2020 (1) TMI 1116 - HC - Income Tax

Court rules Section 115JB doesn't apply to Banking Companies, allows amortization deduction for 'held to maturity' investments.

The court held that Section 115JB of the Income Tax Act does not apply to Banking Companies. It also upheld the allowance of the deduction for ... Applicability of minimum alternate tax under Section 115JB - Preparation of profit and loss account in accordance with Schedule VI vis-a -vis regulatory Acts - Legal fiction in proviso to Section 115JB(2) - Incompatibility of Companies Act requirements with Banking Regulation Act accounting regime - Allowability of amortisation of investments held to maturity under income computation - Instruction No.17/2008 - CBIT/RBI guidanceApplicability of minimum alternate tax under Section 115JB - Preparation of profit and loss account in accordance with Schedule VI vis-a -vis regulatory Acts - Legal fiction in proviso to Section 115JB(2) - Incompatibility of Companies Act requirements with Banking Regulation Act accounting regime - Section 115JB(2) of the Income Tax Act does not apply to banking companies. - HELD THAT: - Section 115JB requires companies to prepare profit and loss accounts in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 and to follow the proviso relating to accounts laid before the annual general meeting under Section 210. Banking companies prepare accounts under the Banking Regulation Act, 1949 and are not obliged to convene the annual general meeting or place accounts under Section 210; consequently they cannot practicably comply with both regimes. The machinery and computation provisions of Section 115JB(2) would be unworkable for banking companies and where computation provisions cannot apply the charging provision was not intended to cover such cases. The proviso does not operate as a legal fiction enabling both sets of requirements to be simultaneously fulfilled. The legislative amendment with effect from 01.04.2013 (and the explanatory memorandum) recognising regulatory Acts for banks confirms that Section 115JB(2) was not intended to apply to banking companies. For these reasons the provisions of Section 115JB(2) are held not to apply to banking companies. [Paras 7, 8, 9, 10, 11]Provisions of Section 115JB(2) do not apply to banking companies; appeal allowed on this point.Allowability of amortisation of investments held to maturity under income computation - Instruction No.17/2008 - CBIT/RBI guidance - Deduction in respect of amortisation/write off of investments held to maturity (done in terms of RBI/CBIT guidance) is allowable to the banking assessee. - HELD THAT: - The claim for amortisation/write off of investments held to maturity maintained in accordance with Reserve Bank of India directions is governed by Instruction No.17/2008 (clause (vii)) issued by the Central Board of Direct Taxes/RBI. Earlier decisions and a division bench ruling of this High Court have held that where accounts are maintained in terms of RBI regulations the corresponding deductions cannot be denied merely because of presentation in the balance sheet. Applying Instruction No.17/2008 and the precedents considered, the tribunal was correct in allowing the deduction for amortisation/write off of the investment held to maturity. [Paras 12]Second substantial question answered in favour of the assessee; deduction allowed.Final Conclusion: Common substantial questions are answered in favour of the assessee: Section 115JB(2) does not apply to banking companies, and the claim for amortisation/write off of investments held to maturity in accordance with RBI/CBIT guidance is allowable. Appeals disposed of accordingly. Issues Involved:1. Applicability of Section 115JB of the Income Tax Act, 1961 to Banking Companies.2. Allowability of amortization of investment 'held to maturity' under Section 37(1) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Applicability of Section 115JB of the Income Tax Act, 1961 to Banking Companies:In this batch of appeals, the primary substantial question of law was whether the provisions of Section 115JB of the Income Tax Act, 1961 apply to Banking Companies. The appeals pertained to assessment years 2002-2003, 2005-2006, 2006-2007, and 2009-2010. The Tribunal had previously ruled that Section 115JB does not apply to Banking Companies, a decision challenged in these appeals.The court analyzed Section 115JB, which mandates companies to prepare their profit and loss account as per Parts II and III of Schedule VI to the Companies Act, 1956. The court noted that Banking Companies prepare their accounts according to the Banking Regulation Act, 1949, and are not required to convene an annual general meeting or place their profit and loss account in such a meeting. This requirement is impossible for Banking Companies, which do not have shareholders and thus cannot hold a general meeting as contemplated under Section 166 of the Companies Act, 1956.The court further observed that the machinery provisions under Sub-Section (2) of Section 115JB would be unworkable for Banking Companies. The Companies Act, 1956, excludes insurance, banking companies, and companies engaged in electricity generation or supply from Section 211(1) and consequently from Section 115JB of the Act. The court also referenced the amendment to Section 115JB effective from 01.04.2013, which aligned the Income Tax Act with the Companies Act, allowing such companies to prepare profit and loss accounts per their Regulatory Acts.The court agreed with the view of the Bombay High Court in 'Commissioner of Income Tax-LTU vs. Union Bank of India' and concluded that the provisions of Section 115JB(2) do not apply to Banking Companies.2. Allowability of Amortization of Investment 'Held to Maturity' under Section 37(1) of the Income Tax Act, 1961:In ITA No.18/2014, an additional substantial question of law was whether the Tribunal erred in allowing the claim of the assessee on the issue of amortization of investment 'held to maturity.' The Tribunal had allowed the deduction based on Reserve Bank of India guidelines, which was contested by the revenue.The court noted that this issue was covered by instruction No.17/2008 dated 26.11.2008 issued by the Central Board of Direct Taxes, specifically Clause (vii). The decision in 'Southern Technologies Ltd vs. Joint Commissioner of Income Tax' was considered by a division bench of this court in 'Karnataka Bank Ltd. vs. Assistant Commissioner of Income Tax,' which held that accounts maintained per Reserve Bank of India Regulations entitle the assessee to deductions. The authorities cannot deny these deductions under the pretext that they were shown as investments in the balance sheet.Accordingly, the court ruled in favor of the assessee, affirming that the Tribunal did not err in allowing the claim for amortization of investment 'held to maturity.'Final Judgment:The court concluded that the provisions of Section 115JB(2) of the Income Tax Act do not apply to Banking Companies and upheld the Tribunal's decision allowing the deduction for amortization of investment 'held to maturity.' The appeals were disposed of in favor of the assessee.