2015 (7) TMI 86 - AT - Income Tax

Deduction u/s.36(1)(viia) - AO disallowed claim for deduction as greater than the amount debited to the profit and loss account as provision - CIT(a)deleted the addition - Held that - The creation of a special reserve u/s.32A or Sec.36(1)(viii) of the Act cannot be equated with creation of PBDD u/s.36(1)(viia) of the Act. Creation of provision u/s.36(1)(viia) of the Act is governed by certain rules like Rule 6ABA of the rules in respect of rural advances. It cannot be created at the bank s whims and fancy. Moreover the Assessee is not making a claim for creation of PBDD in the books of accounts of PY relevant to AY 08-09. The excess reserve created in the subsequent year cannot be equated to the PBDD created in the books for the present AY. The decisions relied upon by the learned counsel for the Assessee do not lay down a proposition that excess provision created in the subsequent year can supplement the inadequate created in an earlier year. The decisions relied upon by the learned counsel for the Assessee lay down proposition that the Assessee should be given liberty to create a reserve in the books of accounts of the relevant AY. For the reasons given above we reject the second alternate submission made by the learned counsel for the Assessee. Thus the Assessee will be entitled to deduction u/s.36(1)(viia) of the Act of Rs. 100, 55, 67, 213/- only. - Decided prtly in favour of revenue. Deduction u/s.36(1)(vii)on account of Bad Debts written off in the books of accounts - claim disallowed by the AO on the ground that the credit balance in the PBDD relating to non-rural branches have to be adjusted against the debit to the profit and loss account on account of bad debts - CIT(A) allowed claim - Held that - Deduction under Section 36(1)(vii) is available for deduction on account of Bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actually written off in the books and debited to Profit & Loss account. Deduction cannot be claimed for creating Provision for Bad and Doubtful Debts of Non-rural branches. It is like any other bad debt written off which is allowed as deduction in the case of Assessees who are not in banking business. Deduction u/s.36(1)(viia)(a) is allowed when a Provision for bad and doubtful debts relating to rural advances is made in the books of account subject to the limit laid down therein. When a deduction is allowed u/s.36(1)(viia)(a) of the Act by way of provision there will be no deduction under clause (vii) for actual write off of bad debts relating to rural advances until or unless there is a balance lying in the provision account made under clause (viia). This so because of the Proviso to Section 36(1)(vii) which provides that in the case of an assessee to which clause (viia) applies the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Thus the proviso ensures that there is no double deduction i.e. firstly getting a deduction when a provision is created and secondly getting a deduction when bad debts are written off. Thus in view of the aforesaid decision of the Hon ble Supreme Court in the case of Catholic Syrian Bank (2012 (2) TMI 262 - SUPREME COURT OF INDIA ) we are of the view that the CIT(A) was right in directing the AO to allow the claim for deduction made u/s.36(1)(vii) of the Act. - Deduction in favour of assessee. Depreciation in the value of investments held by the Assessee in the category of HTM (Held to Maturity) - CIT(A) allowed claim - Held 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 A.Y. 2005-06 has upheld the claim of the assessee. The later decision of the Hon ble High Court of Karnataka in CIT v. Vijaya Bank 2013 (10) TMI 1030 - KARNATAKA HIGH COURT 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. - Decided in favour of assessee. Disallowance of penalty paid - CIT(A) deleted penalty - Held that - According to the Hon ble Court in the case of CIT Vs. Syndicate Bank (2002 (12) TMI 56 - KARNATAKA High Court) held that shows that the amount in question is not compensatory in nature but definitely penal and that the said amount paid by way of penalty though called penal interest cannot be treated as legitimate item of expenditure. The Hon ble Court held that permitting penalty paid for the nature of such violations as an item of deductible expenditure under s. 37 of the IT Act will only amount to placing a premium on the commission of infraction of the assessee. Therefore penalty payable under s. 24(4)(a) and 24(4)(b) could not be allowed as deductible expenditure.- Decided in favour of revenue. Deduction u/s.36(1)(viii) - Held that - A plain reading of the provisions of Sec.36(1)(viii) of the Act clearly shows that what is relevant is profits derived from eligible business computed under the head Profits and gains of business or profession and not the profits derived by the entity as a whole as has been done by the AO and CIT(A). We therefore hold that the method of computation of deduction as done by the AO and CIT(A) is incorrect. The profits derived from eligible business computed under the head Profits and gains of business or profession as done by the Assessee has been accepted by the AO and CIT(A). There should be no difficulty in accepting the claim made by the Assessee for deduction u/s.36(1)(viii) of the Act. The Assessee has also filed before us an alternate method of computation of deduction u/s.36(1)(viii) of the Act to demonstrate that such alternate method will result in claim for deduction being made at Rs. 37, 14, 84, 183/-. The said computation is given as Annexure-2 to this order. We deem it appropriate to direct the AO to examine the computation given as annexure-2 to satisfy himself that the claim as made originally was correct. The AO is thereafter directed to consider the claim of the Assessee for the correct amount of eligible deduction u/s.36(1)(viii) of the Act. - Decided in favour of assessee. Computation of disallowance u/s.14A - Held that - In the present case the claim of the Assessee before the AO that tax free income for the bank is mainly from investments held by the bank. The investment activities of the bank are carried out by the Treasury Department at Head Office. Even without earning any free income these expenditure would have been incurred by the bank since the bank has to hold SLR securities to carry on the business and the expenditure is of fixed in nature. Therefore there is no expenditure incurred directly by the bank for earning any tax free income. Since the expenditure would have been incurred by the bank even without the earning of tax free income no part of the expenditure can be related to earning the tax free income. In the light of the above undisputed fact and in view of the decision of the Hon ble Karnataka High Court in the case of CCI Ltd. (2012 (4) TMI 282 - KARNATAKA HIGH COURT) we are of the view that no disallowance can be made u/s.14A of the Act. The addition made in this regard is directed to be deleted.- Decided in favour of assessee. Rejection of the claim that provisions of Sec.115JB of the Act are not applicable to banking companies - Held that - Provisions of section 115JB of the Act are not applicable to the assessee which is a banking company. The decisions relied upon by the ld. counsel for the assessee of Krung Thai Bank case 2010 (9) TMI 18 - ITAT MUMBAI clearly support the plea of the assessee in this regard. Since the provisions of sec.115JB of the Act are not applicable to banking companies as held by the Tribunal we are of the view that the computation of books profits made by the AO cannot be sustained. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 36(1)(viia) of the Income Tax Act.
2. Deduction under Section 36(1)(vii) of the Income Tax Act.
3. Depreciation on investments held under "Held to Maturity" (HTM) category.
4. Disallowance of penalty as deduction.
5. Applicability of Section 115JB to banking companies.
6. Computation of disallowance under Section 14A of the Income Tax Act.
7. Deduction under Section 36(1)(viii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deduction under Section 36(1)(viia):
The Revenue challenged the CIT(A)'s decision allowing the Assessee's claim for deduction under Section 36(1)(viia) for Rs. 192,57,72,764, arguing it exceeded the provisions made in the accounts. The Tribunal followed the decision in Canara Bank's case, holding that the claim for deduction under Section 36(1)(viia) cannot be greater than the amount debited to the profit and loss account as provision. The Assessee's alternate plea to consider the total provision for bad and doubtful debts (PBDD) created in the books, including non-rural advances, was accepted, allowing a deduction of Rs. 100,55,67,213.

