2023 (12) TMI 1446 - AT - Income Tax

Bank wins multiple tax disputes including Section 14A disallowance and CSR deduction allowance under Section 37(1)

M/s. Canara Bank Versus The Deputy Commissioner of Income Tax, Circle – 2 (1) (1), Bangalore.

ITAT Bangalore allowed several claims by the assessee bank. Section 14A disallowance was decided following Karnataka HC precedent upholding assessee's ... Disallowance u/s. 14A - assessee had suo moto disallowed sum - HELD THAT:- We note that the issue of disallowance u/s. 14A has been considered in assessee’s own case which has been upheld by Hon’ble Karnataka High Court [2023 (1) TMI 243 - KARNATAKA HIGH COURT]It is also noted that the decision of Hon’ble Karnataka High Court has been followed by coordinate bench AY 2016-17 & 2017-18 has considered this issue [2023 (11) TMI 1146 - ITAT BANGALORE] reproduced herein above. Applicability of provisions of section 115JB on assessee bank - HELD THAT:- We note that decision of Hon’ble Delhi Tribunal in Oriental Bank [2022 (4) TMI 147 - ITAT DELHI] has been upheld by Hon’ble Delhi High Court wherein Hon’ble High Court has categorically observed that the revenue in case of Punjab National Bank [2023 (10) TMI 1384 - DELHI HIGH COURT] did not raise this issue which are identical to facts of the present assessee before us as held MAT provisions, as originally enacted, did not apply to banking companies. Decided in favour of assessee. Disallowance u/s.36(1)(viia) - assessee had made provisions for bad and doubtful debts - AO held that only advances made during the year has to be considered for calculating aggregate average rural advances and treated some of the branches as non-rural and did not allow deduction with respect to such branches - HELD THAT:- We note that this issue stands squarely covered by the decision of this Tribunal in assessee’s own case [2023 (11) TMI 1146 - ITAT BANGALORE] and the decision of Karnataka High Court reported in [2023 (1) TMI 243 - KARNATAKA HIGH COURT] as remand this issue to the Ld.AO for necessary verification and consideration of the issue in accordance with law. Disallowance made of the RBI Penalty paid by the assessee - assessee had made payment of Rs. 1,00,000/- as penalty to RBI for non compliance of RBI guidelines which are submitted to be general in nature - AO disallowed the same treating it to be in the nature of penal in nature - HELD THAT:- We remand this matter to file of AO to look into the details/nature of payments made by assessee to RBI in order to verify whether these are routine payments for procedural non-compliances or were punitive in nature. AO is then directed to consider this issue in accordance with law. CSR expenditure - AO disallowed the expenditure claimed by the assessee by holding that these expenditure were not for the purposes of business and were added back to the total income of assessee - HELD THAT:- We note that the Ld.CIT(A) while allowing the claim of the assessee has followed the decision of Union Bank of India [2022 (3) TMI 1131 - ITAT BANGALORE] wherein as per Eastern Coalfields Ltd. [2022 (11) TMI 982 - CALCUTTA HIGH COURT] where Government of India framed guidelines on corporate social responsibility for central public sector enterprises, such public sector is bound to formulate a policy in terms of the said guidelines and if an obligation springs from complying with the said guidelines, it has to be regarded as expenditure incurred on grounds of commercial expediency and allowed as a deduction. Therefore the expenditure in question, on the facts of the present case, satisfies the requirements of Sec.37(1) of the Act. In view of the facts and circumstances of the given case. we are of the view that the deduction claimed by the assessee should be allowed in full. Allowability of Club expenses - expenditure incurred at club towards entrance fee and subscription and expenditure incurred for club services and facilities - DR submitted that the expenditure cannot be allowed as there is no requirement for the assessee to spend it for the purposes of business - HELD THAT:- Admittedly, neither the Ld.AO nor the Ld.CIT(A) has verified the nature of expenditure based on the bills and vouchers. It is not true to say that a bank cannot offer membership benefits in a club to its officials who are at high posts. The reasoning for disallowing the claim by the AO is without any basis. CIT(A) while allowing the claim has not verified whether the expenditure has been incurred for such higher officials by the assessee towards their membership. In the event, upon verification it is found that the expenditure has been incurred towards membership and subscription by the higher officials who are eligible to get such benefit from the assessee, no disallowance could be made. We direct the Ld.AO to verify the details in the line of the above directions and to consider the claim of assessee in accordance with law. The appeals filed by both the assessee and the revenue raise multiple issues concerning the assessment year 2019-20, primarily involving the applicability and interpretation of various provisions of the Income Tax Act, 1961, including sections 14A, 115JB, 36(1)(vii), and related matters such as RBI penalties, CSR expenditures, and club expenses. The Tribunal also considered procedural aspects like delay in filing appeals.1. Issues Presented and ConsideredThe core legal questions addressed include:Validity and applicability of disallowance under section 14A of the Income Tax Act concerning expenditure related to exempt income.Applicability of the Minimum Alternate Tax (MAT) provisions under section 115JB to banking companies, particularly nationalized banks governed by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.Allowability of additions to book profits under section 115JB.Deduction claims under section 36(1)(vii) for bad and doubtful debts and the interplay with provisions under section 36(1)(viia).Disallowance of RBI penalties and their characterization as either penal or routine/procedural payments.Allowability of CSR expenditures and compliance with business expediency requirements under section 37(1).Allowability of club expenses claimed by the assessee.Procedural issues including condonation of delay in filing appeals and validity of assessment orders under section 153.2. Issue-wise Detailed Analysisa) Disallowance under Section 14AThe Tribunal noted that the assessee had earned substantial tax-free dividend income and had itself made a suo motu disallowance under section 14A. The Assessing Officer (AO) invoked Rule 8D to make a further disallowance, which was upheld by the CIT(A). The assessee relied on the Supreme Court judgment in the South Indian Bank case and subsequent Karnataka High Court rulings, which held that no disallowance under section 14A is warranted where no expenditure has been incurred to earn exempt income, particularly dividends.The Tribunal