2016 (10) TMI 164 - AT - Income Tax

Revision u/s 263 - Deduction u/s. 36(1)(viii)eligibility - Held that - No material indicating any query that being the ground on which jurisdiction stands assumed by the ld. CIT in the instant case, was also led during hearing. We, accordingly, uphold the same; it being the settled law that absence or lack of enquiry, in-as-much as it exhibits non application of mind, would result in the result order being erroneous.We, accordingly, uphold the invocation of section 263 qua the relevant issues. Deduction u/s. 36(1)(viii) Eligibility - Held that - We are not inclined to be in agreement with the assessee, but with the Revenue, so that the assessee-bank cannot be considered as an eligible entity u/s.36(1)(viii) of the Act, placing reliance on the decision in the case of The Federal Bank Ltd. (2011 (1) TMI 1184 - Kerala High Court ). We may before parting also add that the assessee is not, as contended, a Government company, which is only a company in which the Central Government s share holding is 51% or more. This is as the assessee is not a company in the first place. Both the terms public company and Government company are defined under the Companies Act, 1956 (refer sections 2(10), 2(18), 3 and 617 thereof). It is not necessary to go into those definitions, and suffice to state that the term stands defined per section 2(10) of the Companies Act, 1956 to mean a company as defined u/s. 3 thereof, i.e., a company formed and registered under the said Act, including existing companies, which stand specified therein, so that the assessee is not a company. The holding of it s share capital by the Central Government in excess of 51% would therefore be of little consequence. Deduction u/s. 36(1)(viii) Quantification - The Revenue s concern is for eliminating the influence of the other income in computing the deduction u/s. 36(1)(viii) - Held that - The concern is valid. In our view the appropriate ratio would be the proportion of taxable business income (stated at ₹ 5509.44 cr. at net of all deductions, save u/s. 36(1)(viii), i.e., prior to deductions under Chapter VI-A), to the gross business income (refer CIT vs. Kerala State Industrial Development Corporation 1998 (2) TMI 6 - SUPREME Court . This ratio is to be applied to the gross income from the eligible activity providing of long-term finance to industry and agriculture. This would yield the taxable income from this activity/s, 40% of which, subject to the creation of the special reserve, would be the amount exigible to deduction u/s. 36(1)(viii). Further, the word used is derived , which has to be assigned a restrictive meaning as compared to the word attributable . As such, to the extent possible, all direct costs are to be identified and adjusted, and the proportion applied only for the indirect costs (refer Power Finance Corporation Ltd. (2006 (8) TMI 332 - ITAT DELHI). Provision for bad and doubtful debts u/s. 36(1)(viia) - Held that - The parameters of the deduction stand provided in the section itself, i.e., for a sum not exceeding 7.5% of the total income (before allowing any deduction under this clause and Chapter VI-A) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank computed in the prescribed manner. The deduction, it may be appreciated, is qua a provision, general in nature, toward the loss that may arise to the bank on account of its rural advances being not realized in whole or in part. The upper limit of the deduction stands specified in the provision itself. As long as, therefore, the provision itself does not exceed the total advances, i.e., by the rural branches of the bank as at the year-end, qua which the provision is created, we see no reason to impose any restriction thereto with reference to the assessment of all advances under the prudential norms provided by the RBI. The cap suggested by us is as the provision is provided on a yearly basis, and upon considering that a provision for risk of loss of an asset cannot exceed the value of the asset under risk itself. We may here also clarify that the provision is to be adjusted against the actual write off on the debt becoming irrecoverable and accordingly claimed u/s. 36(1)(vii), applicable to all the assessees, including Scheduled Banks as the assessee falling under section 36(1)(viia)(a).

Issues Involved:
1. Assumption of jurisdiction under Section 263.
2. Eligibility for deduction under Section 36(1)(viii).
3. Quantification of deduction under Section 36(1)(viii).
4. Deduction for provision for bad and doubtful debts under Section 36(1)(viia).

Detailed Analysis:

1. Assumption of Jurisdiction under Section 263:
The Assessee's appeal challenges the revision dated 17.3.2009 by the Commissioner of Income Tax (CIT) for the assessment year (A.Y.) 2006-07. The Tribunal initially upheld the assumption of revisionary jurisdiction by the CIT due to non-application of mind by the assessing authority. The High Court directed the Tribunal to recall and hear the entire appeal afresh, emphasizing that the Tribunal must apply its mind to all contentions raised by both sides and dispose of the appeal on its own merits.

2. Eligibility for Deduction under Section 36(1)(viii):
The provision applies to financial corporations engaged in providing long-term finance for industrial or agricultural development or infrastructure facility in India. The controversy centers on whether the assessee, a bank, qualifies as a "financial corporation." The Tribunal concluded that the assessee, being a banking company, cannot be considered a financial corporation within the meaning of Section 36(1)(viii). The Tribunal noted that the term "financial corporation" is used for special purpose vehicles established to provide long-term funding, which is distinct from the activities of commercial banks. The Tribunal referred to the legislative history and judicial precedents, including the decision in The Federal Bank Ltd. v. Asst. CIT, which held that banks are not eligible for deduction under Section 36(1)(viii) until the provision was amended by the Finance Act, 2006.

3. Quantification of Deduction under Section 36(1)(viii):
The CIT objected to the quantum of deduction claimed by the assessee at ?230.45 crores. The Revenue contended that the correct deduction should be ?117.03 crores. The Tribunal agreed with the Revenue's concern to eliminate the influence of "other income" in computing the deduction. The appropriate ratio for computing the deduction should be the proportion of taxable business income to the gross business income, applied to the gross income from the eligible activity. The Tribunal emphasized that the word "derived" should be assigned a restrictive meaning, and all direct costs should be identified and adjusted.

4. Deduction for Provision for Bad and Doubtful Debts under Section 36(1)(viia):
The assessee claimed a deduction of ?405.17 crores, which included provision for standard assets. The CIT ordered deletion of the excess provision. The Tribunal referred to the decision in Bharat Overseas Bank Ltd. v. CIT, which clarified that the deduction must exclude provision for standard assets. The Tribunal emphasized that deductions must be made strictly in accordance with the provisions of the Act, not with reference to RBI guidelines. The Tribunal restored the matter to the AO for fresh determination, allowing the assessee to justify the provision with reference to debts considered bad and doubtful.

Conclusion:
The Tribunal upheld the invocation of Section 263 by the CIT and concluded that the assessee is not eligible for deduction under Section 36(1)(viii) as a financial corporation. The quantification of the deduction was directed to be computed based on the proportion of taxable business income to gross business income. The provision for bad and doubtful debts under Section 36(1)(viia) was to be re-evaluated by the AO, excluding provision for standard assets. The assessee's appeal was partly allowed.

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