ACIT LARGE TAX PAYER UNIT, MUMBAI vs. UNION BANK OF INDIA, MUMBAI

The assessee is in appeal in respect of following issues: (a) Disallowance made u/s 14A of the Act, (b) Restricting the deduction claimed u/s 36(1)(viii).

The revenue is in appeal in respect of following issues: (a) Bad debts written off; (b) Loss on revaluation of investment; c) Deduction claimed u/s 80LA; d) Deduction claimed u/s 36(1)(viii) of the Act; e) Deduction claimed u/s 36(1)(viia) of the

The assessee is a Public Sector Bank and the assessment for the year under consideration was completed by the AO by making various additions. In the appeal filed by the assessee before the ld. CIT(A), the First Appellate Authority granted partial relief to the assessee. Aggrieved by the order passed by the ld.CIT(A), both the parties are in appeal before us in respect of issues decided against each of them.

We shall first take up the appeal filed by the assessee. The first issue relates to disallowance made under section 14A of the Act. During the year under consideration, the assessee received income from tax free bonds to the tune of Rs.47.17 crores and dividend income of Rs.6.92 crores both aggregating to Rs.54.09 crores. The assessee claimed the same as exempt u/s 10 of the Act. However, the assessee did not 3 4 6 7 8 / Mu m/ 2 0 1 3 a n d 4 8 4 2 / Mu m/ 2 0 1 3 disallow any expenditure relating to the above said exempted income as required u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. The assessee contended before the AO that no part of interest income is required to be disallowed since investments were held as trade stock and further it had earned net interest income in excess of interest expenditure. The AO, however, did not accept the contentions of the assessee and accordingly, computed the disallowance in terms of Rule 8D of the Rules. Accordingly, the AO disallowed a sum of Rs.23.14 crores u/s 14A of the Act. The ld. CIT(A) also confirmed the same.

The ld. Counsel appearing for the assessee submitted that the assessee has held various investments as “stock-in-trade” only and hence the profit or loss arising on their sale was assessed as business income only. He further submitted that exempted income referred above was incidental income earned during the course of carrying on the business. The Ld Counsel further submitted that the question of disallowing expenditure u/s 14A of the Act shall arise only if the securities are held as investments. He submitted that the assessee does not hold any investments and hence the question of making disallowance u/s 14A of the Act does not arise. In support of his submissions, the ld A.R placed his reliance on the following case law: a) DCIT V/s M/s India Advantage Securities Ltd –ITA No.6711/Mum/2011 order dated-14.09.2012 b) DCIT V/s Gulshan Investment Co.Ltd -ITA No.666/Kol/2012 dated 11.3.2013 c) CCI Ltd Vs. JCIT (206 Taxman 563)(Kar) The Ld A.R submitted that the decision rendered by the Tribunal in the case of India Advantage Securities Ltd (supra) has since been approved by the Hon‟ble Bombay High Court.

The ld. AR further submitted that the assessee is having sufficient amount of interest free funds in excess of investments and hence there is 4 4 6 7 8 / Mu m/ 2 0 1 3 a n d 4 8 4 2 / Mu m/ 2 0 1 3 no question of making any disallowance out of interest expenditure, in view of the decision rendered by Hon‟ble Bombay High Court in the case of CIT V/s HDFC BANK LTD. [2014] 366 ITR 505 (Bom). The ld. AR further submitted that the securities, even though shown as „Investments‟ in the books of account, yet profit or loss arising on their sale was assessed under the head Income from business only for income tax purposes. He further submitted that all the securities are valued at cost or market value whichever is less at the year end and the said valuation methodology also fortifies the fact that the investments are held as trade stock only.

