, ""
IN THE INCOME TAX APPELLATE TRIBUNAL" F" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN, AM AND AMARJIT SINGH, JM
./I.T.A. No.4678/Mum/2013
( / Assessment Year: 2008-09)
Union Bank of India, / Addl. Commissioner of Income Tax,
Central Accounts Department, Vs.
LTU,
6th floor, World Trade Center,
Cuff Parade,
239, Vidhan Bhavan Marg, Mumbai-400005
Nariman Point,
Mumbai-400021
( /Appellant) .. ( / Respondent)
./I.T.A. No.4842/Mum/2013
( / Assessment Year: 2008-09)
Asstt. Commissioner of / Union Bank of India,
Income Tax, Vs. Union Bank Bhavan,
Large Tax Payer Unit, Central Accounts Department,
Centre-1, 28th Floor, 6th floor, 239,
World Trade Centre, Vidhan Bhavan Marg,
Cuffe Parade, Nariman Point,
Mumbai-400005 Mumbai-400021
( /Appellant) .. ( / Respondent)
./ ./PAN. :AAACU0564G
/ Revenue by Shri C Naresh
/Assessee by Shri G M Doss
/ Date of Hearing : 25.08.2015
/Date of Pronouncement: 18.11.2015
2 4678/Mum/2013
and 4842/Mum/2013
/ O R D E R
Per B R Baskaran, AM:
These cross appeals are directed against the order dated 25.3.2013
passed by the ld.CIT(A)-24, Mumbai and they relate to the assessment
year 2008-09.
2. The assessee is in appeal in respect of following issues:
(a) Disallowance made u/s 14A of the Act,
(b) Restricting the deduction claimed u/s 36(1)(viii).
3. The revenue is in appeal in respect of following issues:
(a) Bad debts written off;
(b) Loss on revaluation of investment;
c) Deduction claimed u/s 80LA;
d) Deduction claimed u/s 36(1)(viii) of the Act;
e) Deduction claimed u/s 36(1)(viia) of the
4. The assessee is a Public Sector Bank and the assessment for the
year under consideration was completed by the AO by making various
additions. In the appeal filed by the assessee before the ld. CIT(A), the
First Appellate Authority granted partial relief to the assessee. Aggrieved
by the order passed by the ld.CIT(A), both the parties are in appeal
before us in respect of issues decided against each of them.
5. We shall first take up the appeal filed by the assessee. The first
issue relates to disallowance made under section 14A of the Act. During
the year under consideration, the assessee received income from tax free
bonds to the tune of Rs.47.17 crores and dividend income of Rs.6.92
crores both aggregating to Rs.54.09 crores. The assessee claimed the
same as exempt u/s 10 of the Act. However, the assessee did not
3 4678/Mum/2013
and 4842/Mum/2013
disallow any expenditure relating to the above said exempted income as
required u/s 14A of the Act read with Rule 8D of the Income Tax Rules,
1962. The assessee contended before the AO that no part of interest
income is required to be disallowed since investments were held as trade
stock and further it had earned net interest income in excess of interest
expenditure. The AO, however, did not accept the contentions of the
assessee and accordingly, computed the disallowance in terms of Rule 8D
of the Rules. Accordingly, the AO disallowed a sum of Rs.23.14 crores u/s
14A of the Act. The ld. CIT(A) also confirmed the same.
6. The ld. Counsel appearing for the assessee submitted that the
assessee has held various investments as "stock-in-trade" only and hence
the profit or loss arising on their sale was assessed as business income
only. He further submitted that exempted income referred above was
incidental income earned during the course of carrying on the business.
The Ld Counsel further submitted that the question of disallowing
expenditure u/s 14A of the Act shall arise only if the securities are held as
investments. He submitted that the assessee does not hold any
investments and hence the question of making disallowance u/s 14A of the
Act does not arise. In support of his submissions, the ld A.R placed his
reliance on the following case law:
a) DCIT V/s M/s India Advantage Securities Ltd
ITA No.6711/Mum/2011 order dated-14.09.2012
b) DCIT V/s Gulshan Investment Co.Ltd
-ITA No.666/Kol/2012 dated 11.3.2013
c) CCI Ltd Vs. JCIT (206 Taxman 563)(Kar)
The Ld A.R submitted that the decision rendered by the Tribunal in the
case of India Advantage Securities Ltd (supra) has since been approved by
the Honble Bombay High Court.
