eligible business and non-eligible business as under:-
Sl. No. Particulars Amount (in Rs.) Remarks 1. Total funds deployed (A)s 57719437510 As per Sl no. 1 (Total segment wise funds deployed) of exihibit-1 of submission dated 10.12.2019 2. Total funds deployed in 11241401663 As per SI no. 4.1 of eligible business (B) exihibit-1 of submission dated 10.12.2019 3. Total profit as per IT Act (C) 580222937 As per Sl. No. 3.2 of exhibit-1 of submission dated 20.12.2019 4. Eligible profit for computation 113003857 of special reserve u/s 36(1)(viii) [(D)=(B)*(C) divided by (A)] 5 20% of the profit of the 22600771 eligible business (E)
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT
6 Amount claimed by the 49494107 assessee bank in computation of income (F) 7 Excess claim made for special 26893336 reserve u/s 36(1)(viii) [(F)-(E)] Accordingly, an amount of Rs.2,68,93,336/- should be disallowed on account of excess claim of deduction for creating special reserve u/s 36(1)(viii) and should be added to total income of assessee bank.”
Ld. Pr. CIT thereafter went on to hold the assessment order as erroneous causing prejudice to the Revenue for the Assessing Officer having not examined the claim of the assessee to deduction on creation of special reserve as per Section 36(1)(viii) of the Act and accordingly he set aside the assessment order directing the Assessing Officer to pass a fresh assessment order after proper verification and due application of mind.
We have heard both the parties. The contention of the learned Counsel for the assessee before us was that the jurisdiction assumed by the Ld. Pr. CIT in the present case was against all canons of law and not in accordance with the provisions of Section 263 of the Act at all. His contention being that the issue of assessee’s claim of deduction on account of creation of special reserve as per Section 36(1)(viii) of the Act had been inquired during the assessment proceedings in details by the Assessing Officer; the assessee had furnished detailed replies giving the entire basis on which the profits of the eligible business had been computed and also pointing out that this basis of calculating profits of the eligible business had been accepted in preceding years i.e. AYs 2014-15 and 2012-13 by the learned CIT(A) also. That, therefore, the Assessing Officer, by accepting the assessee’s calculation of claim of deduction under Section 36(1)(viii) of the Act, had taken a plausible view on the matter. That the Ld. Pr. CIT had not pointed out any mistake/error/infirmity in the assessee’s calculation of Shri Rajkot Dist Coop Bank Ltd Vs. PCIT profits of eligible business as submitted to the Assessing Officer at any point of time during the revisionary proceedings. That, at no point of time, the assessee was confronted with the so-called infirmities or anomalies in its calculation as now reproduced in the Ld. Pr. CIT’s order.
In this regard, with respect to its contention that the issue was thoroughly examined by the Assessing Officer during assessment proceedings, our attention was drawn to the following documents:-
(i) Notice under Section 142(1) issued during assessment proceedings dated 06.09.2019 specifically asking the assessee to furnish details of “any other amount allowable as deduction” reflected in the return of income filed by the assessee and claimed at Rs.10,59,39,149/- (Paper- book page No.39); (ii) Assessee’s reply to the aforesaid notice under Section 142(1) giving the break-up of “any other amount allowable as deduction” including therein the deduction claimed under Section 36(1)(viii) of the Act for special reserve created amounting to Rs.4,49,94,107/-. (Paper-book page No.42); (iii) Detailed computation, being statement showing segment-wise profitability of the bank, of the deduction so claimed (paper-book Page Nos. 43 & 44); (iv) Show-cause notice dated 07.12.2019 issued to the assessee during assessment proceedings seeking justification of the claim of deduction under Section 36(1)(viii) of the Act of Rs.4,94,94,107/- (paper-book page No.48);
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT (v) The assessee’s reply to the show-cause notice dated 10.12.2019 explaining the entire basis for claiming the said deduction in accordance with law computing the profits of the eligible business as per provisions of the Income-tax Act and apportioning the cost in accordance with Cost Accounting Standards issued by the Council of the Institute of Cost Accountants of India (paper-book page No. 49- 53). Also pointing out in this reply that this method of computing the eligible business had been upheld by the learned CIT(A) for assessee’s case for AYs 2012-13 and 2013-14.
(vi) The learned CIT(A)’s order in the case of the assessee for AY 2013-14 accepting in principle the assessee’s method of computation of profits from eligible business for the purpose of creating special reserve under Section 36(1)(viii) of the Act (paper-book page Nos. 20 – 34).
It was also pointed out that Department’s appeal against the order passed by the learned CIT(A) approving the assessee’s basis of computing profits from its eligible business for the purpose of creation of special reserve under Section 36(1)(viii) of the Act had been dismissed by the ITAT on account of the tax effect being the limit prescribed as per the CBDT Circular No. 17 of 2019 dated 08.08.2019.
