Public sector bank wins on Section 115JB applicability, CSR deduction, and RBI penalty treatment

ITAT Bangalore ruled in favor of the assessee bank on multiple issues. Section 115JB was held inapplicable as the public sector bank, established under Banking Companies Act 1970, is not a company within the meaning of the Act. CSR expenditure was allowed as deductible for AY 2016-17 and 2017-18, being voluntary expenses for business purposes rather than statutory obligations. RBI penalties for currency operations deficiencies were permitted as deductions under section 37. The matter regarding sundry assets written off was remanded to AO for fresh consideration with directions to verify the assessee's claims and allow deduction if submissions prove correct.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether the provisions of Section 115JB of the Income Tax Act (MAT provisions) are applicable to the assessee bank, which is a nationalized public sector bank and not a company registered under the Companies Act.
• Whether various additions and disallowances made to the book profits under Section 115JB, including bad debts, sundry assets written off, provisions for NPAs, diminution in value of investments, and others, are justified.
• The allowability of Corporate Social Responsibility (CSR) expenditure incurred by the bank under Section 37 of the Act, particularly in light of amendments and statutory obligations under the Companies Act, 2013.
• The allowability of penalties imposed by the Reserve Bank of India (RBI) as deductible expenditure under Section 37 of the Act.
• The allowability of sundry assets written off by the bank as deductible expenditure.

2. ISSUE-WISE DETAILED ANALYSIS

Applicability of Section 115JB to the Assessee Bank

Relevant Legal Framework and Precedents: Section 115JB imposes Minimum Alternate Tax (MAT) on companies, computed on book profits. The Finance Act, 2012 inserted clause (b) to sub-section (2) of Section 115JB, purportedly extending its applicability to certain banks. The assessee bank was constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and is a public sector bank, not a company under the Companies Act.

The Special Bench of the Mumbai Tribunal in Union Bank of India vs. DCIT, LTU (2) examined whether Section 115JB applies to banks constituted as 'corresponding new banks' under the 1970 Act. The Bench held that such banks are separate and distinct from banking companies and thus not liable under Section 115JB.

Court's Interpretation and Reasoning: The Tribunal relied on the Special Bench's reasoning that the Government of India and the Income Tax Act itself recognize these banks as distinct from companies. Therefore, the MAT provisions under Section 115JB do not apply to the assessee bank.

Application of Law to Facts: The assessee being a public sector bank constituted under a special statute and not a company, Section 115JB is not applicable for the assessment years in question.

Conclusion: The Tribunal set aside the orders of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) insofar as the applicability of Section 115JB is concerned, holding that the bank is not liable under MAT provisions.

Additions to Book Profits under Section 115JB for AY 2014-15

Relevant Legal Framework and Precedents: Explanation 1 to Section 115JB provides for certain additions to book profits, including provisions and write-offs.

Court's Interpretation and Reasoning: Since Section 115JB was held not applicable to the bank, the additions made to book profits under this section, including bad debts written off, sundry assets written off, provisions for NPAs, and diminution in value of investments, were not justified.

Application of Law to Facts: The AO and CIT(A) had made these additions on the premise that the bank is a company liable to MAT, which was rejected by the Tribunal following the Special Bench ruling.

Conclusion: The Tribunal set aside these additions and directed that the matter be reconsidered accordingly.

Disallowance of CSR Expenditure for AYs 2016-17 and 2017-18

Relevant Legal Framework and Precedents: Section 37 disallows expenditure not incurred wholly and exclusively for business purposes. Explanation 2 to Section 37(1), effective from AY 2015-16, disallows CSR expenditure incurred under statutory obligation of Section 135 of the Companies Act, 2013.

The Hon'ble Gujarat High Court in PCIT vs. Gujarat Narmada Valley Fertilizers and Chemicals Ltd. clarified that CSR expenditure incurred voluntarily, not under statutory obligation, is allowable if wholly and exclusively for business purposes.

