TaxTMI 
TaxTMI 
2014 (3) TMI 536
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....aim for deduction u/s 35D of the Act, amounting to Rs.3,33,10,139/- being 1/5th of public issue expenses and bond issue expenses; (4) That the CIT (A) erred in allowing relief to the assessee on the point of accrued interest on securities amounting to Rs.16,76,60,611/- offered on cash basis; & (5) That the CIT (A) erred in accepting the assessee's claim that the assessee had traded in securities, shown as investments in the balance-sheet and that the assessee had incurred loss of Rs.30.21 crores on account of re- valuing the investments held as on 31.3.2008 at cost or market value whichever was less. 2.1. Subsequently, the Revenue, vide its application dated: 2.4.2013, sought the permission of this Bench to raise the following additional grounds, namely: I. (1) Since the deduction u/s 36(1)(viia) is allowable for making provision for rural advances only, assessee's claim of deduction u/s 36(1)(viia) of Rs.593,16,34,351/- is not in accordance with the provisions under the Act and, hence, not allowable to that extent? (2) Since (a) non-rural bad and doubtful debts may be written off and allowable u/s 36(i)(vii) independently, (b) deduction u/s 36(1)(viia)(a)....
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....ve noted that assessee's claim of 10% of average rural advances u/s 36(1)(viia) is based on the categorization of places as made by RBI and not in accordance with Explanation (ia) below section 36(12)(viia). Reliance is placed on the decision of the Hon'ble High Court of Kerala dated 07.10.2010 in ITA No.234 of 2009 in the case of CIT v. The Lord Krishna Bank Ltd [195 Taxman 57] wherein it has been held that 'place' referred to in the definition clause for the purpose of identifying the branch as a rural is the revenue village with population in the village as a unit is less than 10,000 and, therefore the claim of the assessee bank needs to be restricted to the advances made by such branches." 2.2. The additional grounds sought to be raised by the Revenue were stated to be consequent to the judgments of (i) the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd v. CIT 343 ITR 270 (SC) and (ii) the Hon'ble Kerala High Court in CIT v. The Lod Krishna Bank Ltd 195 Taxman 57 (Ker) which were, according to the Revenue, delivered after the conclusion of the assessments by the AO in the present assessee's case for the AY under dispute. The admissi....
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.... to be considered is only Rs.349,87,49,928/-.Excess amount claimed of Rs.243,28,84,423/- is disallowed." Further, the assessee had claimed bad debts written off u/s 36(1)(vii) as under: "A. Out of income Rs. 32,14,25,430 Out of provisions Rs.409,34,00,121 Total 441,48,25,551 The bad debts written off by non-rural branches is shown as under: B. Out of income Rs. 21,29,44,194 Out of provisions 371,00,62,381 Total 392,30,06,575 The difference between A and B amounting to Rs.49,18,18,976/- is considered as write off relating to rural branches. [Source: Page 4 of the asst. order] 4.1.1. Extensively quoting the provisions of ss. 36 (1)(vii) and 36(1)(viia) of the Act and also applying the judgments of the Hon'ble Kerala High Court in the case of South Indian Bank Ltd v. CIT- (2010) 191 Taxman 272(Ker -FB) , the AO took a stand that - "7.6. The assessee has shown the B/f balance in provision for Bad & Doubtful debts at Rs.1486,78,05,837/- and has added the new provision of Rs.349,87,49,928/- making a total of Rs.1836,65,55,765/-. The total bad debts written off including those relating to rural branches (Rs.49,18,18,976/-) is Rs.441,48,25,551/- whic....
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....r 1987-88, held that, it was a misconception that the deduction under the clause (viia) was related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause was that, once a provision for bad & doubtful debt was made by a scheduled bank having rural branches, the assessee was entitled to a deduction which was quantified not with respect to the amount provided for in the accounts, but, with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other word, this was a specific deduction given by the statute, irrespective of the quantum provided by the assessee in its accounts towards provision for bad & doubtful debts. 3.5. I am of the considered view that the jurisdictional ITAT Bench's decision in the appellant's own case is binding on the assessing authority, notwithstanding that the decision has not become final. Respectfully following this decision, I hold that the AO was not justified in disallowing the sum of Rs.243,28,84,423/- claimed u/s 36(1)(viia) and direct the AO to allow the same....." Bad & doubtf....
