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2024 (11) TMI 1452 - AT - Income TaxMAT Applicability of section 115JB to the assessee bank - HELD THAT - Insofar as the assessee bank is concerned it is not in dispute that it is a public sector bank came into existence during the year 1969 by way of the Banking Companies (Acquisition Transfer of Undertakings) Act 1970 and in the said Act the assessee bank was termed as corresponding new bank. As relying on Union Bank of India 2024 (9) TMI 789 - ITAT MUMBAI the assessee is not a company and therefore the section 115JB would not be applicable to all the assessment years in dispute. Therefore we set aside the orders of the AO as well as the CIT (A) insofar as the applicability of section 115JB of the Act is concerned and decide the issue in favour of the assessee. Disallowance of CSR expenditure disallowance of penalty levied by RBI and disallowance of sundry assets written off - HELD THAT - We were informed by the Ld.AR that the issue is no longer a dispute and the issue was already settled by the judgment of Gujarat Narmada Valley Fertilizers and Chemicals 2019 (8) TMI 1288 - GUJARAT HIGH COURT now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former the disallowance under Explanation 2 to Section 37(1) comes into play. but as for latter. there is no such disabling provision as long as the expenses even in discharge of corporate social responsibility on voluntary basis can be said to be wholly and exclusively for the purposes of business . There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also. as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015. we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case. Thus allow the CSR claim made by the assessee as allowable expenditure for AY 2016-17 and 2017-18. Allowable expenditure u/s. 37 - penalty imposed by the Reserve Bank of India for the deficiencies in exchange of notes and coins/remittances sent to RBI for operations of currency chest etc. which is a civil liability under the RBI Act - HELD THAT - As relying on IDBI BANK LTD 2021 (2) TMI 608 - ITAT MUMBAI accepting the case of the assessee and allow the penalty imposed by the Reserve Bank of India as eligible for deduction u/s 37 of the Act for AY 2016-17 and 2017-18. Disallowance of sundry assets written off by the assessee bank by debiting the profit and loss account and squaring off the individual items in the books and claimed the same as allowable expenditure - CIT (A) had given a finding that the assessee had not furnished any evidence to prove that the findings of the AO is incorrect and therefore confirmed the disallowance made by the AO - HELD THAT - As considered the submissions made by the Ld.AR that the small value of the assets were written off by the assessee by debiting their P L account and finally they have also squared off the said items in the books of accounts. This fact was not verified by the Ld.AO as well as by the Ld. CIT (A). We therefore set aside the order of both the authorities insofar as the above issue is concerned and remit the issue to the assessing officer for denovo consideration. We also made it clear that in the event the AO finds that the submission made by the assessee is correct to allow the said written off as allowable expenditure.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal were:
2. ISSUE-WISE DETAILED ANALYSIS Applicability of Section 115JB to the Assessee Bank Relevant Legal Framework and Precedents: Section 115JB imposes Minimum Alternate Tax (MAT) on companies, computed on book profits. The Finance Act, 2012 inserted clause (b) to sub-section (2) of Section 115JB, purportedly extending its applicability to certain banks. The assessee bank was constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and is a public sector bank, not a company under the Companies Act. The Special Bench of the Mumbai Tribunal in Union Bank of India vs. DCIT, LTU (2) examined whether Section 115JB applies to banks constituted as 'corresponding new banks' under the 1970 Act. The Bench held that such banks are separate and distinct from banking companies and thus not liable under Section 115JB. Court's Interpretation and Reasoning: The Tribunal relied on the Special Bench's reasoning that the Government of India and the Income Tax Act itself recognize these banks as distinct from companies. Therefore, the MAT provisions under Section 115JB do not apply to the assessee bank. Application of Law to Facts: The assessee being a public sector bank constituted under a special statute and not a company, Section 115JB is not applicable for the assessment years in question. Conclusion: The Tribunal set aside the orders of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) insofar as the applicability of Section 115JB is concerned, holding that the bank is not liable under MAT provisions. Additions to Book Profits under Section 115JB for AY 2014-15 Relevant Legal Framework and Precedents: Explanation 1 to Section 115JB provides for certain additions to book profits, including provisions and write-offs. Court's Interpretation and Reasoning: Since Section 115JB was held not applicable to the bank, the additions made to book profits under this section, including bad