referred to coordinate Bench decisions in the assessee's own case for earlier years, which had settled the issue in favor of the assessee, emphasizing that 'expenditure' under section 14A means an actual outgo and not a mere return on investment. The revenue's reliance on pending appeals before the Supreme Court was noted but did not override binding High Court decisions. Accordingly, the Tribunal allowed the ground raised by the assessee.b) Applicability of Section 115JB (MAT) to Banking CompaniesThe assessee contended that it is not a company under the Companies Act, 1956, but a nationalized bank governed by a special statute, and hence section 115JB does not apply. The Tribunal relied on authoritative decisions, including a recent Delhi High Court ruling in a similar case and various Tribunal judgments, which held that the MAT provisions, as originally enacted, did not apply to banking companies.The Tribunal analyzed the amendment introduced by the Finance Act, 2012, which modified section 115JB(2) to accommodate companies governed by other Acts, but noted that the assessee's status as a nationalized bank under a special Act exempts it from the proviso to section 211(2) of the Companies Act, which is central to the applicability of MAT provisions.Applying the principle that charging and computation provisions form an integrated code, the Tribunal held that if the charging section does not apply, the computation provisions also fail. The Tribunal accordingly allowed the assessee's ground on this issue.c) Additions to Book Profits under Section 115JBSince the Tribunal held that section 115JB does not apply to the assessee, the issue of additions to book profits under this section became infructuous.d) Deduction under Section 36(1)(vii) for Bad and Doubtful DebtsThe assessee claimed deductions for bad debts written off, while the AO disallowed the claim on two grounds: (i) only advances made during the year should be considered for computing aggregate average rural advances, and (ii) some branches were treated as non-rural, disallowing deductions accordingly.The Tribunal referred to extensive precedent including coordinate Bench decisions and Karnataka High Court rulings affirming the assessee's method of computation and allowing the deduction. The Tribunal discussed the distinction between actual write-off and prudential write-off, the requirement that bad debts be written off in individual accounts, and the interplay with provisions under section 36(1)(viia) concerning provisions for bad and doubtful debts.The Tribunal remanded the issue to the AO for verification and consideration in accordance with law, partly allowing the ground for statistical purposes.e) Disallowance of RBI PenaltiesThe AO disallowed penalty payments made to the RBI for non-compliance with RBI guidelines, treating them as penal in nature. The CIT(A) upheld this disallowance.The Tribunal noted a coordinate Bench decision in Union Bank of India's case, which held that such payments are compensatory or routine fines rather than punitive penalties and should not be disallowed outright. However, since the nature of the payments requires detailed scrutiny, the Tribunal remanded the issue to the AO to verify the nature of the payments and decide accordingly.f) Allowability of CSR ExpenditureThe AO disallowed CSR expenditures on the ground that they were not incurred for business purposes. The CIT(A) allowed the claim, relying on the principle that for entities not governed by the Companies Act, CSR expenditure can be allowed if incurred based on government directions and for business expediency.The Tribunal upheld the CIT(A)'s decision, citing coordinate Bench and High Court decisions that recognized CSR expenditure as deductible if it satisfies the business expediency test. The revenue's contrary submissions were not found persuasive.g) Allowability of Club ExpensesThe revenue challenged the allowance of club expenses, including entrance fees and subscriptions, on the ground that they were not for business purposes.The Tribunal noted that neither the AO nor CIT(A) had verified the nature of the expenditure with respect to the beneficiaries. It directed the AO to verify whether the expenses were incurred for membership benefits of higher officials, which could justify the claim. Pending such verification, the Tribunal allowed the ground partly for statistical purposes.h) Procedural Issues: Delay in Filing Appeals and Validity of Assessment OrdersThe revenue's appeal was delayed by 109 days. The Tribunal considered the petition for condonation of delay, applying the principles laid down by the Supreme Court in Collector Land Acquisition v. Mst. Katiji, emphasizing the elastic and liberal approach to condonation to ensure substantial justice. Finding sufficient cause and absence of malafide intent, the Tribunal condoned the delay.The assessee's challenge to the validity of the assessment order on the ground of non-service within the prescribed time under section 153 was left open for consideration in appropriate circumstances, with liberty granted to the assessee.3. Significant HoldingsOn the disallowance under section 14A, the Tribunal quoted the High Court judgment stating:'The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word 'incurred' in Section 14A of the Act have to be read in the context of the scheme of the Act... It is equally well settled that expenditure is a pay out... In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act.'On the applicability of section 115JB to banking companies, the Tribunal relied on the principle that the charging section and computation provisions form an integrated code, quoting:'In a case where the computation provision cannot apply, it would be evident that such a case was not intended to fall within the charging section.'Regarding RBI penalties, the Tribunal followed the reasoning that payments to RBI for procedural non-compliance are compensatory and not punitive, warranting remand for detailed examination.On CSR expenditure, the Tribunal recognized that compliance with government directions and business expediency justify allowability under section 37(1), citing:'If an obligation springs from complying with the said guidelines, it has to be regarded as expenditure incurred on grounds of commercial expediency and allowed as a deduction.'On club expenses, the Tribunal emphasized the need for fact-based verification before disallowance, directing the AO to consider whether the expenses were for legitimate business purposes.In conclusion, the Tribunal allowed several grounds raised by the assessee, partly allowed revenue's grounds for statistical purposes, condoned delay in filing appeals for revenue, and remanded certain issues for further verification by the AO. The decisions reflect a careful application of legal principles, binding precedents, and factual considerations to ensure substantive justice.