The Ld D.R, on the contrary, submitted that the provisions of Rule 8D shall be applicable from AY 2008-09 as held by the Hon‟ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd (328 ITR 81). He further submitted that the assessee has shown the value of securities as “Investments” only in the Balance Sheet and hence the assessee cannot take a different stand for the purposes of sec. 14A of the Act. He further submitted that the disallowance is required to be made under Rule 8D(2)(iii) towards administrative expenses, even if the assessee proves that it has got sufficient interest free funds. He further submitted that the claim of the assessee that it was having sufficient interest free funds and also the claim that the securities are held as stock in trade have not been examined by the AO/CIT(A).

We have heard rival contentions and perused the record. The assessment year under consideration being AY 2008-09, the provisions of Rule 8D are applicable as per the decision of Hon‟ble Bombay High Court rendered in the case of Godre Boyce Mfg. Co. Ltd (supra). However, a careful perusal of the provisions of sec. 14A(2) would show that the assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of income as per rule

In the instant case, the assessee has earned exempted income of Rs.54.09 crores and it has claimed that it did not incur any expenditure in order to earn the above said exempted income. The assessee has raised many contentions, viz., the interest free funds available with the assessee are more than the investments; the securities were held as stock in trade and it has earned net interest income warranting no disallowance of interest expenditure etc. However, we notice that neither the AO nor the Ld CIT(A) did consider the above said contentions of the assessee, more particularly with referencce to the accounts of the assessee, which is a mandatory condition prescribed u/s 14A(2) of the Act. Thus, we notice that the AO has proceeded to compute the disallowance as per rule 8D of IT Rules without satisfying himself that the claim of the assessee was not correct by having regard to the accounts of the assessee. Hence, the disallowance computed by the AO and that confirmed by Ld CIT(A) was not in accordance with the mandate of law.

In view of the above, we are of the view that this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh. The assessee is free to urge all the contentions, which it may deem it necessary before the AO in respect of this issue. After affording necessary opportunity of being heard, the AO may take appropriate decision in accordance with the law.

The next issue urged by the assessee relates to the deduction claimed u/s 36(1)(viii) of the Act. Section 36(1)(viii) provides for deduction of any special reserve created and maintained by a bank to the extent of 20% of the profits derived from eligible business computed

The assessee worked out the deduction u/s 36(1)(viii) as under:-

The Ld CIT(A), however, worked out the deduction in a different manner. According to Ld CIT(A), the assessee did not furnish the details of working of average advances under various sub heads viz., agriculture, industry, infrastructure and housing. He also took the view that the assessee was not forthright in furnishing correct details, since there is huge difference between the term loans reported in the Balance sheet and the average advances worked out by the assessee. Accordingly, the Ld CIT(A) took the view that the assessee has worked out the figures to suit its requirements. The AO noticed that the total interest earned by the assessee during the year gave an yield of 9% of the aggregate advances outstanding as at the year end. Accordingly, he worked out the interest from eligible business at 9% of the term loans reported in the Balance Sheet. In the similar manner, the Ld CIT(A) worked out the percentage of expenses on the total advances. After setting off the expenses estimated by him against the interest income estimated by him, the Ld CIT(A) arrived at the profit from eligible business at 698.95 crores and accordingly worked out the deduction u/s 36(1)(viii) at Rs.139.79 crores. Both the parties are aggrieved by the said decision of Ld CIT(A).

We have heard the parties and perused the record. We are unable to understand as to why the assessee worked out the interest income from eligible business on average basis. When the assessee is able to identify the long term finance given to specified purposes, it should not be difficult to cull out the actual interest income earned from such advances. Since the assessee had proceeded to ascertain the interest income on average basis and since the details furnished by the assessee was not convincing to the tax authorities, they were constrained to make their own estimates

We shall now take up the appeal filed by the revenue. The first issue relates to the bad debts written off. The assessee claimed deduction of bad debts of Rs.330.68 crores in respect of non-rural debts. The bad debts relating to rural debts was set off against the provision made u/s 36(1)(viia) of the Act. The AO took the view that the provision created u/s 9 4 6 7 8 / Mu m/ 2 0 1 3 a n d 4 8 4 2 / Mu m/ 2 0 1 3 36(1)(viia) covers both rural and non-rural advances. Since the deduction of Rs.330.68 crores claimed by the assessee was less than the credit balance available in the provision account (created u/s 36(1)(viia) of the Act), the AO disallowed the bad debts claim relating to non-rural advances. The Ld CIT(A) noticed that identical disallowance made by the AO in AY 2007-08 has since been allowed by the ITAT. Accordingly he deleted this disallowance.