7. The ld. AR further submitted that the assessee is having sufficient
amount of interest free funds in excess of investments and hence there is
4 4678/Mum/2013
and 4842/Mum/2013
no question of making any disallowance out of interest expenditure, in
view of the decision rendered by Honble Bombay High Court in the case of
CIT V/s HDFC BANK LTD. [2014] 366 ITR 505 (Bom). The ld. AR further
submitted that the securities, even though shown as ,,Investments in the
books of account, yet profit or loss arising on their sale was assessed
under the head Income from business only for income tax purposes. He
further submitted that all the securities are valued at cost or market value
whichever is less at the year end and the said valuation methodology also
fortifies the fact that the investments are held as trade stock only.
8. The Ld D.R, on the contrary, submitted that the provisions of Rule 8D
shall be applicable from AY 2008-09 as held by the Honble Bombay High
Court in the case of Godrej Boyce Mfg. Co. Ltd (328 ITR 81). He further
submitted that the assessee has shown the value of securities as
"Investments" only in the Balance Sheet and hence the assessee cannot
take a different stand for the purposes of sec. 14A of the Act. He further
submitted that the disallowance is required to be made under Rule
8D(2)(iii) towards administrative expenses, even if the assessee proves
that it has got sufficient interest free funds. He further submitted that the
claim of the assessee that it was having sufficient interest free funds and
also the claim that the securities are held as stock in trade have not been
examined by the AO/CIT(A).
9. We have heard rival contentions and perused the record. The
assessment year under consideration being AY 2008-09, the provisions of
Rule 8D are applicable as per the decision of Honble Bombay High Court
rendered in the case of Godre Boyce Mfg. Co. Ltd (supra). However, a
careful perusal of the provisions of sec. 14A(2) would show that the
assessing officer shall determine the amount of expenditure incurred in
relation to such income which does not form part of income as per rule
5 4678/Mum/2013
and 4842/Mum/2013
8D, if the AO , having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee.
10. In the instant case, the assessee has earned exempted income of
Rs.54.09 crores and it has claimed that it did not incur any expenditure in
order to earn the above said exempted income. The assessee has raised
many contentions, viz., the interest free funds available with the assessee
are more than the investments; the securities were held as stock in trade
and it has earned net interest income warranting no disallowance of
interest expenditure etc. However, we notice that neither the AO nor the
Ld CIT(A) did consider the above said contentions of the assessee, more
particularly with referencce to the accounts of the assessee, which is a
mandatory condition prescribed u/s 14A(2) of the Act. Thus, we notice
that the AO has proceeded to compute the disallowance as per rule 8D of
IT Rules without satisfying himself that the claim of the assessee was not
correct by having regard to the accounts of the assessee. Hence, the
disallowance computed by the AO and that confirmed by Ld CIT(A) was
not in accordance with the mandate of law.
11. In view of the above, we are of the view that this issue requires
fresh examination at the end of the assessing officer. Accordingly, we set
aside the order of Ld CIT(A) on this issue and restore the same to the file
of the AO with the direction to examine this issue afresh. The assessee is
free to urge all the contentions, which it may deem it necessary before the
AO in respect of this issue. After affording necessary opportunity of being
heard, the AO may take appropriate decision in accordance with the law.
12. The next issue urged by the assessee relates to the deduction
claimed u/s 36(1)(viii) of the Act. Section 36(1)(viii) provides for
deduction of any special reserve created and maintained by a bank to the
extent of 20% of the profits derived from eligible business computed
6 4678/Mum/2013
and 4842/Mum/2013
under the head "Profits and gains of business" carried to such reserve
account. "Eligible business" is defined as the business of providing long
term finance for specific purposes. "Long term finance" is defined to mean
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.
13. The assessee worked out the deduction u/s 36(1)(viii) as under:-
Average advances 41937.41
Yield on advances 10.12%
Cost of funds 5.76%
Interest income 4.36% 1828.47
Less Operation expenses 15% 274.27
Profit earned 1554.20
Deduction u/s 36(1)(viii) 20% 301
The AO did not accept the above said workings. He noticed that the
average advances worked out by the assessee did not tally with the figures
of term loans reported in the Balance Sheet, viz., Rs.32,442/- crores.