The learned Departmental Representative, on the other hand, relied on the order of the Ld. Pr. CIT.
On considering the contention of the learned Counsel for the assessee and perusing the order of the Ld. Pr. CIT, we are convinced with the contention of the learned Counsel for the assessee that the impugned order passed under Section 263 of the Act was not in accordance with law. The Shri Rajkot Dist Coop Bank Ltd Vs. PCIT basic premise with the Ld. Pr. CIT for invoking the revisionary jurisdiction was for the assessee’s calculation of profit from the eligible business for the purpose of deduction on account of creation of special reserve for the said profits was incorrect. As rightly pointed out by the learned Counsel for the assessee, the Ld. Pr. CIT never cared to confront the assessee with the anomalies in the calculation submitted by the assessee to the Assessing Officer for the same. All notices issued to the assessee during revisionary proceedings only mentioned the assessee’s alleged excess claim of deduction under Section 36(1)(viii) of the Act without caring to point out as to how the claim was excess. The show-cause notices only reproduce or bring out the calculation of the special reserve as per the Ld. Pr. CIT and they do not mention as to what was the infirmity/anomaly in the calculation made by the assessee. The order of the Ld. Pr. CIT though mentions the anomalies in the assessee’s calculation but the same was never confronted to the assessee. The Ld.DR was unable to controvert this fact. Without confronting the assessee with the anomalies if any in its calculation of eligible profits for deduction u/s 36(1)(iii) of the Act, how could the assessee be expected to justify its calculation of creation of special reserve? The order passed by the Ld. Pr. CIT is, therefore, against the principles of natural justice. Even otherwise, we have noted that the assessee had submitted detailed explanation with regard to its calculation of deduction under Section 36(1)(viii) of the Act. For the sake of clarity, we reproduce the calculation of profits of the eligible business submitted to the Assessing Officer during assessment proceedings, as placed before us at page Nos. 43 & 44 of the paper-book, as under:-
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT And, the explanation of the basis for the said allocation submitted to the Assessing Officer, placed before us at Page Nos. 50 to 53 of the paper- book, is also reproduced hereunder:-
Re: Our deduction Claim of Rs.4,94,94,107 U/s 36(1)(viii) of the I.T. Act : 2.1 The Rule of Law - We are a banking institution eligible to deduction under Section 36(1)(viii) of the I-T.Act. The sectionprovides that "in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profitsderived from eligible business computed under the"Profits and gains of business or profession" (before making any deductionunder this clause) carried to such reserve account” shall be allowed as deduction. We have during the relevant year carried Rs. 6,00,00,000 to Special Bad and Doubtful Debt Reserve. However. 20% of the profit of the eligible business as computed under the head "Profits and gains of business or profession" amounted to Rs. 4,94,94,107only, thelater being lower of the two has been claimed as deduction. Details of appropriation of profit for the F.Y.2016-17is enclosed and computation of segment-wise profit is attached at PP-14-20.
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT
We have computed the profit of the business of long term finance independently applying Section 28 to 430 of the I.T. Act meaning that income or expenditure which is not relatabte or attributable to the eligible business has to be excluded. As van be seen from the language used for deducibility of expenses in Sections 30, 31 and 32 of the KT. Act, which allow rent/rates/insurance, repairs & depreciation on assets is "assets used for the purpose of business", in Sec. 36(1)(iii) which allows interest on capital, the words used are "borrowed for the purpose of business', the words used in Section 37 which allows any expenditure “.... wholly and exclusively incurred for the purpose of the business" make it not only abundantly clear but mandatory also, that the expenditure can be deducted only if the benefit of the expense is received by the business. 2.2 Requirement of Cost apportionment standards - Essentially, to arrive at profit earned by different segments of the business, the specific Income earned by a segment should be allocated to that segment only and each segment Independently should bear a fair share of indirect costs as well as directly identifiable costs to determine the total cost of the service rendered by the segment. As per Cost accounting Standard - CAS-3 (copy enclosed PP 21-23) issued by the Council of the Institute of Cost and Works Accountants of India on "Overheads' which deals with the method of collection, allocation, apportionment and absorption of overheads", the overheads are to be apportioned to different cost centres based on following two principles: a. Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost. Apportionment of overheads based on this criterion ensures better rationality as it is guided by the relationship between cost object and cost. b. Benefits received — overheads are to be apportioned to the various cost centres in proportion to the benefits received by them. We have followed the above principle of cost and income apportionment to different segment and in absence of any contrary provisions in the Act, this cost formula, which is approved by the ICWAI has to be accepted and followed. Rationally, the interest cost should be allocated to different segment in the ratio of average funds used by the segment concerned and other operative costs should be allocated on the basis of time and efforts consumed. 2.3 Assigning weightage for cost apportionment: The associated cost of financial resources used by different segment i.e. short term loan portfolio, long term loan portfolio, treasury operation, investments activity, etc can only be measured in direct proportion of the funds used by the segments. The Segment which uses more funds should bear more interest cost Sec36(l)(iii). Further, different segment of banking operations requires different infrastructure, time and efforts. For example, short term loans requires yearly appraisal, reviews, renewals, disbursement, etc and frequent supervision and site inspection, etc whereas long term loans are appraised once in 5 years and requires no yearly renewals etc. Similarly, investment activity needs less efforts, less office space, and less time whereas treasury operation takes lots of branches, time and efforts. !n view of this, the allocation of indirect cost /should, be based on some equitable basis applying appropriate weightage determined on time and efforts consideration. Rationally, when the indirect costs are common to different income centres, the apportionment of such cost to the income centres should be based on facts and reasons as also on an equitable and scientific basis. (section 37).