We notice that the Tribunal has allowed identical claim in the assessee‟s own case in AY 2007-08, vide its order dated 18.1.2003 passed in & 6349/Mum/2010. We notice that the Tribunal has followed the decision rendered by the Hon‟ble Supreme Court in the case of Catholic Syrian Bank (343 ITR 270) and also in the case of CIT Vs. Karnataka Bank Ltd (2012)(349 ITR 705). We also notice that the new Explanation 2, which covers both rural and non-rural advances, has been inserted under sec. 36(1)(vii) of the Act by the Finance Act, 2013 w.e.f. 1.4.2014 only and hence it cannot have retrospective effect, since it affects substantive rights of the assessees. Accordingly, we are of the view that there is no reason to interfere with the decision of Ld CIT(A) on this issue.

The next issue relates to the claim of loss on revaluation of investment. Identical issue was considered by the Tribunal in the assessee‟s own case in AY 2007-08 (supra) and it has been decided in favour of the assessee by following the decision rendered by the Hon‟ble Supreme Court in the case of UCO Bank Vs. CIT (240 ITR 355) and also the decision of Hon‟ble Bombay High Court rendered in the case of CIT Vs. Bank of Baroda (262 ITR 334). Accordingly, we do not find any reason to interfere with the decision of Ld CIT(A) on this issue, since he has also followed the decision of Hon‟ble Supreme Court rendered in the case of UCO Bank (supra) in deciding this issue in favour of the assessee.

The next issue relates to the deduction claimed u/s 36(1)(viii) of the Act. This issue has been restored back to the file of the AO in the earlier paragraphs while considering the appeal filed by the assessee.

The last issue relates to the deduction claimed u/s 36(1)(viia) of the Act. The AO allowed the deduction under this section to the extent of the amount actually provided for in the books of account. Section 36(1)(viia) provides a cap for allowing deduction u/s 36(1)(viia) by an amount not exceeding 7.5% of the total income (computed before making any deduction under this clause and chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of bank. It appears that the assessee made a provision of 665.21 crores in the books of account towards “Provision for bad and doubtful debts”. However, the maximum amount allowable u/s 36(1)(viia) appears to have worked out more. Accordingly, it appears that the assessee claimed the maximum amount allowable u/s 36(1)(viia) of the Act, even though it has provided for a lesser amount in its books of account. The AO restricted the deduction u/s 36(1)(viia) to the extent of 11 4 6 7 8 / Mu m/ 2 0 1 3 a n d 4 8 4 2 / Mu m/ 2 0 1 3 the amount actually provided for in the books of account. The Ld CIT(A) allowed the claim of the assessee by following the decision rendered by the Tribunal in the assessee‟s own case for AY 2007-08 (supra), wherein the Tribunal has taken the view that the deduction u/s 36(1)(viia) is allowable to the extent provided in that section irrespective of the quantum actually provided for.

At the time of hearing, it was brought to our notice that an identical issue was considered by another co-ordinate bench of Tribunal in the assessee‟s own case in relating to AY 2005-06 in its order dated 31.7.2015 and the Tribunal has decided this issue against the assessee by following the decision rendered by the Hon‟ble Punjab & Haryana High Court in the case of State Bank of Patiala (272 ITR 54).

Since the decision rendered by the Tribunal in AY 2005-06 is a later decision and since the Tribunal has followed the decision rendered by Hon‟ble Punjab and Haryana High Court, we are inclined to follow the same. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes and the appeal of the revenue is treated as partly allowed for statistical purposes.