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TMI Blog2024 (2) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals), NFAC partly allowed the appeals of the assessee. Hence the assessee and revenue are in appeal for both the years. Certain common grounds are raised in all the appeals. 3. We are taking first the assessee's appeals 4. Ground No. 1 is general in both the appeals. 5. Common ground No. 2 in both the appeals is regarding disallowance u/s. 14A of the Act. The assessee bank in AY 2016-17 had earned a tax free income of Rs. 1,83,91,995/-. It had a total investment portfolio of Rs. 16,256.65 Crores. The Tax exempt investments amounted to Rs. 120.21 Crores. The assessee bank had non-interest bearing funds of Rs. 3,690.59 Crores (page 4 of the Asst order). The non-interest bearing funds, thus, far exceeded the tax exempt investments. 6. The Assessing Officer after considering the reply of the assessee was not satisfied with the amount of disallowance made by the assessee bank. According to him, the disallowance u/s 14A had to be worked out as per Rule 8D. He therefore, invoked the provisions of Rule 8D and made the following disallowances: Rule Particulars Amount (Rs.) 8D(2)(i) Salary of Treasury Department 1,03,34,547 8D(2)(i) Brokerage 22,39,214 8D(2)(ii) Proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's own case for AY 2011-12 & 2012-13 in ITA No. 258/2020 dated 8.2.2021 observing as under:- "4. Even though four substantial questions of law are raised in the appeal Memorandum cited supra, among them, substantial question of law Nos.2 & 4 are covered by the judgment and are answered by the co-ordinate bench of this court vide judgment dated 31..01.2020 in ITA No. 481/2014. Paras 8 to 10 of the said judgment dated 31.01.2020 passed in the aforesaid case, reads as under: "8. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 14A of the Act: Section 14A (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115JA apply to the Banking Companies are not the remaining substantial questions of lay,/ would be reduced otiose. This court has already framed a substantial question of law in this regard today. This court by an order passed on 16.01.2020 passed in ITA No. 13/2014 has already held that the provisions of Section 115JB do not apply to the banking companies. Therefore, the substantial questions of law Nos_3, 4 and 5 and substantial question of law framed in ITA 99/2010 are rendered academic and need not be answered. So far as substantial; question of law No. 2 in ITA No. 97/2010 is concerned, the same is squarely covered by the decision of the Supreme Court in 'CIT VS. ESSAR TELEHOLOINGS LTD.',(2018) 401 ITR 445, wherein it has been held that provisions of Section 114A read with rule 8D of the Income Tax Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of the assessee." 5. In this regard, a memo is also filed by the learned counsel for the appellant, which reads as under: "MEMO ON BEHALF OF THE APPELLANT Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO asked to explain the procedure for write-off and sought for clarification and raised queries. The assessee furnished details explaining the procedures for claiming the deduction. Some parts of the submission are as under:- "2. Details in respect of bad debts claimed U/s 36(1)(vii): a. Board of Directors has the authority for sanctioning of writing off of advances which are delegated to the hierarchy. Branches to not have power to write off. They have to send proposal for write off only in cases where all other avenues for recovering the amount has exhausted and it is not worthwhile to pursue the court proceedings to recover the amount due to the cost and time involved and the chances of recovery. Apart from this, Bank also some times take decision to write off at Head Office level with the balance continue to appear in branch books which is also permitted by the regulator. Recoveries made in both the cases is offered to tax on cash basis. During the A.Y. 2016-17, Bank has offered recoveries made from written off accounts amounting to Rs. 35,78,26,833. .... d. The bad debts were written off by debit to the Provision for Bad and Doubtful Advances Account, copy of state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision a/c u/s 36(1)(viia) and only the excess can be claimed. Since there is no excess amount, the write off is not allowable. He relied on Explanation 2 to section 36(1)(vii). 14. Before the CIT(Appeals), the assessee submitted that the provision for bad and doubtful dets u/s. 36(1)(viia) is applicable only for rural debt and accordingly the non-rural bad debts are eligible for deduction u/s. 36(1)(vii) of the act. Deduction u/s. 36(1)(viia) is not a write off of debts but it is only an allowance allowed in computing the taxable income as a percentage of average rural advances and total profit. Further, the write off against the rural loan/advances is set off against the NPA reserve and not claimed as deduction u/s. 36(1)(vii). Thus, there is no double deduction in respect of urban or rural debt written off. The assessee relied on the decision of the ITAT in its own case for AYs 2013-14 in ITA No. 1906/Bang/2018 order dated 27.12.2021 & 2014-15 in ITA No. 1907/Bang/2018 order dated 26.5.2022. 