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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 ..... 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 case for AY 2005-06, set aside the matter back to the file of the AO. The revisionary authority had, in contradistinction to that year, rendered definite findings qua the said withdrawal, directing so, so that the issue ought to have been decided by the tribunal itself. This was the assessee's contention in its' Miscellaneous Application. The assessee's petition was disposed by the Tribunal by recalling its' order on that ground (in MA No. 170/Mum/2013 dated 04/6/2014) for a decision on merits. The assessee had in the meanwhile also moved the Hon'ble High Court under its appellate jurisdiction (in Income Tax Appeal No.1481 of 2012 dated 17/2/2014/copy on record). The Hon'ble High Court was not happy with the partial revival of the assessee's appeal by the tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 qua the primary facts of the case leading to the instant appeal. We shall proceed issue-wise. Qua the preliminary issue of assumption of jurisdiction, raised per Ground 2, Gd. 1 being general in nature, there is no mention or even whisper of the same in the assessment order. No material indicating any query - that being the ground on which jurisdiction stands assumed by the ld. CIT in the instant case, was also led during hearing. We, accordingly, uphold the same; it being the settled law that absence or lack of enquiry, in-as-much as it exhibits non application of mind, would result in the result order being erroneous. Case law in the matter is legion, even as the ld. DR would before us rely on the decision in the case of Horizon Investment Co. Ltd. v. CIT (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect 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 Rs. 230.45 crores under section 36(1)(viii). The deduction under this section is admissible to Financial Corporations engaged in extending long-term finance to industrial and agricultural development and development of infrastructure facility. The assessee being a banking company cannot be considered as a financial corporation within the meaning of section 36(1)(viii). Therefore, the allowance of Rs. 230.45 crores as deduction under that section is erroneous.' It would be relevant to reproduce the relevant provision, which we do as under: '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) ............ (viii) in respect of any special reserve created and maintained by a financial corporation whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 corporation within the meaning assigned to the said term under the said Act. However, if the spread of the term was to be limited thereto, the statute would have easily defined the term to mean a financial corporation as defined under the said Act. Why, we find reference to State Financial Corporations in other sections of the Act, as s. 36(1)(viia). Further, Reserve Bank of India, 1934 defines 'Industrial Finance Corporation', 'International Finance Corporation' and 'State Financial Corporation' (refer ss. 2(c), 2(cb) and 2(fi) thereof), to none of which categories also the assessee belongs. Rather, the assessee is separately defined per section 2(eb) thereof, and referred to therein as 'State Bank'. The defining attribute of these finance/financial corporations, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regarded as a financial corporation, i.e., as delineated above. In our considered view, the answer is in the negative. The term is used, as sought to be explained earlier, for special purpose vehicles, incorporated or established to fund industry or agriculture or set up infrastructure facilities, on a long-term basis. Reference in this context may be made to the preamble (Introduction) of the State Financial Corporations Act, 1951, which may be reproduced for ready reference, as under: 'THE STATE FINANCIAL CORPORATIONS ACT, 1951 INTRODUCTION A Central Industrial Finance Corporation was set up under the Industrial Finance Corporations Act, 1948 in order to provide medium and long term credit to industrial undertakings which fall outside the normal activities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consultation with the Central Government.' As apparent, it is only as commercial banks, as a class, were considered inadequate to satisfy the funding requirements of the industry, being both capital-intensive and longterm, that the need for establishing financial corporations in the country was felt. Traditionally, the sourcing thereof is by pension and life insurance funds, which mobilize savings by the household sector on a long-term basis, to finance long gestation projects in-as-much as such funds are generated on a long-term basis, primarily with a view to support/supplement the superannuated/old-age funding requirement of individuals. And are used to finance long gestation projects, as in the areas of irrigation, power, energy, public health, public utilities, such as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies 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 activities or other source would not be taken into account for computing the deduction u/s. 36(1)(viii). This position stands in fact confirmed in Power Finance Corporation Ltd. vs. Jt. CIT [2006] 10 SOT 190 (Del-Trib)). The journey of the provision continues; the latest amendment thereto being by Finance Act, 2009, even as major restructuring of the provision was by Finance Act, 2007 substituting the provision w.e.f. 01.4.2008. The scope and rationale of the same stands explained by the Revenue per Departmental Circular No. 3/2008 dated 12.3.2008, titled 'Rationalisation of provisions relating to deduction in respect of creation and maintenance of special reserve under section 36(1)(viii). The salient features of the provision stand brought forth therein are deemed ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 for the construction or purchase of houses in India for residential purposes and (iii) any other financial corporation including a public company, has to be engaged in the business of providing long-term finance for development of infrastructure facility in India. It may be clarified that a financial corporation specified in section 4A of the Companies Act shall include such corporations specified under sub-section (1) and under sub-section (2) of section 4A of the Companies Act. 21.6 The amendment made by the Finance Act, 2007 also provides definitions of the expressions "banking company", "co-operative bank", "primary agricultural credit society", "primary co-operative agricultural and rural development bank", "housing finance company", "public company", "infrastructure facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations 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 Central Government [having regard to their share capital; the extent of operations outside India; the need for resources outside India]. The section was omitted by Finance Act, 1994 and, in fact, operative only for the period 01.4.1983 to 31.3.1985. Once the Legislature has clearly specified a set of entities as banks, which it further classifies as scheduled banks and non-scheduled banks, extending some provisions to scheduled banks or even to both, it can only be said that by using the word 'financial corporation' instead the Legislature intended to exclude banks from the ambit of the provision. Even if the benefit was intended to be extended to a larger set of bodies, why could not a banking company, specifically defined under the Act and, further, a term adopted in the analogous provisions, could be employed. It is noteworthy that both the immediately preced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 provisions in section 36(1)(viia) for Scheduled Banks and made certain provision for deduction exclusively for financial corporations under section 36(1)(viii). Even though Scheduled Banks and financial corporations engaged in business of analogous character, the Banking Companies are not generally referred as financial corporations. Normally financial corporations are either statutory corporations created under specific statutes like State Financial Corporations Act, Industrial Credit and Investment Corporation Act etc. which are public companies. However, these are obviously separate and distinct entities different from Scheduled Banks which are covered by provisions of the Banking Regulation Act. The Legislature obviously did not want to extend the benefit of deduction under section 36(1)(viii) to Scheduled Banks until they amended the provisions by Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 period of which normally varies between 1 to 5 years. 4.4 For the foregoing reasons, we are not inclined to be in agreement with the assessee, but with the Revenue, so that the assessee-bank cannot be considered as an eligible entity u/s.36(1)(viii) of the Act, placing reliance on the decision in the case of The Federal Bank Ltd. (supra). We may before parting also add that the assessee is not, as contended, a Government company, which is only a company in which the Central Government's share holding is 51% 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, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (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's computation is as under: Whole Bank Income including interest and other Income Tax Rs.43183.61 cr. (A) Total income from long term finance as per Annexure 15 to computation of Income Tax Rs.2201.50 cr. (B) Income from business as a whole 55,09,43,82,963 Add: Amount of deduction allowed u/s. 36(1)(viii) 2,30,45,29,648 Total Business Income 57,39,89,12,611 Rs.5739.89 cr. (C) Percentage of taxable business income to gross income as a whole (C)/A. 13.29 13.29% of gross income from long term finance (13.29% of 'B' above) Rs.292.58 cr. Deduction allowable u/s. 36(1)(viii) @ 40% of income from long term finance Rs.117.03 cr. Deduction allowed in assessment order excess deduction allowed Rs.230.45 cr. Rs. 113.42 cr. (refer: para 4.4 of the impugned orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (computed before making any deduction under this clause and Chapter VIA) 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.................' [emphasis, ours] The Tribunal in the case of Bharat Overseas Ltd. (supra) clarified that deduction was not in the nature of a standard allowance but qua a provision for bad and doubtful debts. The same must therefore necessarily exclude that in relation to standard assets, which are considered good and, thus, realizable in full. The RBI norms are only prudential in nature. In our considered opinion reference to the prudential norms by RBI, even if mandatory for the banks, as contended, is unwarranted. Deductions in computing the business income is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been followed/adopted, provide for the minimum provision, and the bank is free to make a higher provision, i.e., than that prescribed by the RBI norms. Provisioning, it may be noted, is a management function, made reflecting its' risk assessment qua different assets. If, therefore, the assessee-bank is able to satisfy the assessing authority that the provision as made is justified with reference to the debts considered by it as bad and doubtful, we see no reason as to why the same cannot be allowed. The matter is accordingly restored back to the file of the A.O. for fresh determination by issuing definite findings of fact. Even as the primary onus would be on the assessee, the A.O. cannot substitute his own judgment with regard to the risk assessment qua a particular asset and, correspondingly, the provision in its respect. H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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