Further, since the term loans reported in the Balance sheet would include
ineligible advances, the AO took the eligible advances at 50% of
Rs.32,442/-, i.e., Rs.16,221/- crores. The AO also did not accept the net
yield on advances of 4.36% worked out by the assessee. The AO noticed
that the assessee had reported interest income of 6731 crores and interest
expenditure of 6361 crores. Accordingly the AO took the view that the
difference between the two figures cited above, i.e., Rs.370 crores was the
net yield on advances. After allowing deduction of 15% for expenses, the
profit derived from the eligible business was worked out at Rs.314.50
7 4678/Mum/2013
and 4842/Mum/2013
crores. Accordingly the AO restricted the deduction u/s 36(1)(viii) at 20%
of Rs.314.50, viz., Rs.62.90 crores. It may be noticed that the assessee
had claimed a deduction of Rs.301 crores.
14. The Ld CIT(A), however, worked out the deduction in a different
manner. According to Ld CIT(A), the assessee did not furnish the details
of working of average advances under various sub heads viz., agriculture,
industry, infrastructure and housing. He also took the view that the
assessee was not forthright in furnishing correct details, since there is
huge difference between the term loans reported in the Balance sheet and
the average advances worked out by the assessee. Accordingly, the Ld
CIT(A) took the view that the assessee has worked out the figures to suit
its requirements. The AO noticed that the total interest earned by the
assessee during the year gave an yield of 9% of the aggregate advances
outstanding as at the year end. Accordingly, he worked out the interest
from eligible business at 9% of the term loans reported in the Balance
Sheet. In the similar manner, the Ld CIT(A) worked out the percentage of
expenses on the total advances. After setting off the expenses estimated
by him against the interest income estimated by him, the Ld CIT(A) arrived
at the profit from eligible business at 698.95 crores and accordingly
worked out the deduction u/s 36(1)(viii) at Rs.139.79 crores. Both the
parties are aggrieved by the said decision of Ld CIT(A).
15. We have heard the parties and perused the record. We are unable
to understand as to why the assessee worked out the interest income from
eligible business on average basis. When the assessee is able to identify
the long term finance given to specified purposes, it should not be difficult
to cull out the actual interest income earned from such advances. Since
the assessee had proceeded to ascertain the interest income on average
basis and since the details furnished by the assessee was not convincing to
the tax authorities, they were constrained to make their own estimates
8 4678/Mum/2013
and 4842/Mum/2013
according to their respective understanding. In our view, the approach of
the assessee is not appreciable. In this era of computerisation, it should
not be difficult at all for the assessee to cull out the actual interest income
earned by it out of eligible business. Further, there should not be any
dispute that it is the responsibility of the assessee to show that the
deduction claimed by it u/s 36(1)(viii) was justified. However, with regard
to the cost of funds and administrative expenses, the assessee is required
to allocate the expenses towards eligible business on a reasonable basis,
since they are incurred from common pool of funds and also for all
activities of the assessee. Hence, in our view, the workings given by the
assessee, AO and Ld CIT(A) on approximate basis cannot be approved.
Accordingly, in our view, this issue also requires reconsideration at the end
of the assessing officer. Accordingly, we set aside the order of Ld CIT(A)
on this issue and restore this matter to the file of the AO for his
reconsideration. The assessee is directed to cull out the interest income
actually earned from out of eligible advances. From the gross interest
income so culled out, the assessee is directed to deduct the cost of funds
and expenses on a reasonable basis and then work out the deduction u/s
36(1)(viii) of the Act. The assessee is also directed to furnish all the
explanations and information to the assessing officer in order to enable
him to satisfy himself with the workings furnished by the assessee.
Accordingly, after affording necessary opportunity of being heard to the
assessee, the assessing officer may take appropriate decision on this issue
in accordance with the law.
16. We shall now take up the appeal filed by the revenue. The first
issue relates to the bad debts written off. The assessee claimed deduction
of bad debts of Rs.330.68 crores in respect of non-rural debts. The bad
debts relating to rural debts was set off against the provision made u/s
36(1)(viia) of the Act. The AO took the view that the provision created u/s
9 4678/Mum/2013
and 4842/Mum/2013
36(1)(viia) covers both rural and non-rural advances. Since the deduction
of Rs.330.68 crores claimed by the assessee was less than the credit
balance available in the provision account (created u/s 36(1)(viia) of the
Act), the AO disallowed the bad debts claim relating to non-rural advances.
The Ld CIT(A) noticed that identical disallowance made by the AO in AY
2007-08 has since been allowed by the ITAT. Accordingly he deleted this
disallowance.
