2024 (8) TMI 1570 - AT - Income Tax

Bank wins appeal on bad debt write-offs, MAT exemption, and TDS provisions under sections 36, 115JB, and 194J

Canara Bank (Erstwhile Syndicate Bank) Versus DCIT Circle-1 Udupi

ITAT Bangalore allowed the assessee bank's appeal on multiple grounds. The Tribunal held that proviso to section 36(1)(vii) applies only to rural advances ... Disallowance u/s 36(1)(vii) being the non-rural write off by the bank - Disallowance of entire claim of the assessee bank u/s 36(1)(vii) stating that non-rural debt written off u/s 36(1)(vii) was less than the credit balance in the provision allowed account for nonrural advances - HELD THAT:- We are of the opinion that this issue came for consideration before this Tribunal in assessee’s own case [2023 (11) TMI 1146 - ITAT BANGALORE] wherein held when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to nonrural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. Careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount representing actual write off in the books of account of bad debts relating to nonrural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to nonrural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A) - Decided in favour of assessee. Deduction u/s 36(1)(vii)(a) - amount eligible as calculated under the section -assessee had calculated the deduction based on the Aggregate Average Rural Advances (AAA) computed as per Rule 6ABA of Income Tax Rules, 1962 and AO held that the provision made in the accounts relating to rural debts alone should be considered to arrive at the deduction u/s 36(1)(vii)(a) - HELD THAT:- We are of the opinion that similar issue came before case of Syndicate Bank [2021 (7) TMI 332 - KARNATAKA HIGH COURT] held that deduction provided in Section 36(1)(viia) shall be allowed in respect of the matters dealt therein, in computing the income. The condition precedent for claiming deduction under section 36(1)(viia) of the Act is that a provision for bad and doubtful debt should be made in the accounts of the assessee. The aforesaid Section mentions the maximum amount for which such a provision should be made. If a provision is made in excess of the limits prescribed under the Section, the assessee would not be entitled to deduction of the excess amount. Once a provision is made and the amount of deduction is within the limit prescribed under the Act, the assessee would be entitled to deduction of the amount for which provision is made in the books of accounts.The assessee is therefore entitled to deduction subject to the limit mentioned in Section 36(1)(viia) of the Act. Applicability of provisions of section 115JB on assessee bank - HELD THAT:-We are of the opinion that similar issue came for consideration in the case of Canara Bank [2023 (12) TMI 1446 - ITAT BANGALORE] held that provisions of section 115JB (MAT) will not apply as the assessee is a Nationalized Bank under the Banking Company (Acquisition and Transfer of Undertaking) Act, 1980. Disallowance u/s 14A - HELD THAT:- This Tribunal in case of Canara Bank [2023 (11) TMI 1146 - ITAT BANGALORE] held that provisions of Section 114A read with rule 8D of the Income Tax Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09 - decided ground in favour of assessee. Disallowance u/s 36(1)(vii)(a) on computation under Rule 6ABA - disallowance u/s 36(1)(viia) on classification of rural branches - HELD THAT:-This issue came for consideration before this Tribunal [2023 (11) TMI 1146 - ITAT BANGALORE] while calculating average aggregate advances of rural branches under section 36(1)(viia), both advance outstanding as well as fresh advances are to be considered. We further note that AO has reverted a clear factual finding in the assessment order that population in these 37 branches exceeded ten thousand as per Census 2011. Before that CIT (A) the assessee could not produce credible evidence. Considering the totality of facts, we remit this issue to the CIT(A) for verification of population of 2011 Census of 37 branches and the assessee is directed to produce the documentary evidence in support of its claim. Disallowance u/s 40(a)(ia) - payment to NFS network towards ATM usage charges and payments to cash tree network towards ATM usage charges, on which no tax was deducted by the assessee - HELD THAT:- This Tribunal in case of Canara Bank (erstwhile Syndicate Bank) in [2022 (1) TMI 124 - ITAT BANGALORE] wherein held that the services made available was the facility of standard faceless screen rendered and the authenticity of the transactions. It was noticed that these services were made available to all and not fall under the category of exclusive service. Accordingly, it was held that the TDS is not required to be deducted treating as technical service u/s 194J of the Act. Allowability of provision of wage arrears - HELD THAT:- We are of the opinion that similar issue came for consideration in the case of Bank of