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....btful debts amounting to Rs.593.16 crores u/s 376(1)(viia) being 10% of average rural advances and 7.5% of the total income, even though the assessee had debited only Rs.349.87 crores to the P & L a/c; - that the CIT (A) erred in not considering the fact that to claim deduction towards provision for bad and doubtful debts, necessary debit has to be made to the P & L a/c and admissible only to the extent provision has been debited; - that the CIT (A) erred in not considering the fact the orders of the Hon'ble ITAT in assessee's own case for the assessment year 1987-88 has not been accepted by the Department and direct appeal to Hon'ble High Court has been filed; - that the CIT (A) erred in not considering the decision of Hon'ble High Court of P & H in the case of State Bank of Patiala v. CIT (2005) 272 ITR 53 (P & H) wherein it has been held that 'making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction and that proviso to clause (vii) of s. 36(1) also shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction u....
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....he issue. In the meanwhile, we would like to point out that the identical issue of additional grounds raised in the present appeal by the Revenue has since been considered by the earlier Bench of this Tribunal in the assessee's own case for the AYs 2006-07 and 2007-08 in ITA Nos.708 & 709/Bang/2010 dated 19.6.2013. After due consideration of the Revenue's contentions and also for the detailed reasons recorded therein, the Hon'ble Bench came to the conclusion that the additional grounds sought to be raised by the Revenue cannot be admitted for adjudication. For appreciation of facts and for ready reference, the brief additional grounds sought to be raised by the Revenue in the present appeals and the relevant portions of the findings of the Bench on similar issues are extracted as below: I. Since the deduction u/s 36(1) (viia) is allowable for making provision for rural advances only, assessee's claim of deduction u/s 36(1)(viia) of Rs.593,16,34,351/- is not in accordance with the provisions under the Act and, hence, not allowable to that extent? "46... (On page 35)..................the provisions of section 36(1)(viia)(a) of the Act lays down as follows: &#....
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....there is opening balance in the PBDD A/c that has to be taken into account and it is only where the provision made is in excess of the opening balance of provision available in PBDD a/c., subject to the limits prescribed in sec.36(1)(viia)(a) of the Act that will be allowed as deduction. Therefore, the additional gr. No.(i) sought to be raised by the Revenue does not arise out of the order of the AO or the CIT (A) and the same cannot be therefore admitted for adjudication. Even assuming that there was an error on the part of the AO in this regard that could have been set right either in proceedings u/s 263 of the Act or by the CIT (A) in exercise of his powers of enhancement. The Revenue cannot seek to raise an issue concluded in the assessment in the form of an additional ground before the Tribunal." III. The Ld. CIT (A) ought to have noted that assessee's claim of 10% of average rural advances u/s 36(1)(viia)................revenue village with population in the village as a unit is less than 10,000 and, therefore the claim of the assessee bank needs to be restricted to the advances made by such branches. "31...(On page 22)................In the course of assessment pro....
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....assessee as prior period expenses. This was, according to the AO, nothing but reversal of interest treated as income and offered for tax in the previous year. After considering the assessee's contentions, the AO disallowed the assessee's claim of Rs.12,80,483/- as reversal of interest on newly identified NPAs on the premise that once the income of that year is properly recorded, the assessee cannot reduce the income from the subsequent years' computation on the ground that in the earlier year income was shown on accrual basis wrongly and, thus, the income of this year gets reduced if set off is permitted. The assessee had not claimed any expenditure against the current year's income, but, seeking reduction of current year's income which was not permissible. In the immediately preceding year, the assessee having declared income on the accrual basis, the only course open to the assessee was to derecognize that income was to treat the same as bad debt by following the RBI's norms. Admittedly, the assessee had not written off the said sum as bad debt u/s 36(1)(vii) of the Act. [Refer: Para 8.4. of the Asst. order]. 6.1. When the issue was taken up by the asse....
