2022 (1) TMI 124 - AT - Income Tax

Banking company wins partial relief on bad debts and section 14A disallowance but loses on ATM charges under section 40(a)(ia)

M/s. Canara Bank (Erstwhile Syndicate Bank) Versus Deputy Commissioner of Income-tax Cirle-1 Udupi And (Vice-Versa)

ITAT Bangalore ruled on multiple issues for a banking company. The tribunal confirmed CIT(A)'s decision allowing deduction under section 36(1)(viia) only ... Disallowance of deduction of Provision for bad and doubtful debts claimed u/s 36(1)(viia) - HELD THAT:- Provisions of sec.36(1)(viia) does not provide that the shortfall amount can be created as provision in any of the subsequent years. The computation of total income is required to be made for every year and it is determined on the basis of books of account maintained by the assessee for that year. Hence, in our view, the provision made in subsequent year cannot be considered for the purpose of allowing deduction u/s 36(1)(viia) of the Act for the year under consideration - we are of the view that the Ld CIT(A) was justified in directing the AO to allow deduction u/s 36(1)(viia) of the Act to the extent of provision created and debited in the Profit and Loss account. Accordingly, we confirm the order passed by Ld CIT(A) on this issue. Disallowance of bad debts claimed u/s 36(1)(vii) - AO noticed that the above said amount was included in “Provisions and Contingencies” account - HELD THAT:- We hold that the view expressed by Ld CIT(A) is not legally correct. Accordingly, we set aside the order passed by Ld CIT(A) with regard to his alternative decision, i.e., the view that the proviso to sec. 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also. Accordingly, we direct the AO to delete the disallowance Applicability of provisions of sec. 115JB - case of the assessee is that clause (b) of sec.115JB(2) is made applicable to banking companies, since banking company is included in sec. 211 of the Companies Act - HELD THAT:- We notice that the provisions of sec.51 of the Act specifically states that only certain provisions of BR Act are applicable to “Corresponding new bank”. We noticed earlier that the Ld CIT(A) has proceeded to decide this issue by observing that all provisions of BR Act are applicable to the Company. We notice that the Ld CIT(A) did not consider the effect of provisions of sec.51 of the BR Act upon the assessee. Hence the decision taken by him under the impression that all the provisions of BR Act are applicable to the assessee is faulted one - CIT(A) should considered the effect of provisions of sec. 51 of BR Act and accordingly he should have appreciated the contentions of the assessee on the definition of “banking company”, provisions of sec.211(2) of the Companies Act etc. Since these aspects go to the root of the issue, in our view, this issue needs to be examined at the end of Ld CIT(A) afresh. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to his file for examining it afresh. Whether Provision for funded interest term loan is liable to be added to net profit u/s 115JB? - HELD THAT:- Since the issue regarding applicability or otherwise of sec.115JB is restored to the file of Ld CIT(A), this issue is also restored to the file of Ld CIT(A) for examining it afresh. Disallowance u/s 14A - HELD THAT:- We are of the view that from the discussion made by the assessing officer in the assessment order, it can be discerned that he was not satisfied with the claim of the assessee. Accordingly he has proceeded to compute the disallowance as per Rule 8D of I T Rules. Accordingly, we are of the view that it cannot be said that the assessing officer has not recorded dissatisfaction. In this view of the matter, we are unable to sustain the decision rendered by Ld CIT(A) on this issue. Accordingly, we reverse the order passed by Ld CIT(A) on this issue. Since he has not decided the issue on merits, we restore this issue to his file to decide the same in accordance with law. Before us, the Ld A.R placed his reliance on the decisions rendered by Hon’ble Supreme Court to contend that no disallowance u/s 14A is called for in the case of the assessee. The Ld CIT(A) should consider those decision and should take appropriate decision in accordance with law. Disallowance u/s 40(a)(ia) - ATM usage charges to M/s National Payment Corporation of India (NPCI) without deduction of tax at source as required u/s 194C or 194J or 194H - HELD THAT:- As held that the TDS is not required to be deducted treating as technical service u/s 194J of the Act - CIT(A) also noticed that the Bangalore bench of Tribunal has held in the case of Corporation Bank[2015 (3) TMI 1360 - ITAT BANGALORE] that similar kind of payment made cannot be considered as Commission or Brokerage warranting deduction of tax at source u/s 194H of the Act. The Ld CIT(A) held that the above said decision shall apply to the facts of the present case also. He further held that the AO did not specify the section under which the TDS is liable to be deducted by the assessee. Accordingly he deleted the disallowance. We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has rendered his decision following the ratio of decision rendered by Hon’ble Supreme Court in the case of Kotak Securities Ltd [2016 (3) TMI 1026 - SUPREME COURT] and also the decision rendered by coordinate bench in the case of Corporation Bank [2015 (3) TMI 1360 - ITAT BANGALORE] Hence we do not find any reason to interfere with his order passed on this issue. Whether the Provision for bad and doubtful debts is not liable to be added to net profit u/s 115JB? - Since the issue of applicability of sec.115JB to the assessee is restored to the file of Ld CIT(A) while considering the appeal of the assessee, we restore this issue also to the file of Ld CIT(A) The legal questions considered in this judgment arise from cross appeals between a public sector bank (hereinafter 'the assessee') and the revenue authority concerning the assessment year 2013-14. The core issues addressed by the Appellate Tribunal (AT) include:(a) Whether the deduction claimed by the assessee for Provision for Bad and Doubtful Debts (PBDD) under section 36(1)(viia) of the Income-tax Act, 1961 (the Act) was correctly disallowed in part by the Assessing Officer (AO).