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TMI Blog2016 (10) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act' hereinafter) dated 17.3.2009 by the Commissioner of Income Tax-11, Mumbai ('CIT' for short) qua its assessment u/s. 143(3) dated 20.03.2008 for the assessment year (A.Y.) 2006-07. 2. The instant appeal was heard and disposed by the Tribunal in the first instance vide its order dated 06/6/2012 (copy on record). While upholding the assumption of revisionary jurisdiction by the Ld. CIT on the ground of non-application of mind by the assessing authority, i.e., qua the relevant issue/s, it - on merits, upheld the exigibility to deduction under section 36(1)(viii) - denied on the basis of that the assessee is not a 'financial corporation' within the meaning of the term in the said section, following the decision by the Tribunal in Union Bank of India vs. Asst. CIT [2012] 49 SOT 32 (Mum). As regards the quantification, the matter was remanded to the file of the Assessing Officer (AO). The assessee objected thereto by moving a Miscellaneous Petition qua the other objection raised by the ld. CIT, i.e., in respect of withdrawal of deduction under section 36(1)(viia) in-so-far as it related to standard assets, qua which also the Tribunal had, following its order in the assessee's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and dispose of the Appeal on its own merits and in accordance with law. This direction issued by us in the exercise of our further appellate and inherent powers should serve as a reminder to the Tribunal that the matters of vital importance affecting the interest of public should not be disposed of in a light hearted or casual manner. The record must be perused in its entirety and properly and minutely. That is the function and which the judicial body is required to perform and oblige to carry out as well. In these circumstances and the unsatisfactory and unhappy manner in which the Miscellaneous Application has been dealt with and decided that we have directed the revival of the Appeal. We express no opinion on the rival contentions and the Appeal shall be decided by the Tribunal on its own merits and in accordance with law, without being influenced by any observations. We further clarify that this order passed today does not oblige the Tribunal to either allow the Appeal in entirety or partially. All courses and open in law can be adopted by the Tribunal.' The assessee's appeal was accordingly posted for hearing and heard afresh, i.e., on all grounds. We observe no dispute q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is cognizant of a 'corporation' as distinct from a 'company' and, further, only two Corporations stood approved by the Central Government, i.e., Export-Import Bank of India and Industrial Development Bank of India, both established under separate Acts of Parliament, as required for eligibility of financial corporations u/s. 36(1)(viii) prior to AY 2000-01. Reliance is placed on the decision in The Federal Bank Ltd. v. Asst. CIT [2011] 198 Taxman 491 (Ker). The assessee, on the other hand, relies on the decision by the Tribunal in Union Bank of India (supra). 4.1 The matter stands agitated with reference to whether the assessee-bank is a 'financial corporation' within the meaning of the term under section 36(1)(viii) of the Act or not. Though not an incorrect representation of the controversy, it does not to our mind spell out or state the same in full; the opening words of the impugned order reading as under, so that the controversy, succinctly stated, is if the assessee is an eligible assessee u/s. 36(1)(viii): '1 (i) The assessee has been granted deduction of ₹ 230.45 crores under section 36(1)(viii). The deduction under this section is admissible to Financial Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA; and (iii) An undertaking referred to in sub-section (10) of section 80-IB; (e) "long term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;' Clearly, it is not any financial corporation, but only one which is engaged in providing long-term finance for industrial or agricultural development or for setting up an infrastructure facility that qualifies as a financial corporation eligible for deduction under section 36(1)(viii). 4.2 We may next discuss if the assessee could be considered as a 'financial corporation', i.e., within the meaning of the term under section 36(1)(viii), failing which its' case would stand ousted at the threshold. We begin by considering the scope of the term, defined inclusively. The term 'Financial Corporation' stands defined per section 2(b) of the State Financial Corporations Act, 1951 to mean a Financial Corporation established under sections 3 or 3A of the said Act, so that the assessee is not a financial c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration under any Central, State or Provincial Act, engaged in provision of longterm finance as its principal business. We are, when we say so, conscious of the definition being inclusive and not restrictive and, accordingly, the meaning ascribed thereto by us conforms to the generality of the term. True, the definition is extended - by way of amendments, to include a public company and a government company as well. That, however, only reflects or signifies the form of the organization and does not suggest anything about or impinge on its functional character. As such, as long as it is engaged in providing long-term finance for industry or agriculture or infrastructure, it would fall to be an eligible entity u/s. 36(1)(viii). It is thus not any public or Government company, but only one engaged in the specified activity, satisfying the defining attribute thereof, that would stand to be covered by or fall within the ambit of the provision. This, it may be noted, is in agreement with our understanding of the term 'financial corporation' as delineated above. 