Baroda [2017 (2) TMI 1422 - ITAT MUMBAI] held as per the agreement and the policy, the wage revision was certain and it could have been reasonably estimated also. Hence, the provision made by the assessee towards wage revision was allowable. Decided in favour of the assessee. Adjustments to book profits and Computation of Income u/s 115JB - disallowance of Amount debited under provisions & contingencies for NPA - HELD THAT:- We are of the opinion that provisions of section 115JB of the Act is not applicable so as to compute the book profit in view of the order of the Tribunal in case of Canara Bank [2023 (12) TMI 1446 - ITAT BANGALORE]. The core legal questions considered by the Appellate Tribunal (AT) in this matter pertain primarily to the interpretation and application of various provisions of the Income Tax Act, 1961, especially sections 36(1)(vii), 36(1)(viia), 115JB, 14A, and 40(a)(ia), as they apply to a banking company. The issues include:1. Whether the disallowance of deduction claimed under section 36(1)(vii) on account of non-rural bad debts written off by the bank is justified, particularly in light of the proviso to section 36(1)(vii) read with section 36(1)(viia) and section 36(2)(v).2. The correctness of restricting deduction under section 36(1)(viia) to the extent of provision created in books, and whether this section applies only to rural advances or also to non-rural advances.3. Applicability of the provisions of section 115JB (Minimum Alternate Tax) to the bank, considering its status as a nationalized bank and not a company under the Companies Act, 1956.4. The validity of additions made to book profits under section 115JB, particularly with respect to provisions for restructured accounts and wage arrears.5. The correctness of disallowance under section 14A regarding expenditure incurred in relation to exempt income.6. The issue of deduction under section 36(1)(vii)(a) relating to the computation of aggregate average advances under Rule 6ABA of the Income Tax Rules, 1962, and classification of rural branches.7. Disallowance under section 40(a)(ia) for failure to deduct tax at source on payments made to National Financial Switch (NFS) and Cash Tree networks towards ATM usage charges.Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 36(1)(vii) for Non-Rural Bad Debts Written OffLegal Framework and Precedents: Section 36(1)(vii) allows deduction for bad debts actually written off in the books. Section 36(1)(viia) permits deduction for provisions made for bad and doubtful debts relating to rural advances. The proviso to section 36(1)(vii) prevents double deduction by requiring adjustment of write-offs against provisions allowed under section 36(1)(viia). The Supreme Court in Catholic Syrian Bank Ltd. clarified that section 36(1)(viia) applies only to rural advances, and the proviso to section 36(1)(vii) is limited to rural advances to avoid double deduction.Court's Interpretation and Reasoning: The Assessing Officer (AO) disallowed the claim on the ground that the bank had not debited the amount of doubtful debts to the Profit & Loss account but had debited provisions for NPA. The Commissioner of Income Tax (Appeals) (CIT(A)) held that the non-rural bad debts written off should be adjusted against the provision allowed under section 36(1)(viia), applying the proviso to section 36(1)(vii) to non-rural advances as well.The Tribunal referred to a coordinate Bench decision in the assessee's own case for AYs 2016-17 and 2017-18, which followed the Supreme Court ruling in Catholic Syrian Bank Ltd. and held that the proviso to section 36(1)(vii) applies only to rural advances. It rejected the CIT(A)'s view that the proviso applies to non-rural advances, holding that the bank is entitled to claim deduction under section 36(1)(vii) for non-rural bad debts written off without adjustment against provisions under section 36(1)(viia).Key Evidence and Findings: The Tribunal noted that the bank did not maintain separate provision accounts for rural and non-rural advances, but the law contemplates only one provision account. The Tribunal also observed that the Explanation 2 to section 36(1)(vii) is prospective and does not affect the impugned assessment year.Application of Law to Facts: Since section 36(1)(viia) applies only to rural advances, the proviso limiting deduction under section 36(1)(vii) to the excess over provision allowed under section 36(1)(viia) does not apply to non-rural advances. Therefore, the bank's claim for deduction of Rs. 975.07 crores under section 36(1)(vii) for non-rural bad debts written off is allowable in full.Treatment of Competing Arguments: The revenue argued for adjustment of non-rural bad debts against provisions, relying on the proviso to section 36(1)(vii) and Explanation 2. The bank relied on Supreme Court decisions and coordinate Bench rulings. The Tribunal favored the bank's interpretation.Conclusion: The disallowance of