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2015 (10) TMI 2009 - AT - Income TaxApplicability of provisions of section 115JB - banking business - Held that - Allow the appeal of the assessee on the ground that the bank is not required to prepare its P&L accounts in accordance with the provisions of part-II & of schedule VI of Companies Act, 1956 and therefore, the provisions of MAT insec.115JB of the IT Act, is not applicable to the assessee. See M/s Indian Bank Vs Addl.CIT 2011 (8) TMI 1112 - ITAT CHENNAI - Decided in favour of assessee. Deduction u/s 36(1)(viia) - whether provisions of section 36(1)(viia) provides for limiting the deduction tot eh amount of provisions made in the accounts? - 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) - Decided in favour of assessee in part. Deduction u/s 36(1)(viia) - bad debts written off pertaining to non-rural branches without adjusting the same against the provisions made u/s 326(1)(viia) - Held that - CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (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. U/s 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year, while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans. Therefore, we hold that provisions of Sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields Decided in favor of assessee. See Catholic Syrian Bank Ltd. Versus Commissioner of Income Tax, Thrissur 2012 (2) TMI 262 - SUPREME COURT OF INDIA - Decided against revenue. Depreciation on held to maturity (HTM) investment - Held that - As decided in case of UCO Bank 1999 (9) TMI 4 - SUPREME Court Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case Addition u/s 36(1)(viii) - whether the assesssee is not a specified entity prior to amendment in the IT Act,w.e.f.1/4/2008 and not doing an eligible business to be entitled for deduction u/s 326(1)(viii)? - Held that - As decided in Union Bank of India case 2012 (6) TMI 500 - ITAT MUMBAI even otherwise the assessee is a Govt. company since the Central Government holds more than 51% of the share capital of the bank and as defined inSec.617 of the Companies Act, the assessee is a Government Company. Hence the deduction u/s 36(1)(viii) has to be allowed to the assessee as it is engaged in the business of providing long term finance for industrial, agriculture and infrastructure development in India and is a Government Company. The assessee is a financial Corporation within themeaning of Sec.36(1)(viii) since it is a Government Company. However, the deduction available under this section will be restricted to the amount transferred to Special reserve subject to the limit of prescribed percentage of profits derived from providing long term finance for the approved purposes mentioned in Sec.36(1)(viii). For the purpose of determining the deduction available to the assessee u/s 36(1)(vii) the issue is remitted back to the file of the AO subject to the above direction the appeal of the assessee on this issue is allowed - Decided against revenue. Disallowance made u/s 14A - CIT(A) allowed the claim - Held that - This issue is covered by the order of ITAT, Bangalore Bench in assessee s own case for previous AYs 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 against revenue.
Issues Involved:
1. Applicability of Section 115JB of the IT Act, 1961 to the assessee. 2. Deduction under Section 36(1)(viia) of the IT Act, 1961. 3. Deduction of bad debts under Section 36(1)(vii) of the IT Act, 1961. 4. Depreciation on "Held to Maturity" (HTM) investments. 5. Deduction under Section 36(1)(viii) of the IT Act, 1961. 6. Disallowance under Section 14A of the IT Act, 1961. Issue-wise Detailed Analysis: 1. Applicability of Section 115JB of the IT Act, 1961 to the Assessee: The assessee, a nationalized bank, argued that since it prepares its accounts as per the Banking Regulation Act, 1949, and not as per Schedule VI Part II & III of the Companies Act, 1956, the provisions of Section 115JB are not applicable. The Tribunal referred to the case of M/s Indian Bank Vs Addl.CIT, where it was held that the provisions of Section 115JB do not apply to banking companies as they are exempt from preparing accounts under Schedule VI of the Companies Act. The Tribunal, respecting the decision of the Co-ordinate Bench, set aside the orders of the lower authorities and allowed the appeal of the assessee. 2. Deduction under Section 36(1)(viia) of the IT Act, 1961: The CIT(A) directed the AO to allow the claim of deduction under Section 36(1)(viia) amounting to Rs. 143,12,69,349/-. The Tribunal referred to the Co-ordinate Bench's decision in the case of Canara Bank, which held 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 Tribunal allowed the revenue's appeal to this extent and rejected the alternate submission by the assessee regarding excess provision in subsequent years. 3. Deduction of Bad Debts under Section 36(1)(vii) of the IT Act, 1961: The CIT(A) directed the AO to allow the deduction of Rs. 34,45,27,639/- under Section 36(1)(vii) for bad debts written off pertaining to non-rural branches without adjusting against provisions made under Section 36(1)(viia). The Tribunal referred to the Supreme Court's decision in Catholic Syrian Bank Ltd., which clarified that deductions under Section 36(1)(vii) and 36(1)(viia) are distinct and independent. The Tribunal dismissed the revenue's appeal on this issue. 4. Depreciation on "Held to Maturity" (HTM) Investments: The CIT(A) allowed the claim of depreciation on HTM investments amounting to Rs. 349,47,34,269/-. The Tribunal referred to the Co-ordinate Bench's decision in ITA No.578(B)/2012, which upheld that depreciation on investments held under HTM or "Available for Sale" can be allowed as deduction. The Tribunal dismissed the revenue's appeal on this issue. 5. Deduction under Section 36(1)(viii) of the IT Act, 1961: The CIT(A) allowed the deduction of Rs. 20 Cr under Section 36(1)(viii), considering the assessee as a specified entity. The Tribunal referred to the Mumbai Bench's decision in the case of Union Bank of India, which held that the assessee, being a Government company, is entitled to the deduction under Section 36(1)(viii). The Tribunal dismissed the revenue's appeal on this issue. 6. Disallowance under Section 14A of the IT Act, 1961: The CIT(A) deleted the disallowance of Rs. 3,43,28,658/- under Section 14A. The Tribunal referred to the Co-ordinate Bench's decision in ITA No.578(B)/2012, which held that no disallowance can be made under Section 14A as the expenditure would have been incurred even without earning any tax-free income. The Tribunal dismissed the revenue's appeal on this issue. Conclusion: The appeals filed by the assessee for the assessment years 2006-07 and 2007-08 were allowed, and the appeals filed by the revenue were partly allowed for the assessment year 2006-07 and dismissed for the assessment year 2007-08. The Tribunal pronounced the order in the open court on the 11th of September, 2015.
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