4.3 We next consider if the assessee bank, a banking company, i.e., to which Banking Regulation Act, 1949 applies, could be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of a minimum rate of dividend on the shares, restriction on distribution of profits and special powers for the enforcement of its claims and recovery of dues. Since the incorporation, regulation and winding up of such Corporations fall within the purview of Parliament vide Entry No.43 of the Union List- The State Governments have requested the Government of India to enact the necessary enabling legislation, which is sought to be effected by this Bill. The main features of the Bill are as follows:- (i) The Bill provides that the State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State. (ii) The share capital shall be fixed by the State Government but shall not exceed ₹ 2 crores. The issue of the shares to the public will be limited to 25 per cent, of the share capital and the rest will be held by the State Government, the Reserve Bank, Scheduled Banks, Insurance Companies, Investment Trusts, Co-operative Banks and other Financial Institutions. (iii)Shares of the Corporation will be guaranteed by the State Government as to the re-payment of principal and the payment of a minimum dividend to be prescribed in consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (No. 2) Act, 1970, agricultural development was also included as the objective/purpose of the provision of the long term finance to qualify as an eligible activity. Finance Act, 1979 extended the benefit of the provision to approved public companies engaged in providing long-term finance for the housing sector; the deduction being in the meanwhile (by Finance Act, 1974) enhanced to, from the erstwhile 10%/25% (on the basis of the share capital), to a uniform rate of 40%. The deduction on account of a special reserve would provide a fiscal benefit by lowering the taxable income while at the same time insuring its' retention in-as-much as the same could not be distributed by way of dividend. As it was subsequently noticed that the financial corporations/approved public companies had diversified their activities and were claiming deduction under this section even in respect of income derived from activities other than those specified in the section, for which there was no justification, the provision was amended by Finance Act, 1995 to limit the deduction to 40% of the income derived from long-term finance from the specified activities, so that the income derived from other business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is twice the amount of the paid-up share capital and of the general reserves, the reduction in the level of deduction to twenty per cent will have the effect of elongating the time period during which the deduction can be claimed by the beneficiary "specified entities". Effectively therefore the specified entities are not adversely affected in the long term. 21.5 The provision has also been restructured to provide for different categories of entities (which now also includes co-operative banks) and their respective activities for eligibility of the deduction under the said clause. For claiming deduction under the said clause, (i) a financial corporation specified in section 4A of the Companies Act or a financial corporation which is a public sector company or a banking company or a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank) has to be engaged in the business of providing long-term finance in India for industrial or agricultural development or development of infrastructure facility, (ii) a housing finance company has to be engaged in the business of providing long-term finance fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precedence value. Why, it was precisely on account of inadequacy of commercial banks that need for such institutions, to meet the long term funding requirements of industry, agriculture and infrastructure, that the need for setting up such specialized institutions was perceived, followed by the need for providing fiscal benefit thereto by reducing the effective rate of tax by providing deduction on the basis of creation of a reserve, which would have also have the affect of spurring their internal growth rate. The omission of any reference to banks, ubiquitous in the financial sector, in the provision, is a clear legislative intent not to extend the benefit of the deduction to commercial banks, which specialize in and are engaged in business of banking, which includes a wide spectrum of activities, including financial intermediation, but to only those corporations whose core activity is long-term funding. The placement of the provision (section 36(1)(viii)) also assumes significance in this regard. In fact, an analogous provision (section 36(1)(viiia)) was inserted in the Act by Finance Act, 1982 to extend a benefit to Scheduled Banks (other than foreign banks) approved by the Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately brought under the subsequent sub-section namely, clause (viii) of section 36(1) wherein financial corporation is given an inclusive definition covering public companies