2. Deduction under Section 36(1)(vii):
The Assessee claimed a deduction of Rs. 108,53,62,763 for bad debts written off, which the AO disallowed, arguing the credit balance in the PBDD for non-rural branches should be adjusted. The Tribunal, following the Supreme Court's decision in Catholic Syrian Bank, held that deductions under Sections 36(1)(vii) and 36(1)(viia) are independent, and the proviso to Section 36(1)(vii) applies only to rural advances. Thus, the Tribunal upheld the CIT(A)'s decision to allow the deduction.

3. Depreciation on Investments (HTM):
The AO disallowed the Assessee's claim for depreciation on investments held under HTM, following RBI's Master Circular. The Tribunal, following its own and the Karnataka High Court's decisions in similar cases, upheld the CIT(A)'s decision allowing the deduction, treating such investments as stock-in-trade.

4. Disallowance of Penalty:
The AO disallowed Rs. 90,94,829 paid as penalty, considering it for infraction of law. The Tribunal, following the Karnataka High Court's decision in Syndicate Bank, held that such penalty is not allowable as a deduction, reversing the CIT(A)'s order.

5. Applicability of Section 115JB:
The Tribunal held that the provisions of Section 115JB do not apply to banking companies, following its decision in Syndicate Bank and other similar cases. Consequently, the computation of book profits under Section 115JB by the AO was not sustained.

6. Computation of Disallowance under Section 14A:
The AO invoked Rule 8D to disallow Rs. 2.14 crores as expenditure related to exempt income. The Tribunal, considering the Karnataka High Court's decision in CCI Ltd., held that no disallowance under Section 14A is warranted as the Assessee's expenditure would have been incurred irrespective of earning tax-free income.

7. Deduction under Section 36(1)(viii):
The AO and CIT(A) rejected the Assessee's claim for deduction under Section 36(1)(viii), considering the entity's overall loss. The Tribunal held that the deduction should be computed based on profits derived from eligible business, not the entity's overall profits. The AO was directed to re-examine the computation provided by the Assessee.

Conclusion:
The appeal by the Revenue was partly allowed, while the appeal by the Assessee was allowed, with specific directions to re-examine certain computations and deductions.