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....tion 36(1)(viii) allowed the deduction to a financial institution for an amount not exceeding 40 per cent of the total income carried to a special reserve. For claiming this deduction, this clause required that the reserve to the extent of 40 per cent of the total income be credited by debit to profit and loss account. By the Finance Act, 1997 the phrase 'and maintained' was inserted after the word 'created' in section 36(1)(viii) with effect from 1.4.1998. By the same Finance Act, 1997, clause (v) of section 36(2) was also made applicable with retrospective effect from 1.4.1992 to all the assessees to which clause (viia) of sub-section (1) of section 36 applied which was earlier applicable to only banks. The Finance Act, 1997, has also made provisions by proviso to section 36(1)(vii) applicable to all the assessees with retrospective effect from 1.4.1992 which was earlier applicable to banks only. Simultaneously, sub-section (4A) was inserted in section 41 by the Finance Act 1997 with effect from 1.4.1998 whereby any amount subsequently withdrawn from the special reserve created by the assessee under section 36(1)(viii) in respect of which, deduction had been allow....
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....assessee is a banking company and cannot be considered as an industrial undertaking. Section 35D referred to an industrial unit which concerned production or operation. It implies that the industrial undertaking or the unit must be engaged in some manufacturing, producing or processing activity. The business of the company is that of banking which is not covered u/s 35D. The expenses are admissible, after commencement of business, only in connection with either extension of industrial undertaking or setting up of new industrial unit. Therefore, the assessee's case does not come within the purview of section35D." 7.2. When the issue went before the CIT (A) for adjudication, the CIT (A) decided the issue in favour of the assessee for the following reasons, namely: "6.5. (On page 12)..............The AO has held that the expenditure was not covered u/s 35D because the bank had already commenced its business and it was not an industrial undertaking. It is apparent that he treated the expenditure as capital in nature. However, it is the appellant's case that the expenditure was revenue in nature because it was the cost of raising working capital. Though, there is merit in ....
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....the provisions of section 35D of the Act were applicable only when the expenses are incurred after commencement of business in connection with expansion of industrial undertaking or in connection with setting up of a new industrial unit. Admittedly, the assessee was not an industrial under-taking. This aspect has been overlooked by the CIT (A). Even assuming that the claim is not one made u/s 35D of the Act, the assessee's claim for deduction as a revenue expenditure on the basis that the issue of share capital was for meeting the working capital requirement cannot also be sustained. The fact that the capital raised by issue of shares is for meeting the working capital requirement or otherwise, will not be a relevant consideration This aspect has been made clear by the Hon'ble Supreme Court in the case of Brooke Bond India Ltd [supra] wherein at page No.801 in the concluding part of the judgment, the Hon'ble Supreme Court observed that by issue of shares, there is increase in capital and, therefore, there is an expansion of capital base of the company and, therefore, the expenses will retain the character of capital expenditure. In view of the above, we are of the view ....
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....ccepted by the then CIT (A) for the assessment year 2005-06. However, the AO took a divergent view on the premise that the finding of the then CIT (A) for the AY 2005-06 was not accepted by the Revenue even in the cases of other banks (assessees) also. It was the stand of the AO that as per s.145 of the Act, the assessee could not follow dual method of accounting and should have offered to tax interest on securities on accrual basis which was regular method of accounting it employed. On an appeal, the CIT (A) had allowed the issue in favour of the assessee on the reasoning that - "7.4.......................I find that the appellant has consistently offered to tax interest on securities only on due date basis and not on the basis of the alleged accrual. The jurisdictional ITAT in its order dated 21.11.2008 in ITA No.1160 (Bng)/07 in the case of Karnataka Bank Ltd, for assessment year 2004-05, had decided the issue in favour of the bank. Besides, I also find that the various judicial decisions relied upon by the ld. AR are in favour of the appellant. Respectfully following the said decisions, the AO is directed to delete the addition made in respect of interest accrued but not due....
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....in the case of CIT v. Tamil Nadu Mercantile Bank Ltd [291 ITR 137 (Mad)]; (ii) Hon'ble Kerala High Court in CIT v. Federal Bank [301 ITR 188 (Ker)]; and (iii) the findings of the earlier Bench of this Tribunal in ITA No.1160/2007 dated: 21.11.2008 in the case of Karnataka Bank Limited for the AY 2004-05. Also the findings of the earlier Bench of this Tribunal in the assessee's own case for the AYs 2006-07 and 2007-08 (supra) wherein an identical issue to that of the present one under dispute came up for adjudication. After taking into account the assessee's contentions, the findings of the CIT (A) and also extensively quoting the judgment of the Hon'ble Madras High Court in the case of Tamil Nadu Mercantile Bank Limited (supra), the Hon'ble Bench had recorded its findings as under: "111. (On page 77) It is not in dispute before us that identical decision has also been rendered by the Hon'ble High Court of Kerala in the case of CIT v. Federal Bank 301 ITR 188 (Ker). In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the Revenue in the past.....