15. The CIT(Appeals) observed that the ITAT in assessee's own case for AYs 2013-14 relied on the finding of the Supreme Court in the case of Catholic Syrian Bank Ltd. that section 36(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities. He further submitted that the Revenue has filed appeal against the order of the Hon'ble Tribunal to the jurisdictional Hon'ble High Court. 19. After hearing both the sides, we note that similar issue has been decided by the coordinate Bench of this Tribunal in assessee's own case for AY 2014-15 in ITA No. 1907/BANG/2018 & 230/PAN/2018 dated 26.5.2022 in favour of the assessee after considering Explanation 2 inserted in section 36(1)(vii) by Finance Act, 2013 (after the decision of the Supreme Court in the case of Catholic Syrian Bank) held as under:- "7.7 We heard the Ld D.R and perused the record. Now the core question that arises is whether the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and then the excess amount over and above the balance available in PBDD alone could be allowed as bad debts u/s 36(1)(vii) of the Act. 7.8 The provisions of sec. 36(1)(vii) allows deduction as under:- "36(1)(vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. Provided that in the case of an as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the PBDD allowed under clause (a) of sec.36(1)(viia) of the Act. The Hon'ble Supreme Court, inter alia, also observed as under:- "31 It was neither in dispute earlier nor is it disputed before us, that the assessee-bank is maintaining two separate accounts, one being a provision for bad and doubtful debts other than provision for bad debts in rural branches and another provision account for bad debts in rural branches for which separate accounts are maintained...." Referring to the above said observations, the revenue has taken the view that the Hon'ble Supreme Court has rendered its decision on the assumption that the banks would be maintaining two separate PBDD a/c, viz., one for rural branches and another one for non-rural branches. 7.10 It is possible that all banks may not be maintaining two separate accounts, as observed by the Hon'ble Supreme Court. Hence there was an apprehension in the minds of revenue with regard to the effect of the decision rendered by Hon'ble Supreme Court. For instance, if a particular bank is maintaining only a single PBDD a/c for the provision created u/s 36(1)(viia) of the Act and even if that bank is not having any rural branches, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed under clause (a) of Sec. 36(1)(viia) refers to 'rural advances' only. In fact the expression "rural branches" finds place in clause (a) only. It can be noticed that the reference to "rural branches" is not there in clause (b) to (d). Generally, the foreign banks may not have rural branches. However, such kind of banks, financial institutions, NBFC etc. are also eligible to claim deduction towards PBDD u/s 36(1)(viia) of the Act under clauses (b) to (d). In view of the decision rendered in the case of Catholic Syrian bank, it is possible that the assessees covered by clause (b) to (d) may contend that the bad debts written off by them need not be adjusted against PBDD allowed u/s 36(1)(viia) of the Act, since the bad debts relate to "non-rural debts". Accordingly, we are of the view that the Explanation 2 has been inserted in order to bring the assesses covered by clauses (b) to (d) within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. Hence, in our view, advances given by rural and non-rural branches mentioned in Explanation 2 shall apply to the assesses covered by clause (b) to (d) of sec. 36(1)(viia) of the Act. 7.12 At this juncture, we may ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances. Section 36(1)(viia) of the Act contains three subclauses, i.e. sub-clause (a), sub-clause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-clause (a) refers to rural advances whereas other sub-clauses do not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances. It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of section 36(1). In order to clarify the scope and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould have brought amendment in clause (a) to sec. 36(1)(viia) to make its intention clear that the clause (a) shall apply to both rural and non-rural advances. Since there is no such amendment, the interpretation given by Hon'ble Supreme Court that "clause (viia)(a) applies to rural advances only" shall remain intact. Explanation 2 inserted in sec. 36(1)(vii), in our view, does not override the above said interpretation given by Hon'ble Supreme Court. 7.14 In the Memorandum explaining the purpose of introducing Explanation -2 in Sec. 36(1)(vii), it has been acknowledged that only the clause (a) refers to "rural branches". It has also been stated that the foreign banks do not have rural branches. The assesses covered by clause (b) to (d) may not be having rural branches. Hence, the memorandum explains as under with regard to the decision rendered by Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra):- "However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for this AY 2017-18 also. 21. Common ground No. 4 is alternate ground to ground No. 3 and since ground No. 3 is allowed, ground No. 4 is infructuous for both the years. 