2018 (12) TMI 828 - HC - Income Tax

Bank eligible for deduction under Section 36(1)(viii) based on good faith belief & legal advice

The court held that the respondent-assessee bank was eligible for the deduction under Section 36(1)(viii) based on a bona fide belief supported by legal ... Penalty u/s 271(1)(c) - concealment or furnishing inaccurate particulars, by making a claim for deduction under Section 36(1)(viii) - CIT-A held that the assessee had paid advance tax for the Assessment Year 2003-04, without including and computing benefit of deduction under Section 36(1) (viii) which would indicate and show that the assessee was not entitled to the benefit - Held that:- We do not agree that payment of advance tax would show and establish lack of bonafides. It is not only the assessee bank who had verily believed their entitlement to deduction under clause (viii); even officers of the Central Board of Direct Taxes were of the same opinion. Bonafides, therefore, of the assessee cannot be doubted or debated as advance tax was paid. There is no column of income tax returns whereby the assessee, in case of claim, can call upon Assessing Officer to decide and adjudicate claim for deduction. Provisions of Advance Ruling were not applicable. Therefore, to claim any benefit of any deduction, a claim is required to be made in the return with full particulars and details. Bonafides are accordingly examined with reference to statutory provision, which is required to be interpreted, and whether interpretation placed by assessee was plausible and could have been accepted. Where the explanation is not make belief and sham but genuine, the assessee would satisfy the requirement of Explanation 1 to Section 271(1)(c). This test and requirement is satisfied in the present case. Further, full and complete facts were clearly stated in the income tax returns. In our opinion, the assessee had acted bonafidely and were under a genuine belief that they were entitled to benefit of the said deduction - Decided against revenue Issues Involved:1. Whether the respondent-assessee bank was eligible for deduction under Section 36(1)(viii) of the Income Tax Act, 1961.2. Whether the penalty under Section 271(1)(c) of the Income Tax Act, 1961 for concealment of income was justified.Issue-wise Detailed Analysis:1. Eligibility for Deduction under Section 36(1)(viii):The respondent-assessee bank, wholly owned by the Reserve Bank of India, claimed deductions under Section 36(1)(viii) of the Income Tax Act for the Assessment Years 2003-04 to 2009-10. The Revenue contended that the bank was not engaged in providing long-term finance for the construction or purchase of houses in India for residential purposes, which was a prerequisite for the deduction. The Tribunal, however, deleted the penalty imposed on the bank for concealment of income under Section 271(1)(c).The court examined the statutory provisions of Section 36(1)(viii) as applicable during the relevant assessment years, which allowed deductions for financial corporations engaged in providing long-term finance for industrial, agricultural development, or infrastructure facilities. The definition of 'long-term finance' was loans or advances repayable over a period of not less than five years. The court noted that the respondent-assessee bank was engaged in promoting and regulating housing finance institutions and providing refinance support for housing development, though it did not directly grant housing loans to individuals.The court acknowledged that the respondent-assessee bank had sought clarification from the Central Board of Direct Taxes (CBDT) and had received a legal opinion confirming its eligibility for the deduction. The bank had created a special reserve and disclosed the deduction claim in its income tax returns, indicating a bona fide belief in its eligibility.2. Justification of Penalty under Section 271(1)(c):The Revenue argued that the penalty should be imposed as the bank concealed income and furnished inaccurate particulars. The court agreed that mens rea or guilty mind is not required to impose penalty under Section 271(1)(c). However, Explanation 1 to the section requires that the assessee must prove that the explanation offered was bona fide and that all material facts were disclosed.The court found that the respondent-assessee bank had acted in good faith by seeking clarification from the CBDT and obtaining a legal opinion. The bank had disclosed full and correct facts in its returns, and the claim for deduction was based on a genuine belief supported by legal advice. The court emphasized that bona fide requires reasonable care and attention, and the bank's conduct met this standard.The court also noted that the amendment to Section 36(1)(viii) by the Finance (No. 2) Act, 2009, effective from April 1, 2010, was enacted to specifically include corporations engaged in refinancing long-term finance for housing, indicating that the respondent-assessee bank's interpretation was plausible.The court concluded that the respondent-assessee bank's claim for deduction was bona fide and that the penalty under Section 271(1)(c) was not justified. The appeals were dismissed with no order as to costs, affirming the Tribunal's decision to delete the penalty.Conclusion:The court held that the respondent-assessee bank was eligible for the deduction under Section 36(1)(viii) based on a bona fide belief supported by legal advice and full disclosure in its returns. The penalty under Section 271(1)(c) was not justified as the bank's conduct was found to be in good faith. The appeals by the Revenue were dismissed.