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....e Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 (SC) relied on by the assessee was rendered before the RBI's guidelines on valuation of investment portfolio. The AO was, therefore, of the view that once the guidelines came into force, the assessee should have followed the same. It was the opinion of the AO that even though the assessee had followed the RBI's guidelines for the purpose of books of account, but, not for computation of income for income-tax purpose. 9.2. Aggrieved, the assessee took up the issue with the CIT (A). The CIT(A) had, after due consideration of rival submissions and also various judicial pronouncements including the findings of the earlier Bench of this Tribunal in ITA No.50/Bang/1997 dated 29.7.2003 in the case of Karnataka Bank on a similar issue, decided the issue in favour of the assessee. The relevant portion of the findings of the CIT (A) is extracted as under: "10.6. (On page 23) Following the above decision of the Hon'ble Supreme Court [UCO Bank v. CIT (1999) 240 ITR 355 (SC)] and in line with its decision dated 24.1.2008 in ITA No.253/Bang/2007 in the case of ACIT (LTU) v. Vijaya Bank, the Hon'ble ITAT ....
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....eration. The Bench had, after due consideration of the rival submissions, the judgment of the Hon'ble jurisdictional High Court dated 11.3.2013 in the case of CIT v. Vijaya Bank in ITA No.687/2008, decided the issue in favour of the assessee. For appreciation of facts and for ready reference, the relevant portion of the finding of the earlier Bench is extracted as under: "62. (On page 50). We have given a careful consideration to the rival submissions and are of the view that the contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in assessee's own case on an identical issue for the AY 2005-06 has upheld the claim of the assessee. The later decision of the Hon'ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the revenue in its appeal is without merit. Consequently, the same is dismissed." 9.4. In view of the proposition of the earlier Bench on a similar issue [supra], we are of the view that this ground of the Revenue deserves to be rejected. It is ordered accordingly. Assessee Appeal - ITA No.708/Bang/2012 10. This appeal by the assessee is dire....
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....pose of Rule 8D(2)(iii), where investments giving rise to exempt income is nil, such investments should not be taken into account and erred in holding that even where there is no income received from the investment, Rule 8D would be applicable. 2.7 That in any case and without prejudice to the above, administrative expenses to earn the exempted income was negligible and from that standpoint assumption of expenditure at Rs.30,09,99,982/- is grossly excessive. 3.1 That the CIT(A) erred in rejecting the Appellant's contention that Section 115JB of the Act at the threshold had no application to the Appellant. 3.2 That the CIT(A) erred in holding that the issue on non-applicability of Section 115JB raised by the Appellant was a new issue for the first time and that it was accepted by the Appellant for the earlier years having failed to note that the issue had been raised before the CIT(A) even during earlier years. 3.3 That the CIT(A) erred in holding that by virtue of the deeming provisions of the Banking Companies (Acquisition and Transfer of Undertaking) Act, the Appellant would be deemed to be a company for the purposes of the Income-tax Act. 3.4 That the learned ....
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....tion 115JB. 4.8 That the CIT(A) erred in proceeding on the premise that the provision for future interest sacrifice in CDR Accounts pertained to liability which is unascertained or represented diminution in value of assets. 4.9 That the Commissioner ought to have noted and held that the provision for reward points on credit cards represented provision for ascertained liabilities and therefore did not warrant add back for the purposes of Section 115JB. 5. That the CIT-A's order to the extent questioned herein is otherwise bad and inoperative in law. Each of the foregoing grounds is without prejudice to the other and the Appellant craves leave to add to, amend or delete all or any of the foregoing either before or at the time of hearing." A perusal of the grounds of appeal raised indicate that they are in respect of two issues namely :- i) Disallowance under section 14A of the Act towards expenditure related to the earning of exempt income; and ii) The applicability of section 115JB of the Act to the assessee bank. 11.0 Disallowance u/s.14A of the Income Tax Act r.w. Rule 8D. 11.1 The grounds raised at S.Nos.1.1 to 2.7 relate to the disallowance of expe....