22. Next common Ground No. 5 is regarding disallowance of amount being penalty paid to RBI and ground No. 5 is with regard to disallowance of club expenses. The ld. AR submitted that considering the smallness of the amounts in both the years, these grounds are not pressed, though the assessee does not accept it on merits. Accordingly the issues raised in ground Nos.5 & 6 for both the years are left open. 23. Ground No. 7 in AY 2016-17 relates to additions made by the AO to the book profits u/s. 115JB of the Act as contingent liability which were sustained by the CIT(Appeals) as under:- Sr. No. Particulars Amount (Rs.) 1. Provision for HD Commission 1,75,00,000 2. Provision for exgratia and bonus 18,00,00,000 3. Provision for gratuity to HD Canvassers 14,31,000 4. Provision for gratuity 6,09,00,000 24. The ld. AR made detailed submissions in respect of each of the additions as below:- "7.1.2. Provision for HD Commission - Rs. 1,75,00,000/- 7.1.2.1. The Appellant Bank estimated the commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer is based on surmises & conjunctures, hence, liable to be deleted. 7.1.4. Provision for gratuity to HD Canvassers - Rs. 14,31,000/- 7.1.4.1. This amount was provided by the Appellant Bank based on the actuarial valuation. The learned Assessing Officer disallowed the same by observing that it is a contingent liability. 7.1.4.2. The learned CIT(A) also upheld the disallowance. Our Submissions: 7.1.4.3. The amount provided is based on the actuarial valuation and is not contingent liability. The addition made by learned Assessing Officer is based on surmises & conjunctures and hence, liable to be deleted. 7.1.5. Provision for gratuity - Rs. 6,09,00,000/- 7.1.5.1. This amount was provided by the Appellant Bank based on the actuarial valuation. The learned Assessing Officer disallowed the same by observing that it is a contingent liability. 7.1.5.2. The learned CIT(A) also upheld the disallowance even though the audited accounts of the Gratuity Fund which showed the amount due from the Bank as current assets was produced before the learned CIT(A) at the time of the hearing (Refer page 140 of the Appeal Memorandum). The actuarial valuation reports are g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actuarial valuer therefore the provisions made are to be treated as ascertained liability. This view is fortified by the decision dated 22.02.2022 of the coordinate Bench of the Tribunal in the case of Jeans Knit (P) Ltd. [2022] 138 taxmann.com 480 [Bang. Trib.]. The relevant part is as under:- "The AO during the course of asst. proceedings has added back the provisions created towards gratuity, leave encashment and bonus while computing the book profits of the assessee holding that the same to be an unascertained and contingent liabilities. The order of the AO was upheld by the CIT who relied on sec. 43B of the Act. 32. Before us, the Ld.AR submitted that the gratuity and leave encashment provision is made based on the actuarial valuation which is undisputed fact. The Ld.AR submitted that there are judicial pronouncements where it has been held that the provisions credited based on actuarial valuation would be an ascertained liability and cannot be added back for determination of book profits u/s 115JB of the Act. With respect to provision for payment of bonus, the Ld.AR submitted that the provisions is made as per the Payment of Bonus Act 1965 and it is statutory liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation the same cannot be held as an unascertained liability and cannot be added for the purpose of computing the book profits u/s.115JB. The Hon'ble Jurisdictional High Curt in the case of CIT v. Kirloskar Systems Ltd. [2013] 40 taxmann.com 124/[2014] 220 Taxman 1 (Kar.) held that- "The Apex Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 has held that an assessee who is maintaining the account on mercantile System, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to the accepted principle of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. The liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. Therefore for that reason it was held that the gratuity payable and encashment of EL is not a contingent liability and the provisions thereof is to be deducted. In the light of the settled principles laid down by the Apex Court no substantial question of law ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised computation is not tenable. It is prayed that the issue may be remitted to the learned CIT(A) to adjudicate the revised computation on merits. 32. After considering the rival submissions, we noted that during the course of assessment proceeding vide assessee's letter dated 5.11.2018 the assessee submitted revised calculation of book profit. In the said calculation the appellant bank had not added the provision for NPA of Rs. 267,17,51,684 and provision for investment depreciation of Rs. 13,16,10,956. The AO did not accept the same. The CIT(A) observed that the appellant failed to furnish any copy of audit report in Form 29B to comply the provision of section 115JB(4) of the Act. Considering the argument of the ld. AR of the assessee, we remit this issue to the AO fresh consideration. 