and Government companies. It is not as if the Legislature was unaware of the fact that Scheduled Banks are registered under the Companies Act. When the Legislature makes special provisions for deductions admissible to different types of assessees and when Scheduled Banks are specifically referred to in the sections made applicable to them, it cannot be assumed that the Legislature wanted to cover Scheduled Banks within the meaning of public companies engaged in financing making them financial corporations. If the assessee's contention that a Scheduled Bank engaged in long- term financing including advance for infrastructural development falls within the definition of public company and in turn financial corporation within the meaning of section 36(1)(viii) is accepted, then there was no need for the amendment introduced in 2007 referred to above whereunder banking companies are also specifically granted deduction under section 36(1)(viii) of the Act. As already pointed out by us, the Legislature made specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the omission of the word 'bank' or 'banking company' or 'scheduled bank', etc. in the provision cannot but be deliberate - the legislative intent being the foundation of any interpretative exercise (CIT vs. Baby Marine Exports [2007] 290 ITR 323 (SC)). Though without doubt relevant as well as contextual, we do not consider it in fact necessary to travel to such length to justify of the assessee being not an eligible assessee u/s. 36(1)(viii). This is as, as noted earlier, it is not any financial corporation, but only those engaged - principally, if not wholly, in long-term lending for specific activities, that are eligible under the provision. Banks are neither dedicated nor in fact geared to provide such specialized services, which, as afore-stated, extends to, for larger sized projects yielding returns/social benefits over the long term, decades, resulting in the need for creation or institution of such special bodies to meet this vital need of the core sectors of the economy. The risk profile and the financing of the banks is entirely different, being spread over the variety of services, with their sourcing in the main extending to time and demand liabilities, the time peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(viii) (40% of above) Rs.2,30,45,29,648 (refer: para 4.4 of the impugned order) This stands rejected by the Revenue as the basis thereof is the 'whole bank' income, and which includes income assessable under other heads of income as well, i.e., which are not assessable as business income. The assessee's alternate claim is as under: Whole Bank income including interest and other income Rs.32,183.61 cr. Taxable income as per assessment order dtd. 20.3.08 Rs.5,515.91 cr. Add: Dedn. allowed u/s. 36(1)(viii) Rs.230.45 cr. Add: Dedn. allowed u/s. 36(1)(viia) Rs.1,392.33 cr. Taxable income before 36(1)(viii) deduction Rs.7,139.33 cr. Taxable income as % of total income/other income 16.53 Taxable income attributable to providing long-term finance to industry and agriculture 3,63,96,28,838 Allowable deduction u/s. 36(1)(viii) - (40% of above) 1,45,58,51,535 Deduction allowed earlier 2,30,45,29,648 Difference to be disallowed 84,86,78,113 (refer: para 4.5 of the impugned order) This again did not find acceptance as the taxable income includes income assessable, besides under Chapter IV-D, under other heads of income as well. The Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order. Before us, the assessee's case was that the provision was made following the RBI guidelines, which clearly provide for provision on standard assets varying from 0.25% to 0.4%. Reliance is also placed on Circular No. 258 dated 14.6.1979 issued by CBDT clarifying that section 36(1)(viia) was introduced to allow the commercial banks to make adequate provision for risk they undertake in relation to the rural advances. The Revenue, on the other hand, relies on the decision by the Tribunal in Bharat Overseas Bank Ltd. vs. CIT (in ITA No. 1191/Mds/2012/copy on record). 8. We have heard the parties, and perused the material on record. We begin by reproducing the relevant provision: 'Other deductions 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - (i).............. (ii) ............ (viia) in respect of any provision for bad and doubtful debts made by- (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding five per cent of the total income (co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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). So, however, we may also clarify that we are in principle in agreement that a provision for bad and doubtful debts cannot include that against standard assets, i.e., which the bank (assessee) itself regards as good for receipt and, therefore, with the decision by the tribunal in Bharat Overseas Bank Ltd. (supra) relied upon by the Revenue. A provision is by definition a charge against profits, while that in respect of an asset, considered good, would be more in the nature of an appropriation of profit, i.e., a reserve. This is precisely what the Tribunal in Bharat Overseas Bank Ltd. (supra) means when it states of the deduction being not in the nature of a standard allowance. No contrary judgment by the tribunal or a higher court has even otherwise been brought to our notice. At the same time, the provision as per RBI guidelines - which are contended to have be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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