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TMI Blog2018 (5) TMI 1627X X X X Extracts X X X X X X X X Extracts X X X X ..... cific adjudication. 3. Ground Nos.2 to 4 raised by the revenue reads as follows:- 2. Whether on facts & circumstances of the case, is the learned CIT(A) correct in allowing deduction of Rs. 177.38 crores U/s.36(1)(viia), even when the provision made in books of accounts by the assessee was only for Rs. 9.11 crores. 3. Whether QQ facts & circumstances of the case, is the learned CIT(A) right in relying on the decision of Catholic Syrian Bank Ltd Vs. CIT - 343 ITR 270 in respect of Sec.36(1)(viia) when the facts and issues involved in both cases are different. 4. The learned CIT(A) has failed to appreciate the fact that deduction U/s. 36(1)(viia) can only be claimed to the extent of provision made in books and subjected to the restrictions mentioned in Sec.36(1)(viia). 4. The assessee is a rural regional bank engaged in the business of banking. In the course of assessment proceedings u/s 143(3) of the Incometax Act, 1961 (Act) for AY 2009-10, the AO noticed that the asssessee had claimed deduction on account of provision for bad and doubtful debts for a sum of Rs. 9,11,50,296/-. The sum of Rs. 9,11,50,296/- is the sum which was debited towards Provision for Bad and Doubtf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the decision of co-ordinate Bench of the Tribunal should be followed in preference to the decision of non jurisdictional High Court decision. In this regard, the ld counsel for the assessee placed reliance on the decision of the Hon'ble Karnataka High Court in the case of Patil Vijayakumar & Others Vs. Union of India 151 ITR 48 (Kar). 8. We have considered the rival submission. The provisions of Section 36(1)(viia)(a) of the Act lays down as follows: ITA Nos.673, 674 & 684/B/14 4 "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 co-operative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal held that Judicial discipline demands that the Tribunal should follow the later decision which has considered both the decisions on the issue. The Tribunal following the said decision held deduction on account of Provision for Bad and Doubtful Debts u/s.36(1)(viia) of the Act has to be allowed only to the extent such provision is actually debited in the Profit & Loss Account by the Assessee for the relevant previous year. We therefore respectfully following the decision of the Tribunal in the case of Canara Bank (supra), allow Gr.No.2 to 4 raised by the Revenue and hold that the disallowance made by the AO was proper and the Assessee is entitled to deduction only to the extent PBDD is debited to the P & L A/c. Thus Gr.No.2 to 4 3 raised by the revenue are allowed. 11. As far as the decision of the Hon'ble Karnataka High Court in the case of Patil Vijayakumar (supra) cited by the learned counsel for the Assessee is concerned, We find that the issue in the aforesaid case was as to whether the Income-tax Act 1961 being all India statute, the view expressed by one High Court should be followed by the other High Courts of different state. The Hon'ble Karnataka High Court took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts & circumstances of the case, is the learned CIT(A) correct in holding that Rs. 778.48 crores as eligible for deduction U/s.36(1)(viii) of the Act. 6. Whether on facts & circumstances of the case, is the learned CIT(A) correct in allowing deduction even though the following advances prima fade are not eligible U/s. 36(1)(viii) for deduction. (a) Advances to Rural Artisans Rs. 8.91 crores (b) Advances to retail trade Rs. 93.71 crores (c) Advances to small business Rs. 25,44 crores (d) Advances to professional & self employed Rs. 43.82 crores (e) Advances to Road Transport Operators Rs. 20.57 crores 13. Before we proceed to discuss these grounds, it is useful to set out the provision of sec. 36(1)(viii) of the Act which allows certain deductions to Banking companies and it reads as follows:- "(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent. of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed; (ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and (iii) an undertaking referred to in sub-section (10) of section 80-IB; (h) "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." 14. As can be seen from the aforesaid provision, deduction is allowed to specified entity (the assessee is a specified entity) of 20% profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause). The Assessee has to create and maintain a special reserve A/C and transfer to such reserve account the sum which is claimed as deduction u/s.36(1)(viii) of the Act. "Eligible business" has been defined in Explanation (b) to sec. 36(1)(viii) of the Act whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 3 months to 6 months old 55.49 " 6 months to 1 year old 124.85 " 1 year to 3 years old 1358.12 " 3 years to 5 years old 416.18 " 5 years and above 374.56 2526.28 16. The Assessee pointed out that the AO had taken the long term finance from the table above at Rs. 374.56 Crores by considering the loans given by the Assessee for a period above 5 years was Rs. 374.56 Crores. The Assessee pointed out that the above table showed the remaining term of loans and advances as on 31.03.2009 (Maturity Pattern) and not the tenure of the loans given. The Assessee also submitted that as per RBI, the banks have to give Assets and Liabilities Management (ALM) statement as on Balance Sheet date showing maturity pattern of Deposits, Advances, Investments, etc but it does not indicate the tenure of the loan or deposits but only maturity pattern of deposits and advances. The Assessee pointed out that the learned assessing officer without discussing the ALM Statement given in the Annual Report with the Assessee has mistaken the maturity pattern of loans and advances as on 3103.2009 as tenure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act which reads as under : 