17. We notice that the Tribunal has allowed identical claim in the
assessees own case in AY 2007-08, vide its order dated 18.1.2003 passed
in ITA Nos.6631/Mum/2010 & 6349/Mum/2010. We notice that the
Tribunal has followed the decision rendered by the Honble Supreme Court
in the case of Catholic Syrian Bank (343 ITR 270) and also in the case of
CIT Vs. Karnataka Bank Ltd (2012)(349 ITR 705). We also notice that the
new Explanation 2, which covers both rural and non-rural advances, has
been inserted under sec. 36(1)(vii) of the Act by the Finance Act, 2013
w.e.f. 1.4.2014 only and hence it cannot have retrospective effect, since it
affects substantive rights of the assessees. Accordingly, we are of the
view that there is no reason to interfere with the decision of Ld CIT(A) on
this issue.
18. The next issue relates to the claim of loss on revaluation of
investment. Identical issue was considered by the Tribunal in the
assessees own case in AY 2007-08 (supra) and it has been decided in
favour of the assessee by following the decision rendered by the Honble
Supreme Court in the case of UCO Bank Vs. CIT (240 ITR 355) and also
the decision of Honble Bombay High Court rendered in the case of CIT Vs.
Bank of Baroda (262 ITR 334). Accordingly, we do not find any reason to
interfere with the decision of Ld CIT(A) on this issue, since he has also
followed the decision of Honble Supreme Court rendered in the case of
UCO Bank (supra) in deciding this issue in favour of the assessee.
10 4678/Mum/2013
and 4842/Mum/2013
19. The next issue relates to the deduction claimed u/s 80LA of the Act.
The AO disallowed this claim for the reason that the assessee did not
furnish the audit report prescribed u/s 80LA of the Act along with the
return of income. The Ld CIT(A) noticed that the assessee has furnished
the audit report before the AO before finalisation of the assessment order
and accordingly, by following the decision rendered by the Honble Delhi
High Court in the case of Cit Vs. Web Commerce India Pvt Ltd (2009/179
Taxmann 310). The Honble Delhi High Court in the above said case has
held that the filing of audit report is only directory and not mandatory.
Since the assessee has filed the audit report before finalisation of
assessment order, we are of the view that the Ld CIT(A) was justified in
directing the AO to allow the claim.
20. The next issue relates to the deduction claimed u/s 36(1)(viii) of the
Act. This issue has been restored back to the file of the AO in the earlier
paragraphs while considering the appeal filed by the assessee.
21. The last issue relates to the deduction claimed u/s 36(1)(viia) of the
Act. The AO allowed the deduction under this section to the extent of the
amount actually provided for in the books of account. Section 36(1)(viia)
provides a cap for allowing deduction u/s 36(1)(viia) by an amount not
exceeding 7.5% of the total income (computed before making any
deduction under this clause and chapter VIA) and an amount not
exceeding 10% of the aggregate average advances made by the rural
branches of bank. It appears that the assessee made a provision of
665.21 crores in the books of account towards "Provision for bad and
doubtful debts". However, the maximum amount allowable u/s 36(1)(viia)
appears to have worked out more. Accordingly, it appears that the
assessee claimed the maximum amount allowable u/s 36(1)(viia) of the
Act, even though it has provided for a lesser amount in its books of
account. The AO restricted the deduction u/s 36(1)(viia) to the extent of
11 4678/Mum/2013
and 4842/Mum/2013
the amount actually provided for in the books of account. The Ld CIT(A)
allowed the claim of the assessee by following the decision rendered by
the Tribunal in the assessees own case for AY 2007-08 (supra), wherein
the Tribunal has taken the view that the deduction u/s 36(1)(viia) is
allowable to the extent provided in that section irrespective of the
quantum actually provided for.
22. At the time of hearing, it was brought to our notice that an identical
issue was considered by another co-ordinate bench of Tribunal in the
assessees own case in ITA No.6920/Mum/2013 relating to AY 2005-06 in
its order dated 31.7.2015 and the Tribunal has decided this issue against
the assessee by following the decision rendered by the Honble Punjab &
Haryana High Court in the case of State Bank of Patiala (272 ITR 54).
23. Since the decision rendered by the Tribunal in AY 2005-06 is a later
decision and since the Tribunal has followed the decision rendered by
Honble Punjab and Haryana High Court, we are inclined to follow the
same. Accordingly, we set aside the order of Ld CIT(A) on this issue and
restore that of the AO.
24. In the result, the appeal filed by the assessee is treated as allowed
for statistical purposes and the appeal of the revenue is treated as partly
allowed for statistical purposes.
Pronounced accordingly on 18th th Nov, 2015.
18th th Nov, 2015
Sd sd
(AMARJIT SINGH) ( B.R. BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai: 18th Nov, 2015.
12 4678/Mum/2013
and 4842/Mum/2013
.../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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