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....red to earn the exempt income. It is submitted that the Assessing Officer has not made any specific finding to this effect and contended that in the absence of such a finding, no disallowance could be made in terms of Rule 8D; ii) The assets earning tax free income were trading assets of the assessee bank and the income so received were incidental receipts to which the provisions of section 14A of the Act would not apply; iii) The exempt income has been earned out of own funds or non-interest bearing funds and therefore there is no interest cost at all and therefore disallowance u/s.14A of the Act would not be applicable. iv) Even if disallowance has to be made u/s.14A of the Act, the disallowance has to be computed by considering the net interest earned and not gross interest as computed by the Assessing Officer. Since the net interest is a negative figure, no disallowance can be made u/s.14A r.w Rule 8D; v) Even if disallowance has to be made, the investments which yield NIL income ought to be excluded from the computation u/s. 14A r.w. Rule 8D; and vi) If at all the disallowance is to be made, it is u/s.14A r.w. Rule 8D (iii), to the extent of Rs.2,33,68,855 only.....
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.... furnishing a reasonable opportunity to the assessee to place all germane material on the record....... The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case." 33. Respectfully following the Bombay High Court decision, we are inclined to restore this issue back to the file of the Assessing Officer with a direction to decide the issue afresh by following the ratio of the decision of the Bombay High Court in Godrej Boyce Mfg. Co. Ltd., after giving effective opportunity of hearing to the assessee. This issue is allowed for statistical purpose." 70. Following the aforesaid decision, we remand the issue to the AO for fresh consideration to be decided on the lines indicated by t....
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....lier assessment years, remanded the issue of computation of the expenditure back to the file of the Assessing Officer to determine the quantum of disallowance. However, as held by the Assessing Officer and confirmed by the learned CIT (Appeals), the provisions of Rule 8D of the IT Rules, 1962 are applicable for and from the year under consideration i.e. Assessment Year 2008-09. Since in the earlier assessment years, the provisions of Rule 8D were not applicable and therefore the Assessing Officer was directed to estimate the expenditure related to the earning of exempt income. Since the provisions of Rule 8D of the Rules becomes applicable for estimating the expenditure from the period under consideration, we hold that the expenditure related to the earning of exempt income is covered by the provisions of Rule 8D. Assessee's ground at S. No.2.1 is treated as allowed for statistical purposes. 11.8.2 The computation of expenditure as per Rule 8D contains three limbs, namely :- i) Expenditure directly related to the exempt income; ii) Interest expenditure not directly attributable to any particular income; and iii) An amount equal to one half percent of the average val....
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....hall not part of total income. In this view of the matter, we direct the Assessing Officer to make the computation of the disallowance under Rule 8D(iii) at 0.5% of the average value of the investments as on 1.4.2007 and 31.3.2008, in respect of those investments, the income from which do not or shall not form part of the assessee's total income; i.e. investments that generate or are likely to generate exempt income. It is ordered accordingly. Accordingly, assessee's ground at S.No.2.6 is dismissed. The assessee's grounds raised at Serial Nos.1 to 2.7 are accordingly disposed off. 11.9 As regards the contention of the assessee that only net income and not gross income should be considered for disallowance under section 14A r.w. rule 8D, there is nothing in the provisions of law therein to substantiate such a claim and we therefore reject this claim. Accordingly assessee's ground at S.No.2.7 is dismissed. 12. Applicability of section 115JB of the Act. 12.1 In grounds at S.Nos.3 and 4, the assessee contends that the provisions of section 115JB of the Act apply only to a company registered under the Companies Act, 1956 and do not apply to the assessee. It i....
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....into play at al l. However, the assessee is a banking company and under proviso to Section 211 (2) of the Act , the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act , and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act . It is thus contended that the provisions of Section 115 JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act . Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for reopening the assessment is clearly wrong and insufficient . We are urged to quash the reassessment proceedings on this short ground. 6. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of the learned counsel, according to the departmental representative, are c....