36(1)(viii) In respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head " profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account." From the provision of section 36(1)(viii) of the Act, it is clear that the deduction of 20% should be on the profits pertaining to the eligible business. The AO, in the case on hand, has considered the profits from the eligible business to be at 17% of the book profit instead of considering the total income from the eligible profits. Various courts have held that for the purposes of claiming deduction under section 36(1)(viii) of the Act, it has to be computed on the total income before deduction under this section. As regards the issue of whether statutory deduction under section 36(1)(viii) of the Act should be calculated on the total income, before deduction under section 36(1)(viii) itself or after deduction under section 36(1)(viii) of the Act, it is a settled issue in view of the decisions of the Hon'ble Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a factual finding as to what should be considered as eligible advances i.e., long term finance provided by the Assessee. We are of the view that since no finding has been given by the CIT(A) as to the basis on which the relief was given by the CIT(A), we deem it fit and proper to set aside the order of the CIT(A) and remand to the AO for fresh consideration the question of proper deduction to be allowed u/s 36(1)((viii) of the Act. The AO will consider the contentions put forth by the assessee and decide the issue afresh affording opportunity being heard to the assessee. 21. Ground Nos.5 and 6 are treated as allowed for statistical purposes. 22. In the result, the appeal by the assessee is treated as partly allowed. ITA No.674/Bang/2014 (Revenues' Appeal for Asst. Year 2010-11) 23. Ground Nos. 1, 8 and 9 raised by the revenue are general in nature and calls for no specific adjudication. 24. Ground Nos.2 and 3 raised by the Revenue are similar to ground Nos. 2 to 4 raised by the assessee in its appeal for assessment year 2009-10 in ITA No.673/Bang/2014. For the reasons stated therein the disallowance made by the AO u/s 36(1)(viia) of the Act is restored and the relief allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.1.2008 for Assessment Year 2003-04. II. (ii) The Karnataka Bank Ltd. VJCIT in ITA No.50/Bang! 997. III. (in) ING Vysya Bank Ltd V DCIT (2006) 6 SOT 606 (Bang) held that all investments made by the assessee constitute stock in trade for the purpose of income tax and has to be therefore valued in the manner in which stock-in-trade is valued. On further appeal by the revenue the Tribunal upheld the order of the CIT(A). Following are the relevant observation of the ITAT in ITA No.226/Bang/2012 for assessment year 2008-09 held as follows:- "11.5 We have heard the rival contentions on the issue before us and have perused and carefully considered the material on record including the judicial, pronouncements relied on. In the case on hand, we find that there is no dispute as regards the investment made by the assessee in securities and the said investments have been treated and classified by the assessee as stock-in-trade, which have been valued at the end of the year at cost or market value, whichever is less. From this it is clear that the asses-see is treating the securities held under the category 'held to maturity' as stock-in-trade. This issue has been considered in deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect in deleting the addition made on account of stale drafts and pay orders U/s. 41(1). 7. Whether on facts & circumstances of the case, is the CIT(A) correct in not appreciating that stale drafts & pay orders have not been claimed by the persons and the amounts involved remained with the assessee bank and hence taxable as per Section 28(iv) of the l.T. Act." 30. As far as ground Nos. 6 and 7 are concerned, the issue is with regard to whether the AO was justified in making an addition by treating liability of the assessee on account of stale drafts as income of the assessee u/s 41(1) of the Act. It was not disputed by the parties before us that identical issue was considered by the Tribunal in assessee's own case in assessment year 2008- 09. The facts in AY 2008-09 which are similar to the facts in the present AY are that the Assessing Officer noticed that in the Assesse's Balance Sheet as on 31.3.2007 an amount of Rs. 58,31,851 was shown as liability outstanding towards Drafts and Pay Orders. The Assessing officers treated these amounts as income of the assessee u/s.41(1) of the Act by relying on the ns of the Hon'ble Apex Court in the case of T.V. Sundaram lyengar & Son ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was credited to the profit and loss account. The RBI's directions are also clear that the assessee should not use the amount transferred to General Reserve for any purpose other than meeting any, future claims by the persons entitled to claim the aforesaid amount. The amount was also not available for distribution of dividend. In the fight of the aforesaid facts and circumstances prevailing in the case of the assessee, we are of the view that the decision of the Hon'ble Supreme Court in the case of TV Sundaram lyengar and Sons (supra) will not be applicable to the facts of the present case.' 31. The Tribunal on the above contentions held in ITA No.226/Bang/2014 order dated 28/11/2013 as follows:- "7.3.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited on either side. The Assessing Officer has invoked the provisions of section 41(1) of the Act to bring the amount of Rs. 58, 31,851 received for making drafts and pay orders to tax in the hands of the asses e in the period under consideration. section 41(1) of the Act, specifically deals with amour1t that were allowed as a deduction in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g/2011 dt.22.4.2012). Following, the aforesaid decisions of the coordinate Bench of the Tribunal (supra) we delete this addition of Rs. 58,31,851 made by the Assessing Officer under section 41(1) of the Act as being unsustainable. 