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT
Based on our experience, we may state that the benefit of indirect overheads should be apportioned to various segment as shown in the Exibit-1 i.e. in the ratio of 5 : 3.5 ; 1.25 : and 0.25 to Short term , long term , treasury activities and investing activities, respectively and interest should be apportioned in the ratio of funds used by each segment. 2.4. Computation of profit from eligible business :Based on the above rationale and cost apportionment principles, segment-wise income, expense allocation and profit have been worked out in the attached sheet marked Exibit-1,). On perusal of the same, it will be seen that the profit from the "Eligible business of providing long term finance comes to Rs. 24,74,70,533 and the deduction @ 20 % of the same comes to Rs. 4,94,94,106 as detailed below 2.5.1 Gross Income of the business of long term finance 1,35,05,47,911 2.5.2 Expenses Allocated : Interest cost allocated on Funds used basis 71,78,06,338 Other Expenses - allocated on appropriate weightage basis 31,92,85,142 Total cost Allocated to the segment 103,70,91,480 2.5.3 Adjusted profit of eligible business : A. Profit of L/T finance business- as per Ch. 1V-D of I.T. Act. 31,34,56,431 B. Total assets & funds deployed in Long term Finance 1423,88,25,126 C Total Assets & funds deployed in Eligible L/T finance 1124,14,01,663 D. Profit of the eligible business - A / B x C 24,74,70,533 E. 20% of profit of the eligible business 4,94,94,106 2.5.4 Amount Carried to Spl Bad & Doubtful Reserve 6,00,00,000 2.4.5 Allowable deduction -lower of 2.5.3 (E) or 5.1.4 4,94,94,106 In light of the above submission, you will see that the method of computing "profit from eligible business" followed by us meets the requirement of law as well as the cost accounting standard and therefore, profit of eligible business computed and deduction claimed on that basisis proper. This very method of computing profit of eligible business has also been upheld by CIT(Appeals)-1, Rajkot in our own case for A.Y. 2012-13 & 2013- 14 in Appeal No.CIT-1/RJT/T.408/16-17 and CIT-1/RJT/41219/15-16, both decided on 31-07,2017. Copies of the appeal ordersare enclosedfor your easy reference. We request you to follow the ratio of the decided cases to the present assessment also. Trust that you will appreciate the above legal position in right perspective and will not disallow any part of the claim of expenditure debited to reserves and claimed as deduction from total income as also the claim u/s36(1)(viii) of the Act.
As is evident from the above, the detailed working of computation of deduction under Section 36(1)(viii) of the Act had been furnished by the assessee along with giving scientific and cogent basis for the same. The basis of allocation of all elements of income and expenses ,both direct and indirect was given ,pointing out that it was in accordance with fundamental principles of cost apportionment as laid down by Cost Accounting Standards issued by the Institute of Cost Accountants of India. The Ld. Pr.
Shri Rajkot Dist Coop Bank Ltd Vs. PCIT CIT having not pointed out any infirmity in the same to the assessee, and even the infirmities pointed out in his order u/s 263 of the Act not addressing this explanation of the assessee, there is no error in the order of the AO found by the Ld.PCIT. Even otherwise, we have noted that this assessee’s basis of calculating claim of deduction under Section 36 (1)(viii) of the Act has been consistently accepted and approved by the learned CIT(A) in preceding assessment years, i.e. AYs 2014-15 and 2012-13. The Assessing Officer, therefore, accepting the assessee’s claim of deduction in the impugned year, has taken a plausible view.
In view of the above, we hold that there was no error in the order of the Assessing Officer accepting the assessee’s claim of deduction under Section 36(1)(viii) of the Act and the order passed by the Ld. Pr. CIT under Section 263 of the Act is, therefore, set aside.
In effect, the appeal of the assessee is allowed. Order pronounced in the open Court on 27 /02/2023 at Ahmedabad.