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TMI Blog2024 (11) TMI 1188X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is allowable as deduction u/s 36(1)(iii) and the AO is directed to delete the disallowance made in this regard. Taxation of recovery of bad-debts - assessee has reduced an amount from its computation of total income on account of recovery in respect of accounts written off of Rural Branches - AO did not accept the submissions made by the assessee with regard to such adjustment held any recovery in respect of accounts written off of rural branches required to be added back in computation of income - HELD THAT:- AR brought to our attention that a similar issue in assessee's own case for AY 2013-14 [ 2024 (3) TMI 1371 - ITAT MUMBAI] as clear that the AO has held the recovery to be taxable for the reason that the adjustment made to the provision is indirectly charged to P L A/c. This scenario is considered in the above decision and therefore respectfully following the same, we hold that the recovery of bad-debts which has not been claimed as a deduction u/s 36(1)(vii) in earlier years is not taxable. Accordingly, the AO is directed to delete the addition made in this regard. Applicability of provisions of section 115JB on assessee bank - HELD THAT:-As in assessee&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the decision of the CIT(A) in deleting the addition made towards interest on NPA. Deduction u/s 36(1)(viii) - CIT(A) remitted the issue back to the AO with a direction to recomputed the deduction based on actual interest on eligible advances after deducting cost and expenses on reasonable basis - HELD THAT:- As in assessee's own case for AY 2014-15 [ 2020 (11) TMI 1076 - ITAT MUMBAI ] decided Tribunal vide order [ 2016 (1) TMI 1427 - ITAT MUMBAI ] has remitted the issue back to the file of Assessing Officer to allow the deduction based on actual interest earned from eligible advances after deducting cost and expenses on reasonable basis. The CIT(A) has restored the issue to Assessing Officer to follow the directions of Tribunal. The Id. Departmental Representative has not brought before the Bench any material to controvert the findings of Tribunal in immediately preceding assessment year. Thus, we see no reason to interfere with the decision of the CIT(A). Sale of Asset to Asset Reconstruction Company (ARC) - assessee has incurred loss on sale of assets to ARC - AO disallowed the said claim rejecting the contention of the assessee that the said amount has been debited in acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: Assessee's Appeal Issues contended AY2016-17 AY2017-18 Disallowance u/s 14A r.w.r. 8D Ground No.1 Ground No.1 Disallowance u/s 14A without recording objective satisfaction Ground No.1.1 Ground No.1.1 Amendment in 14A vide Finance Act, 2022 is retrospective. Ground No. 1.2 Ground No. 1.2 Disallowance u/s 14A r.w.r. 8D(ii) Ground No. 1.3 Ground No. 1.3 Disallowance of interest paid on IPDI Bonds Ground No.2 Ground No.2 Taxation of recovery of baddebts written off Ground No.3 Ground No.3 Applicability of provisions of section 115JB Ground No. 4 Ground No. 4 Addition of provisions made for doubtful debts, fraud, suspense, depreciation on investment and derivatives to book profit u/s 115JB Ground No.5 Exclusion of income of foreign branches in completing book profit u/s 115JB Ground No.6 Revenue's Appeal Issue contended AY2016-17 AY2017-18 Broken period interest Ground No.1 Ground No.1 Amortization of premium paid on HTM Securities Ground No.2 Ground No.2 Taxation of unrealized rent on NPA Ground No.3 Ground No.3 Deduction u/s 36(1)(viii) Ground No. 4 Ground No. 4 Sale of Asset to Asset Restructuring company Ground No.5 Disallowance on payment made to RBI for not followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted by the Revenue. The Hon'ble Apex Court in the case of Maxopp Investment Pvt. Ltd. (supra) has observed that where shares are held as 'stock-in-trade', it becomes business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not is immaterial. It is quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the intention of the assessee is to trade in shares to earn profits. The Hon'ble Supreme Court approved the order of Hon'ble Punjab Haryana High Court in the case of PCIT vs. State Bank of Patiala, 391 ITR 218 albiet for a different reason that provisions of section 14A would not get attracted where the shares are held in 'stock-in-trade', Following the judgment rendered in the case of Maxopp Investment P. Ltd. (supra), the Tribunal in the case of Asstt.CIT vs. UCO Bank (supra), Punjab National Bank vs. ACI (supra) and IDBI Bank Ltd. Vs. DCIT(supra) has held that disallowance under section 14A r.w.r. 8D of the Act in case of assessee engaged in Banking business and holding shares as 'stock-in-trade' is not warranted. 7. The CIT(A) has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Loss Absorption Capacity Provisions for write down of principal or conversion to equity on trigger (c) Discretionary pay out with existence of full coupon discretion 8. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in the case of DCIT Vs. State Bank of India (ITA Nos. 3033 2873/Mum/2019 dated 29.09.2022) has considered a similar issue where it has been held that 16 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as argument of rule of consistency is concerned, the Ld. CIT(A) has rejected the contention of the assessee following the decision of the Hon ble Delhi High Court in the case of Krishak Bharati cooperative Ltd (supra). The said finding being based on the precedent, we concur with the finding of the Ld. CIT(A). 16.1 The assessee has distinguished the decision of Hon ble Punjab Haryana High Court in the case of Pepsu Road transport Corporation (supra) on the ground that in said case capital was provided by the Union of India under a statutory obligation which had no provision of repayment. Further in the event of the liquidation of Pepsu Road transport C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specifically asked the assessee vide notice dated 24.11.2016 to provide the detail of income tax reversal on distribution of unsecured perpetual securities. In this regard assessee has given detailed submission vide letter dated 16.12.2016 stating that it has issued 11.4% unsecured perpetual securities (bonds) for the purpose of business use. Interest of such securities is payable @ 11.40% per annum. The assessee has also specifically explained in line with accounting standard, the aforesaid interest is charged to reserve and surplus. The gross amount of interest of aforesaid securities was of Rs. 142.03 crores for F.Y. 2010-11. But the same was charged to Rs. 113.61 crores after netting off taxes [142.03 - 28.42]. The amount of tax impact of Rs. 28.42 crores has been charged to reserve and surplus during the year. Thereafter again on 23.12.2016 the assessee has explained to the assessing officer that during the year the company has incurred Rs. 18.63 crores on issue of 10.75% debenture of Rs. 1500 crores. This amount being expenditure of capital nature has not been claimed by the assessee in its return of income. The assessee has also supplied to the Assessing Officer detailed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 263 is unjustified and we quash the same. Therefore, we allow the ground of appeal of the assessee. 16.3 Respectfully, following the finding of the Tribunal (supra), we set aside the finding of the Ld. CIT(A) on the issue in dispute and direct the Ld. A.O. to delete the disallowance of interest amounting to Rs. 18,00,00,000/-, which was made u/s 36(1)(iii) of the Act. The ground No. 4 of the appeal of the assessee is accordingly allowed. 9. The facts pertaining to the issue in assessee's case is identical to the above and therefore in our considered view the decision of the Co-ordinate Bench the above case is applicable to assessee also. Accordingly, we hold that the interest claimed by the assessee is allowable as deduction u/s 36(1)(iii) and the AO is directed to delete the disallowance made in this regard. Taxation of recovery of bad-debts 10. During the year under consideration the assessee has reduced an amount of Rs. 9,49,46,665/- from its computation of total income on account of recovery in respect of accounts written off of Rural Branches. The AO did not accept the submissions made by the assessee with regard to such adjustment and held that 11.2 The contention of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks as per RBI norms, a deduction of say ₹.500 is allowed based on formula (an amount not exceeding 8.5% of the total income and an amount not exceeding 10% of the aggregate average advances by the rural branches) under section 36(1)(viia). However, if no provision is made in the books, no deduction is allowed under section 36(1)(viia) as per section 36(2)(v) of the Act. 14. Accordingly, for the purpose of determining taxable income, the provision made of ₹.1000 is added back and offered to tax, the deduction of ₹.500 is claimed u/s 36(1)(viia) in the tax computation. Therefore, the actual bad debts written off is charged to the provision account, which the assessee ultimately reverses in the tax computation and allowed only the statutory deduction u/s 36(1)(viia) of the Act, in the books it never crossed the amount allowed under section 36(1)(viia) of the Act. 15. If there is a reversal of provision which is credited to P L account, the same will be offered to tax and no deduction is allowed under section 36(1)(viia) of the Act. Therefore, the provision made/reversed and deduction allowed under section 36(1)(viia) / amount offered to tax form a separate stream of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act. 19. Therefore, it is clear that where a deduction has not been allowed in respect of bad debts written off under the 2nd stream, the question of charging the recovery effected out of such bad debts written off to tax will not arise. In the third situation discussed in the chart, when the assessee does not make any provision as per RBI Guidelines, then it cannot claim any deductions under section 36(1)(viia) of the Act and it can only claim deduction under section 36(1)(vii) of the Act, if there is any recovery, it can be charged to tax under section 41(4) of the Act. Therefore, the proposed addition of recovery of bad debts by the Assessing Officer is not proper and observation of Ld.CIT(A) is also not correct, the revenue has to appreciate the actual claim of deductions made by the assessee under various provisions exclusively enacted for the purpose of banking companies has to be read along with the tax computation submitted by the assessee and not express their opinion without properly verifying the impact in the tax computation. It may look double deduction while reading the provisions in isolation. Accordingly, the grounds raised by the assessee is allowed. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsection (1) of Section 129 of the Companies Act is applicable, who are required to prepare its statement of profit and loss account in accordance with provisions of the Act governing such company. For the sake of ready reference the amended subsection (2) of Section 115JB is again reproduced hereunder:- (2) Every assessee, (a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or (b) being a company, to which the second proviso to subsection (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company: Provided that while preparing the annual accounts including statement of profit and loss, (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including statement of profit and loss; (iii) the method and rates adopted for calculating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fulfilled, it requires such assessee for the purpose of this section to prepare its profit and loss account in accordance with the provisions of the Act governing such company. 43. Since 115JB is applicable to the company to which second proviso to Section 129(1) applies, therefore, it would be relevant to quote Section 129 of the Companies Act which reads as under:- 129. Financial statement-(1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III: Provided that the items contained in such financial statements shall be in accordance with the accounting standards. Provided further that nothing contained in this subsection shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company Provided also that the financial statements shall not be treated as not dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. 46. The expression company has been defined in section 5(d) of the BR Act as under: (d) company means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that Act; 47. Therefore, in so far as is relevant, the entity has to be a company as defined in section 3 of the Companies Act, 1956 (Now 2013) to be regarded as a banking company. Section 3(1)(i) of the Companies Act, defines a 'company' as under: (i) company means a company formed and registered under this Act or an existing company as defined in clause (ii) 48. Therefore, it is sine-qua-non that for an entity to qualify as a company it must either be a company formed and registered under the Companies Act or it should be an existing company as defined in sub-clause (ii) thereof. Since the Assessee is not formed and registered under the Companies Act, 1956, albeit came into existence by a separate Act of Parliament, that is, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 , therefore, it does not fall in the first part of the said section. 49. Further, the expression existing company has been defined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961), every corresponding new bank shall be deemed to be an Indian company and a company in which the public are substantially interested . Therefore, the said deeming fiction is created only for the purposes of the Income-tax Act. Further, for the purposes of the said Act, it treats every corresponding new bank to be an Indian company and also a company in which the public are substantially interested. 53. First of all, deeming an entity to be an Indian Company or a company in which public are substantially interested for the purposes of the Income-tax Act would not ipso facto make such entity as a 'company' for the purposes of the Companies Act, 2013, unless the conditions specified in Section 3 thereof are fulfilled. There is no provision to deem a nationalised bank to be a company for the purposes of Section 3 of the Companies Act, 1956. 54. As explained in the foregoing paragraphs, Section 2(17) of the income Tax Act r.w.s. 2(26) which defines company to mean a company formed and registered under the Companies Act, 1956, does not meet the requirement of being a company in the case of assessee bank, because the Indian company has to be formed and registered under the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 115JB is applicable. 