8.0. In the result, the assessee's appeal for Assessment Year 2007-08 is partly allowed." 32. Respectfully following the decision of the Tribunal, we uphold the order of the CIT(A) and dismiss ground Nos.6 and 7 raised by the Revenue. 33. In the result, appeal by the Revenue is partly allowed. ITA No.684/Bang/2014 (Assessment Year 2010-11) Assessee's Appeal: 34. The Only issue that arises consideration in this appeal by the assessee is with regard to the disallowance of interest expenses made by the AO u/s 40a(ia) of the Act. In terms of Sec.40(a)(i) of the Act, if tax is deductible at source under Chapter XVII-B of the Act and where it is not so deducted at source on the amount of any interest or royalty, fees for technical services or other sum chargeable under the Act, which is payable outside India or in India to a non-resident, not being a company or to a foreign company, the same shall not be allowed as deduction while computing "Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I; (vi ) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;" 35. Under Section 194A of the Act which is a section appearing in Part XVIIB of the Act, the Assessee was obliged to deduct tax at source where interest paid is in excess of Rs. 10,000/- per annum. During the assessment proceedings it was noticed by the AO that the Assessee has paid total interest of Rs. 234,62,57,000/- during the F.Yr 2009-10. Of this amount Rs. 15,03,55,000/- was paid to NABARD and Rs. 68,44,000/- was paid to Reserve Bank of India . Thus the interest paid on other deposits came to Rs. 218,90,58,000/- . The assessee was asked to give further break up of the sum of Rs. 218,90,58,000/- to verify whether TDS was made on the interest paid on term deposits exceeding Rs. 10,000/-. In response the assessee submitted the following break up of interest paid : Sl. No. Head of deposits Interest paid for the FY 2009-10 1. Savings Bank Deposits 35,94,69,466 2. Recurring Deposits 1,66,60,914 3. Pigmy Deposits 4,47,07,916 4. Interest paid up to Rs. 10,000/- on Term Deposits 132,01,23,494 5. Interest above Rs. 10,000/- on Term Deposits 44,80,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT(A) upheld both the additions made by the AO. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. 39. Before the Tribunal, on the issue of disallowance of a sum of Rs. 28,98,43,706, the learned counsel for the Assessee submitted that once the depositors give Form No.15G/H, the law empowers the Assessee to make payment of interest without deduction of tax at source. The requirement of filing the form so obtained before the prescribed authority within the prescribed period was only a procedural requirement and it was mandatory and for failure to file the form before the prescribed authority no disallowance can be made u/s.40(a)(ia) of the Act. For the above proposition the learned counsel for the Assessee relied on the decision of the Hon'ble Karnataka High Court in the case of Sri Marikamba Transport Co. 231 Taxman 484 (Karn.) wherein the Hon'ble Karnataka High Court as follows: "4. The combined reading of these two provisions make it clear that if there is any breach of requirements of Section 194C(3), the question of applicability of Section 40(a)(ia) arises. The exclusion provided in Sub-section of Section 194C from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same u/s 40a (ia) of IT Act. Like so the claim of interest payment stated to be made to Government was not properly supported with the evidences thus inviting the disallowance of the same u/s 40a (ia) of IT Act. 9.4. Thus an amount the Rs. 12,98,57,409 for non-deduction of TDS on theinterest paid exceeding Rs. 10,000/- and an amount of Rs. 28,98,43,076/- where no 15G/15H forms were stated to be submitted or interest stated to be paid to Government Department, is disallowed u/s 40a (ia) of IT Act. Thus the total amount of Rs. 41,97,00,485/- disallowed and added back to the income returned by the assessee." 41. Without prejudice to his reliance on the order of the AO, the ld DR submitted that the disallowance to the extent of payment to government should be set aside to the AO and the assessee should be asked to furnish the required details. 42. We have given a careful consideration to the rival submissions. As far as disallowance of interest of a sum of Rs. 28,98,43,076/- is concerned to the extent of the disallowance relates to interest paid to persons furnished Form 15 G and Form 15 H to the assessee, no disallowance can be made u/s 40a(ia) of the Act as held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 'an assessee in default' u/s 201(1) of the Act is passed as Sec.40(a)(ia) in Chapter XVIIB are interlinked provisions. 44. The ld DR however, submitted that the interest in question is allowable as revenue expenditure u/s 37(1) of the Act and, therefore, the disallowance u/s 40a(ia) of the Act is applicable. It was submitted by him that commercial principles cannot be made applicable in the context of disallowance u/s 40a(ia) of the Act. It was submitted by him that the acceptance of deposits by banking company is only for the purpose of lending which is a regular business of the assessee and interest paid on such deposits will fall within the ambit of sec. 37(1) of the Act and not u/s 28 of the Act. It was also submitted by him that even sec. 40(a)(ia) of the Act makes a specific reference to any interest and, therefore all types of interest are covered within the ambit of sec. 40(a)(ia) of the Act. It was submitted by him that language of the sec. 40(a)(ia) of the Act does not require for its application that there must be an order u/s 201(1) of the Act under Chapter XVII B of the Act. 45. We have given a careful consideration to the rival submissions. We do not find force ..... X X X X Extracts X X X X X X X X Extracts X X X X
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