deduction under section 36(1)(vii) for non-rural bad debts written off is set aside, and the deduction is allowed in full.2. Deduction under Section 36(1)(viia) and Computation under Rule 6ABALegal Framework and Precedents: Section 36(1)(viia) allows deduction for provisions made for bad and doubtful debts relating to rural advances, subject to limits computed under Rule 6ABA of the Income Tax Rules, 1962. The Karnataka High Court in Syndicate Bank vs DCIT held that deduction is allowable to the extent of provision made in books within prescribed limits.Court's Interpretation and Reasoning: The bank claimed deduction of Rs. 1702.94 crores under section 36(1)(viia), computed on aggregate average rural advances. The AO disallowed a large part on the ground that provisions related to non-rural branches or were in excess of prescribed limits. The CIT(A) allowed the claim but restricted it to the extent of provision created. The Tribunal upheld the restriction, relying on the Karnataka High Court decision.Regarding the method of computing aggregate average advances, the Tribunal held that both outstanding advances and fresh advances during the year are to be considered, following coordinate Bench decisions and the Calcutta High Court ruling in Uttarbanga Kshetriya Gramin Bank. However, the classification of rural branches was remitted to the AO for verification based on the 2011 Census population data.Key Evidence and Findings: The Tribunal noted that advances outstanding at the beginning of the year and advances made during the year both form part of aggregate average advances under Rule 6ABA. The bank had not produced credible evidence to support classification of certain branches as rural.Application of Law to Facts: Deduction under section 36(1)(viia) is allowed only to the extent of provision created in books, and aggregate average advances computation includes both opening and fresh advances. Classification of rural branches must be verified with documentary evidence.Treatment of Competing Arguments: The revenue challenged the classification of rural branches and the method of computation. The bank relied on Tribunal and High Court decisions supporting its method. The Tribunal partly allowed the bank's claim but remitted the branch classification issue.Conclusion: Deduction under section 36(1)(viia) is allowed subject to provision created in books. Aggregate average advances computation includes both opening and fresh advances. Rural branch classification is remitted for verification.3. Applicability of Section 115JB (Minimum Alternate Tax) to the BankLegal Framework and Precedents: Section 115JB imposes MAT on companies based on book profits. The proviso to section 211(2) of the Companies Act, 1956 requires companies to prepare accounts as per Schedule VI. Nationalized banks are not companies under the Companies Act but are governed by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980. Various Tribunal and High Court decisions, including those of Delhi High Court and Tribunal, have held that section 115JB does not apply to banking companies as they do not fall within the definition of 'company' under the Companies Act for this purpose.Court's Interpretation and Reasoning: The bank contended that section 115JB does not apply as it is not a company under the Companies Act and prepares accounts under the Banking Act. The CIT(A) and AO rejected this. The Tribunal relied on a recent decision of the Delhi High Court affirming the non-applicability of section 115JB to nationalized banks and other coordinate Bench decisions.Key Evidence and Findings: The Tribunal noted that the bank is a nationalized bank under the Banking Companies Act, not a company under the Companies Act, and the accounts are prepared under regulatory provisions other than Schedule VI. The charging section and computing provisions form an integrated code, and where computation provisions cannot apply, the charging section also does not apply.Application of Law to Facts: Section 115JB is not applicable to the bank for the assessment year under consideration.Treatment of Competing Arguments: The revenue relied on ITAT Mumbai decision applying section 115JB to banks, but the Tribunal preferred the consistent view of the jurisdictional High Court and Delhi High Court decisions.Conclusion: Provisions of section 115JB are not applicable to the bank.4. Additions to Book Profits under Section 115JBLegal Framework and Precedents: Explanation 1 to section 115JB lists adjustments to book profits. Provisions and write-offs are generally added back unless they are actual write-offs. The non-applicability of section 115JB to banks affects this issue.Court's Interpretation and Reasoning: The AO made additions to book profits for various provisions and write-offs. The CIT(A) allowed the appeal except for provision for restructured accounts. However, since section 115JB is not applicable to the bank, this ground