(b) Whether the deduction claimed for bad debts written off under section 36(1)(vii) of the Act was rightly disallowed by the AO.(c) The applicability of provisions of section 115JB (Minimum Alternate Tax or MAT) of the Act to the assessee, particularly whether the assessee qualifies as a 'banking company' under the relevant laws.(d) Whether the provision for funded interest term loan should be added back to net profit for the purposes of computation under section 115JB.(e) The validity of disallowance under section 14A of the Act relating to expenditure incurred to earn exempt income.(f) The correctness of disallowance under section 40(a)(ia) of the Act for failure to deduct tax at source (TDS) on payments made by the assessee.Issue-wise detailed analysis follows:1. Deduction for Provision for Bad and Doubtful Debts (PBDD) under section 36(1)(viia)Legal framework and precedents: Section 36(1)(viia) allows deduction for provisions made for bad and doubtful debts relating to rural advances, subject to prescribed limits. The provision is an incentive provision and must be interpreted accordingly. The Tribunal had earlier examined similar issues in the assessee's own cases and in the case of ING Vysya Bank Ltd, holding that the deduction is allowable to the extent the provision is actually created and debited to the Profit and Loss (P&L) account, without bifurcation into rural and non-rural debts.Court's interpretation and reasoning: The AO restricted the deduction to the provision for rural debts only (Rs. 168.02 crores), disallowing the balance claimed by the assessee. The CIT(A) relied on the Tribunal's earlier decisions and held that the deduction must be allowed to the extent the provision is debited to the P&L account, irrespective of rural or non-rural classification. The AT affirmed this view, rejecting the assessee's contention that shortfall amounts debited in subsequent years could be claimed in the current year. The Tribunal emphasized that income computation is annual and based on books maintained for that year; hence provisions created in subsequent years cannot be considered.Key findings and application: The deduction under section 36(1)(viia) is limited to the amount actually debited to the P&L account during the relevant year, subject to statutory limits. The AO's restriction to rural debts only was incorrect.Conclusion: The order of the CIT(A) allowing deduction to the extent of provision created and debited to the P&L account was confirmed.2. Deduction for Bad Debts Written Off under section 36(1)(vii)Legal framework and precedents: Section 36(1)(vii) permits deduction for bad debts actually written off in the accounts. Mere provision or creation of contingency reserves does not qualify. The proviso to section 36(1)(vii) limits the deduction for bad debts relating to rural advances to the excess over the provision allowed under section 36(1)(viia). The Supreme Court in Vijaya Bank and Catholic Syrian Bank cases clarified that provisions under clauses (viia) and (vii) are distinct and independent, with proviso applying only to rural advances to prevent double deduction.Court's interpretation and reasoning: The AO disallowed Rs. 1258.47 crores relating to non-rural advances on the ground that these were only provisions and not actual write-offs. The CIT(A) accepted the assessee's explanation of the accounting treatment, noting that write-offs were effected by debiting the Provision for Bad and Doubtful Debts account and crediting the Prudential Write Off account, which netted off advances in the balance sheet. The CIT(A) held that the write-off was reflected in the books and thus deductible. The revenue did not appeal this finding, rendering it final.However, the CIT(A) also held that the proviso to section 36(1)(vii) required adjustment of bad debts written off against the provision allowed under section 36(1)(viia) for both rural and non-rural advances, disallowing the non-rural bad debts deduction. The AT, relying on a coordinate bench decision in State Bank of Hyderabad, rejected this view, holding that the proviso applies only to rural advances. The proviso's purpose is to prevent double deduction only for rural advances, and non-rural bad debts written off are fully deductible under section 36(1)(vii).Key evidence and findings: The accounting records showed actual write-off entries. The Supreme Court's authoritative interpretation established the distinction between provisions and actual write-offs and the scope of the proviso.Application of law to facts: The AO and CIT(A) erred in extending the proviso's application to non-rural advances. The assessee is entitled to claim deduction for non-rural bad debts actually written off without adjustment against provisions.Conclusion: The disallowance of Rs. 1258.47 crores was deleted, and the AO was directed to allow the deduction.3. Applicability of section 115JB (MAT) to the assesseeLegal framework and precedents: Section 115JB applies to 'every company' and includes banking companies. The Banking Regulation Act (BR Act) defines 'banking company' as a company transacting banking business, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (BCA