56. Thus, we hold that Section 11 of the Acquisition Act which deals a corresponding new bank treated as Indian company for the purpose of Income Tax, however, Clause (b) in Sub-Section 2 to Section 115JB does not permit treatment of such bank as a company for the purpose of the said clause, because it should be company to which second proviso to sub-section (1) to Section 129 of the Companies Act is applicable. The said proviso has no application to the corresponding new bank as it is not a banking company for the purpose of the said provision. The expression company used in section 115JB(2)(b) is to be inferred to be company under the Companies Act and not to an entity which is deemed by a fiction to be a company for the purpose of the Income Tax Act. 57. Before us, ld. Counsel has given various references under the Income Tax Act itself where the corresponding new bank and a banking company have been treated separate and independent from each other for which our reference was also drawn to Section 36(1)(viii) 72A. Apart from that, it is noticed that, Section 194A(1) of the Act which provides that if any specified person is responsible for paying to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tta-1. 8. Bank of Baroda, 3, Walchand Hirachand Marg, Bombay-1. 9. Punjab National Bank, Parliament Street, New Delhi-1. 10. Bank of India, 70/80 Mahatma Gandhi Road, Bombay-1. 11. Central Bank of India, Mahatma Gandhi Road, Bombay-1. 12. United Bank of India, 4, Narendra Chandra Datta Srani (Clive Ghat Street), Calcutta-1. 13. Bank of Maharashtra, 1177 Peth, Poona-2. 14. Syndicate Bank, Manipal, Mysore State, Mysore 59. Thus, the aforesaid notification read with provision of Section 194A(3), makes it clear that even Government of India considers the above entities separate and distinct from banking companies. Once under the Income Tax Act, Legislature itself has made a distinction for the aforesaid banks including the assessee are not covered as banking company, then, this further buttresses the point that these banks are separate and distinct from other banking companies. 60. Accordingly, the question referred to Special Bench is decided in favour of the assessee banks that clause (b) to sub section (2) of section 115JB of the Income-tax Act inserted by Finance Act, 2012 w.e.f. 1-4-2013, that is, from assessment year 2013-14 onwards, are not applicable to the banks constituted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court's decision in the case of Bank of Rajasthan (316 ITR 391)? ***** 6. Even as far as question (B) is concerned, we find no infirmity in the orders passed by the CIT (Appeals) or the ITAT. In deciding this issue, CIT (Appeals) and the ITAT have merely followed the judgment of this Court in the case of American Express International Banking Corpn. v. CIT [2002] 258 ITR 601/125 Taxman 488. On going through the said judgment, we find that question (B) reproduced above and projected as substantial by Mr Suresh Kumar is squarely answered by the judgment of this Court in the case of American Express International Banking Corpn. (supra). In view thereof, we do not find that even question (B) gives rise to any substantial question of law that needs to be answered by this Court. 19. We heard the parties and perused the material on record. We notice that the Hon'ble Supreme Court in the case of CIT Vs. Citi Bank (Appeal No. 1549 of 2006 dated 12.08.2008) while considering the following question of law has held the appeal in favour of the assessee. Whether on facts and in circumstances of the case, the High Court was right in law in holding that the interest paid for broken p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, we see no reason to interfere with the decision of CIT(A). Taxation of unrealized interest on NPA 24. During the assessment proceedings, the AO noticed that the assessee has not recognized the interest income pertaining to the NPA on accrual basis and called on the assessee to furnish details and provide explanations. The assessee submitted before the AO that as per the provisions of section 43D of the Act in the case of Schedule Bank income by way of interest in relation to prescribed categories of bad or doubtful debts shall be chargeable to tax having regard the Guidelines issued by the RBI either in the year in which it is credited to the P L A/c or in which actually received by the Bank whichever is earlier. The assessee relied on the decision of the Hon'ble Supreme Court in the case of Vasisthchay Vyapar Ltd. (253 taxaman 401) where it is held that even in case where the provisions of section 43B are not applicable interest on bad and doubtful debits have to be taxed only in accordance with RBI Guidelines. The AO did not accept the submissions of the assessee to hold that the when the assessee is maintaining books of account on accrual basis, not accounting for inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 days were classified as no-accrual loans. The unpaid interest in respect of such loans was reversed to an account called Reserve for Doubtful Interest (RFDI) account. All subsequent interest accruals of such loans were credited to RFDI account and not to the profit and loss account. The assessee offered to tax the net amount credited to the RFDI account i.e. the interest accruals in the RFDI account net of recoveries. However, it was argued that such tax treatment leads to offering interest on nonaccrual loans to tax on accrual basis, even if the same is not credited to the profit and loss account. The Mumbai Tribunal held that where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. The aforesaid decision has been affirmed by the Bombay High Court in the case of DIT vs. American Express Bank Ltd [2015] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 97.18 crores and accordingly made a disallowance of Rs. 94.82 crores. The CIT(A) remitted the issue back to the AO with a direction to recomputed the deduction based on actual interest on eligible advances after deducting cost and expenses on reasonable basis as has been held in assessee's own case for AY 2010-11 (ITA No. 1627/Mum/2014 dated 08.01.2016). 