is rendered infructuous.Application of Law to Facts: No addition to book profits under section 115JB is warranted as the section does not apply.Conclusion: This ground is dismissed as infructuous.5. Disallowance under Section 14ALegal Framework and Precedents: Section 14A disallows expenditure incurred to earn exempt income. Rule 8D prescribes the method for determining such expenditure. The Supreme Court in CIT vs. Essar Teleholdings Ltd. held that section 14A read with Rule 8D is prospective and cannot be applied to years prior to AY 2008-09.Court's Interpretation and Reasoning: The CIT(A) deleted the disallowance on the ground that the AO did not record dissatisfaction as required. The Tribunal held that the AO's questionnaire and assessment order sufficed to record dissatisfaction. However, the jurisdictional High Court in the bank's own case held that section 14A read with Rule 8D is prospective and cannot be applied to prior years.Application of Law to Facts: The disallowance under section 14A is not sustainable for the assessment year in question.Conclusion: Disallowance under section 14A is deleted.6. Deduction under Section 36(1)(vii)(a) and Classification of Rural BranchesLegal Framework and Precedents: Rule 6ABA prescribes computation of aggregate average advances for deduction under section 36(1)(viia). The classification of rural branches depends on population criteria and definitions such as revenue villages.Court's Interpretation and Reasoning: The Tribunal held that aggregate average advances computation includes both opening balances and advances made during the year, following coordinate Bench and High Court decisions. However, the classification of rural branches based on population was remitted to the AO for verification.Application of Law to Facts: Deduction computation is allowed as claimed, subject to verification of rural branch classification.Conclusion: Deduction allowed; rural branch classification remitted for verification.7. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on ATM Usage ChargesLegal Framework and Precedents: Section 40(a)(ia) disallows expenditure where tax is deductible at source but not deducted. Payments for services liable to TDS under Chapter XVII-B attract this provision.Court's Interpretation and Reasoning: CIT(A) deleted disallowance relying on Supreme Court decision in Kotak Securities Ltd. that transaction charges for facility usage do not constitute technical services attracting TDS under section 194J. Tribunal upheld this view, following coordinate Bench decisions that payments to NPCI for ATM usage are not commission or brokerage requiring TDS.Application of Law to Facts: The payments to NFS and Cash Tree networks are not liable for TDS under section 194J or 194H; hence disallowance under section 40(a)(ia) is not justified.Conclusion: Disallowance under section 40(a)(ia) is deleted.8. Provision for Wage ArrearsLegal Framework and Precedents: Provisions for wage arrears are allowable if liability is certain and quantifiable. Tribunal decisions in the assessee's own case and in Bank of Baroda have allowed such provisions where effective date of liability is established.Court's Interpretation and Reasoning: The Tribunal followed coordinate Bench decisions holding that wage revision provisions are allowable if liability is ascertainable, even if agreement is signed after the year-end.Application of Law to Facts: Provision for wage arrears of Rs. 180 crores is allowable.Conclusion: Claim for provision for wage arrears is allowed.Significant Holdings:'The proviso to section 36(1)(vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is 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. Clause (viia) applies only to rural advances.''Section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012, would not be applicable to a banking company.''The disallowance under section 14A read with Rule 8D is prospective in nature and cannot be applied to assessment years prior to AY 2008-09.''Aggregate average advances under Rule 6ABA includes both opening balances and advances made during the year.''Payments made to National Payment Corporation of India towards ATM usage charges do not attract TDS under sections 194C, 194J or 194H and hence disallowance under section 40(a)(ia) is not justified.''Provision for wage arrears is allowable where liability is certain and can be reasonably estimated, notwithstanding the timing of agreement signing.'The Tribunal's final determinations include allowing the deduction under section 36(1)(vii) for non-rural bad debts written off without adjustment against provisions under section 36(1)(viia), restricting deduction under section 36(1)(viia) to provisions created in books, holding section 115JB inapplicable to the bank, deleting disallowance under section 14A and section 40(a)(ia), allowing provision for wage arrears, and remitting rural branch classification issues for verification.