Act) deems 'corresponding new banks' to be companies for income tax purposes. The Finance Act, 2012 clarified MAT's applicability to banking companies.Court's interpretation and reasoning: The AO and CIT(A) held that the assessee, a corresponding new bank, is deemed a company under section 11 of the BCA Act and hence liable to MAT under section 115JB. The assessee contended it is not a 'banking company' as defined under the BR Act and thus exempt. The CIT(A) did not consider section 51 of the BR Act, which limits the applicability of certain BR Act provisions to corresponding new banks, and did not fully examine the interplay of definitions under the Companies Act and BR Act.Key findings: The Tribunal found the CIT(A)'s order incomplete and set aside the decision, restoring the issue to the CIT(A) for fresh consideration, including the effect of section 51 of the BR Act and the definitions under relevant statutes.Application of law to facts: The issue involves complex statutory interpretation of overlapping definitions and deeming provisions. The Tribunal emphasized the need for detailed examination of these provisions before a final conclusion.Conclusion: The matter was remanded for fresh adjudication.4. Addition of Provision for Funded Interest Term Loan to Net Profit under section 115JBThis issue was linked to the applicability of section 115JB and was also remanded to the CIT(A) for fresh consideration along with the MAT applicability issue.5. Disallowance under section 14A of the ActLegal framework and precedents: Section 14A read with Rule 8D of the Income-tax Rules allows disallowance of expenditure incurred to earn exempt income. However, disallowance can be made only if the AO records dissatisfaction with the assessee's claim of no expenditure or inadequate expenditure.Court's interpretation and reasoning: The AO applied Rule 8D and disallowed Rs. 59.56 crores, rejecting the assessee's contention that no disallowance was warranted as interest-free funds exceeded tax-free investments. The CIT(A) deleted the disallowance on the ground that the AO had not recorded dissatisfaction with the assessee's voluntary disallowance of Rs. 9,24,123/-.The Tribunal observed conflicting facts regarding whether the assessee had voluntarily disallowed any amount and found that the AO had indeed recorded dissatisfaction and proceeded to compute disallowance. Therefore, the CIT(A)'s deletion was unsustainable.Application of law to facts: The issue was restored to the CIT(A) for fresh decision on merits, considering relevant Supreme Court precedents cited by the assessee.Conclusion: The deletion of disallowance under section 14A was reversed, and the issue remanded.6. Disallowance under section 40(a)(ia) of the ActLegal framework and precedents: Section 40(a)(ia) mandates disallowance of expenditure where tax is not deducted at source as required. The nature of payment and the correct TDS provisions are relevant.Court's interpretation and reasoning: The AO disallowed Rs. 67.94 crores paid as ATM usage charges to National Payment Corporation of India (NPCI) for failure to deduct TDS. The CIT(A) relied on the Supreme Court decision in Kotak Securities Ltd and a coordinate bench decision in Corporation Bank, which held that such payments are for facilities and not commission or brokerage, and hence not liable to TDS under sections 194C, 194J, or 194H.Application of law to facts: The CIT(A)'s reasoning followed binding precedents and was upheld by the Tribunal.Conclusion: The disallowance under section 40(a)(ia) was rightly deleted.7. Relief granted in computing book profit under section 115JBSince the applicability of section 115JB itself was remanded, the related relief granted was also restored to the CIT(A) for fresh consideration.Significant holdings include:'The actual provision made in the books by the assessee on account of PBDD (irrespective of whether it is rural or non-rural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (non-rural) advances does not arise for consideration.''Section 36(1)(viia) applies only to rural advances. The proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there was no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies.''The write off of bad debts at Head Office is carried out by debiting the Provision for bad & doubtful debts account and crediting the Prudential Write Off account. Though these accounts written off technically continue to appear in the books of the bank's branches, the same are reduced from the total advances of the Bank while preparing the Balance Sheet for the Bank as a whole. The condition that the debt should be written off in the accounts of the assessee is fulfilled.''Section 115JB(1) is the charging section and it overrides all other provisions of the Act. It provides that the provisions of this section are applicable in case of 'every company'. It does not carve out any exception.''The AO and CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). The proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia).'In conclusion, the Tribunal confirmed the partial allowance of deduction for PBDD under section 36(1)(viia) limited to the amount debited to the P&L account, deleted the disallowance of bad debts written off under section 36(1)(vii) relating to non-rural advances, remanded the issue of applicability of section 115JB and related addition for funded interest term loan for fresh consideration, reversed the deletion of disallowance under section 14A and restored it for fresh decision, and upheld the deletion of disallowance under section 40(a)(ia). The appeals were accordingly partly allowed and partly restored for further adjudication consistent with the above analysis.