28. The ld. AR brought o our attention the below observations of the Coordinate Bench in assessee's own case for AY 2014-15 (ITA No. 1807/Mum/2018 dated 27.11.2020) where it has been held that 16. Both sides heard and orders of authorities below examined on this issue. We find that the issue with respect to computation of deduction under section 36(1)(viii) had come up before the Tribunal in ITA NO.1627/Mum/2014(supra). The Tribunal vide order dated 08/01/2016 has remitted the issue back to the file of Assessing Officer to allow the deduction based on actual interest earned from eligible advances after deducting cost and expenses on reasonable basis. The CIT(A) has restored the issue to Assessing Officer to follow the directions of Tribunal. The Id. Departmental Representative has not brought before the Bench any mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim was made before the Department authorities that it had suffered a loss on sale of NPA.s, that the AO and the FAA held that the assessee had not suffered real loss ie. it was notional loss only. There is no doubt about selling of assets to ARCIL, that ARRIL is not a fake or bogus entity, that the sale has not been doubted by the AO/FAA, that the entry in the books of accounts have been made as per the instructions of the RBI. In our opinion, following of RBI instruction by a banking company cannot be basis for denying or allowing any claim. It is said that the entries in the books of accounts are not conclusive proof of taxability of any income. What has to be seen is the substance of the transaction. Considering the fact that the assessee had suffered loss while carrying out normal business activity i.e. selling its assets. Therefore, we hold that there was no justification for disallowing the loss suffered in the transaction. Reversing the order of the FAA, we decide Ground no.8 in favour of the assessee. 32. Respectfully following the above the decision of the Co-ordinate Bench, we uphold the decision of the CIT(A) in deleting the disallowance made by the AO. 33. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence should be allowed. The CIT(A) allowed the claim of the assessee by placing reliance on the decision of the Co-ordinate Bench in the case of IDBI Bank Vs. DCIT (ITA No. 3394/Mum/2019 dated 09.02.2021). 37. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench in the case of IDBI Bank (supra) has considered a similar issue and held that 12. We have heard the rival submissions and perused the relevant materials on record. In M/s Stock Bond Trading Company (supra) one of the questions was whether the Tribunal was justified in deleting the additions made by the AO under provisions to section 37(1) being penalty imposed by the National Stock Exchange on the assessee. The Hon ble High Court held that : 3 As regards the second question is concerned, the finding of fact recorded by the CIT(A) and upheld by the ITAT is that the payments made by the Assessee to the Stock Exchange for violation of their regulation are not on account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act, 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by law', shall alone would be hit by the Explanation to section 37. Thus impugned amount of penalty was allowable as deduction. 12.1 In the instant case, as recorded by the AO the assessee has claimed expenses on account of penalty of Rs. 15,00,000/- imposed by the RBI u/s 47A of the Banking Regulation Act, 1949 and Rs. 94,200/- for noncompliance of guidelines on customer service, guidelines in respect of exchange of coins and small de-nomination notes and mutilated notes. The ratio laid down in the decisions mentioned at para 12 is squarely applicable to the instant case instead of the decision in ANZ Grindlays Bank (supra) relied on by the Ld. DR. Therefore, following the decisions mentioned at para 12 above, we delete the disallowance of Rs. 15,94,200/- levied by the AO. Accordingly, the 2nd ground of appeal is allowed. 38. It is relevant to note that the Explanation-1 to section 37 provides that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to be incurred wholly and exclusively for the purpose of business or profession and no deduction shall be allowed in respect of such expenditure. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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