debts written off, sundry assets written off, provisions for NPAs, and diminution in value of investments, were not justified. Application of Law to Facts: The AO and CIT(A) had made these additions on the premise that the bank is a company liable to MAT, which was rejected by the Tribunal following the Special Bench ruling. Conclusion: The Tribunal set aside these additions and directed that the matter be reconsidered accordingly. Disallowance of CSR Expenditure for AYs 2016-17 and 2017-18 Relevant Legal Framework and Precedents: Section 37 disallows expenditure not incurred wholly and exclusively for business purposes. Explanation 2 to Section 37(1), effective from AY 2015-16, disallows CSR expenditure incurred under statutory obligation of Section 135 of the Companies Act, 2013. The Hon'ble Gujarat High Court in PCIT vs. Gujarat Narmada Valley Fertilizers and Chemicals Ltd. clarified that CSR expenditure incurred voluntarily, not under statutory obligation, is allowable if wholly and exclusively for business purposes. The Tribunal's Coordinate Benches have consistently followed this principle, allowing voluntary CSR expenditure as business expenditure. Court's Interpretation and Reasoning: The Tribunal noted that the assessee bank is not governed by Section 135 of the Companies Act, 2013, and the CSR expenditure was incurred voluntarily based on Government guidelines for Central Public Sector Enterprises. Such expenditure generates goodwill and commercial benefits. Application of Law to Facts: The CSR expenditure claimed by the bank was held to be allowable under Section 37 as it was not a statutory obligation and was incurred wholly and exclusively for business purposes. Conclusion: The Tribunal allowed the CSR expenditure disallowed by the lower authorities for both assessment years. Disallowance of Penalties Levied by RBI Relevant Legal Framework and Precedents: Section 37 disallows expenditure incurred for offences or violations prohibited by law. However, penalties of a compensatory or procedural nature, not punitive or criminal, are allowable. The Bombay High Court in CIT vs. Stock & Bond Trading Company held that penalties imposed for regulatory procedural violations, not criminal offences, are allowable. Similarly, the Kerala High Court in CIT vs. Catholic Syrian Bank held that penalties without criminal liability are allowable. Tribunal decisions have applied these principles to RBI penalties imposed on banks for procedural non-compliance. Court's Interpretation and Reasoning: The Tribunal observed that the penalties imposed by RBI on the assessee bank were civil liabilities under the RBI Act, not punishments for criminal offences. These penalties arose from procedural deficiencies, such as exchange of notes and coin operations. Application of Law to Facts: The Tribunal applied the precedents to allow the penalty amounts as deductible expenditure under Section 37. Conclusion: The disallowances of RBI penalties were set aside and allowed as business expenditure. Disallowance of Sundry Assets Written Off Relevant Legal Framework and Precedents: Expenditure debited to profit and loss account and written off assets can be allowable if properly evidenced and incurred wholly and exclusively for business purposes. Court's Interpretation and Reasoning: The CIT(A) had confirmed the disallowance on the ground that the assessee did not furnish evidence to rebut the AO's findings. However, the Tribunal noted that the AO and CIT(A) did not verify the assessee's submissions that these were small value assets written off and squared off in books. Application of Law to Facts: The Tribunal found that the issue was not properly examined and remitted the matter to the AO for fresh consideration with directions to verify the assessee's claims. Conclusion: The disallowance was set aside and remitted for de novo adjudication, with a direction to allow the expenditure if the assessee's submissions are found correct. 3. SIGNIFICANT HOLDINGS On the applicability of Section 115JB, the Tribunal held: "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 'corresponding new bank' in terms of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and therefore, the provision of Section 115JB cannot be applied and consequently, the tax on book profits (MAT) are not applicable to such banks." On CSR expenditure, the Tribunal relied on the Gujarat High Court ruling: "This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation u/s 135 of Companies Act 2013. and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play. but, as for latter. there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be 'wholly and exclusively for the purposes of business'." Regarding penalties imposed by RBI, the Tribunal observed: "Only those payments, which have been made by the assessee for any purpose which is an 'offence' or which is 'prohibited by law', shall alone would be hit by the Explanation to section 37. Thus impugned amount of penalty was allowable as deduction." On sundry assets written off, the Tribunal emphasized the need for proper verification and evidence, remitting the issue for fresh consideration. In final determinations, the Tribunal:
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