33. In the result, the appeals of the assessee are partly allowed for statistical purposes. REVENUE APPEAL (ITA Nos. 963 & 964/Bang/2023) 34. The issue involved in both the appeals are deduction claimed by the assessee u/s. 36(1)(viia) has been allowed by the CIT(A) and the CIT(A) has not appreciated the ration of the decision of Hon'ble High Court of Kerala in the case of Lord Krishna Bank w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(viia) Rs. 88,24,01,309 37. The CIT(A) after considering the detailed submissions and following the judgment of the Hon'ble jurisdictional High Court in the case of CIT, LTU v. Canara Bank [2023] 147 taxmann.com 171 (Karnataka) dated 5.12.2022 and the decision of ITAT Bangalore in appellant's own case for the AY 2014-15 allowed the deduction claimed by the assessee u/s. 36(1)(viia). For the determination of rural branches of a bank he remitted the issue to the AO to consider the bank branch being a rural branch on the basis of RBI guidelines. Aggrieved from the above order of CIT(A), the revenue filed appeals before the ITAT. 38. The ld. DR relied on the order of AO and submitted that the CIT(A) while deciding the category of rural branches has accepted the findings recorded by the AO, however, ignored the decision of Hon'ble High Court of Kerala in the case of Lord Krishna Bank and directed to AO to follow the RBI guideline. 39. The ld. AR submitted that the issue is squarely covered in favour of the assessee by the order of the jurisdictional High Court and in assessee's own case and further submitted that the ld. CIT(A) has rightly allowed the appeal of the assessee. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision made by the assessee benefit in Canara Bank v. Jt. CIT [2018] 99 taxmann.com 357/[2017] 60 ITR (Trib.) 1 (Bengaluru - Trib.). He further submitted that the said order has been followed by the Tribunal in Vijaya Bank v. Jt. CIT [IT Appeal Nos. 915 & 845 (Bang.) of 2017, dated 5-1-2018] and the said method of making provision has been approved by the Calcutta High Court in Uttarbanga Kshetriya Gramin Bank case. 8. We have carefully considered the rival contentions and perused the records. 9. In Para 7.2 of the impugned order, the Tribunal has recorded thus, "7.2 Before us, the learned Authorised Representative for the assessee reiterated the submission that the language of Rule 6ABA is very clear and does not mandate that only incremental advances has to be considered and nothing can be read into it as has been done by the authorities below. It was submitted that this issue has been considered and decided in favour of the assessee by the co-ordinate bench of this Tribunal in the case of Canara Bank v. JCIT (2017) 60 ITR (Trib) 1 [ITAT (Bang)]" 10. It is further held that the said decision has been followed in Vijaya Bank case. The manner in which the computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 2003-04 and 2004-05. The first day of the previous year for these assessment years would be 1-4-2002 and 14-2003. For the purpose of computing the deduction under section 36(viia) the population figures available prior to 1-4-2002 is to be considered. [Para 6] If the provisional population totals as published on 27-3-2001 and 1-9-2010 is taken into consideration, then it is the Census figures of 2001, which has to be taken into consideration. If the final population published on December 2003 is taken into consideration, then it would be the final population figure of 1991 Census that has to be taken into consideration. The question is which is the final population total which has to be taken into consideration because as it is clear from the letter written by the Registry of Home Affairs, the provisional population total cannot be relied upon. [Para 7] In respect of any provision for bad and doubtful debts made by the scheduled bank, an amount not exceeding 7 1/2 percentage of the total income computed before making any deduction under this clause and chapter VIA and an amount not exceeding 10 per cent of the aggregate average advances made by the rural bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one could find whether a branch is a rural branch or not. It is no doubt true that the Census Department initially publishes a provisional population total, probably calling objections from the public and after considering those objections, publishes final population total. The legislature has used the words 'bad and doubtful debts' and the words 'provisional' and 'final' conspicuously missing in the said words. The word 'published' has to be understood as final population as contended by the assessee. If other words are added, it would amount to re-writing which is impermissible in law. Keeping in mind the object, before the bank is entitled to the said benefit, all that is to be seen is whether in that village where the rural branch is situated, population is less than 10,000 or exceeding 10,000. Census is conducted once in ten years. After conclusion of the Census, provisional figure will be published and then final publication is made. If from the date of provisional population totals being published, it has crossed the 10,000 limit as prescribed under the law, then it does not satisfy the requirements of the rural branch and, consequently, wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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