The Tribunal's Coordinate Benches have consistently followed this principle, allowing voluntary CSR expenditure as business expenditure.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee bank is not governed by Section 135 of the Companies Act, 2013, and the CSR expenditure was incurred voluntarily based on Government guidelines for Central Public Sector Enterprises. Such expenditure generates goodwill and commercial benefits.

Application of Law to Facts: The CSR expenditure claimed by the bank was held to be allowable under Section 37 as it was not a statutory obligation and was incurred wholly and exclusively for business purposes.

Conclusion: The Tribunal allowed the CSR expenditure disallowed by the lower authorities for both assessment years.

Disallowance of Penalties Levied by RBI

Relevant Legal Framework and Precedents: Section 37 disallows expenditure incurred for offences or violations prohibited by law. However, penalties of a compensatory or procedural nature, not punitive or criminal, are allowable.

The Bombay High Court in CIT vs. Stock & Bond Trading Company held that penalties imposed for regulatory procedural violations, not criminal offences, are allowable. Similarly, the Kerala High Court in CIT vs. Catholic Syrian Bank held that penalties without criminal liability are allowable.

Tribunal decisions have applied these principles to RBI penalties imposed on banks for procedural non-compliance.

Court's Interpretation and Reasoning: The Tribunal observed that the penalties imposed by RBI on the assessee bank were civil liabilities under the RBI Act, not punishments for criminal offences. These penalties arose from procedural deficiencies, such as exchange of notes and coin operations.

Application of Law to Facts: The Tribunal applied the precedents to allow the penalty amounts as deductible expenditure under Section 37.

Conclusion: The disallowances of RBI penalties were set aside and allowed as business expenditure.

Disallowance of Sundry Assets Written Off

Relevant Legal Framework and Precedents: Expenditure debited to profit and loss account and written off assets can be allowable if properly evidenced and incurred wholly and exclusively for business purposes.

Court's Interpretation and Reasoning: The CIT(A) had confirmed the disallowance on the ground that the assessee did not furnish evidence to rebut the AO's findings. However, the Tribunal noted that the AO and CIT(A) did not verify the assessee's submissions that these were small value assets written off and squared off in books.

Application of Law to Facts: The Tribunal found that the issue was not properly examined and remitted the matter to the AO for fresh consideration with directions to verify the assessee's claims.

Conclusion: The disallowance was set aside and remitted for de novo adjudication, with a direction to allow the expenditure if the assessee's submissions are found correct.

3. SIGNIFICANT HOLDINGS

On the applicability of Section 115JB, the Tribunal held:

"Accordingly, the question referred to Special Bench is decided in favour of the assessee banks that clause (b) to sub section (2) of section 115JB of the Income-tax Act inserted by Finance Act, 2012 w.e.f. 1-4-2013, that is, from assessment year 2013-14 onwards, are not applicable to the banks constituted as 'corresponding new bank' in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, the provision of Section 115JB cannot be applied and consequently, the tax on book profits (MAT) are not applicable to such banks."

On CSR expenditure, the Tribunal relied on the Gujarat High Court ruling:

"This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s 135 of Companies Act 2013. and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play. but, as for latter. there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be 'wholly and exclusively for the purposes of business'."

Regarding penalties imposed by RBI, the Tribunal observed:

"Only those payments, which have been made by the assessee for any purpose which is an 'offence' or which is 'prohibited by law', shall alone would be hit by the Explanation to section 37. Thus impugned amount of penalty was allowable as deduction."

On sundry assets written off, the Tribunal emphasized the need for proper verification and evidence, remitting the issue for fresh consideration.

In final determinations, the Tribunal:

• Held that Section 115JB is not applicable to the assessee bank for all three assessment years and set aside MAT computations accordingly.
• Disallowed additions to book profits under Section 115JB for AY 2014-15 as the provision itself was not applicable.
• Allowed CSR expenditure disallowed by the lower authorities for AYs 2016-17 and 2017-18.
• Allowed penalty payments made to RBI as deductible expenditure under Section 37 for AYs 2016-17 and 2017-18.
• Remitted the issue of sundry assets written off to the AO for de novo consideration with directions to allow if submissions are found correct.

---