ACIT, Mangalore V. M/s Corporation Bank, Mangalore

ITA 1264/BANG/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86077 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 23-02-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 21-08-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Assessee Lawyers: Not Found
• Keywords: Depreciation; Earning of tax free income; question of law; Bad and doubtful debts; Revised return
• Section: 80HHC; 14A; 28; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER ITA NO.1264(BANG) 2013 (ASSESSMENT YEAR : 2011-12) THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-2(1), MANGALORE APPELLANT VS M/S CORPORATION BANK, FINANCIAL MANAGEMENT DIVISION, H.O.P.B NO.88. MANGLADEVI TEMPLE ROAD, PANDESHWAR, MANGALORE RESPONDENT PAN NO.AAACC7245E AND ITA NO.1352(B)/2013 (ASSESSMENT YEAR : 2011-12) M/S CORPORATION BANK, FINANCIAL MANAGEMENT DIVISION, H.O.P.B NO.88. MANGLADEVI TEMPLE ROAD, PANDESHWAR, MANGALORE PAN NO.AAACC7245E APPELLANT VS THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-2(1), MANGALORE RESPONDENT ASSESSEE BY : SHRI S. ANANTHAN, CA REVENUE BY : DR. P.K.SRIHARI, ADDL.CIT DATE OF HEARING : 24-02-2015 DATE OF PRONOUNCEMENT : 11-03-2015 O R D E R PER SHRI ABRAHAM P GEORGE, AM: THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE RESPECTIVELY DIRECTED AGAINST AN ORDER DATED 18-07- 2013 OF CIT(A), MYSORE. ITA NOS.1264 & 1352(B)/13 2 2. APPEAL OF THE ASSESSEE IS TAKEN UP FIRST FOR DIS POSA L. ASSESSEE HAS RAISED 5 GROUNDS IN TOTAL OF WHICH GROUND NO.1 IS G ENERAL AND NEEDS NO ADJUDICATION. THROUGH ITS GROUND NO.2 ASSESSEE ASS AILS THE DISALLOWANCE OF RS.386,34,99,765/- CLAIMED BY IT UNDER SECTION 3 6(1)(VIIA) OF THE IT ACT, 1961 (IN SHORT THE ACT) 3. FACTS APROPOS ARE THAT THE ASSESSEE A PUBLIC SE CTOR BANK HAD CLAIMED RS.423,79,66,948/- AS DEDUCTION U/S 36(1)(V IIA) OF THE ACT. THE COMPUTATION GIVEN BY THE ASSESSEE FOR ARRIVING AT T HIS FIGURE WAS AS UNDER; CALCULATION OF DEDUCTION U/S 36(1)(VIIA) OF THE IT ACT, 1961 AMOUNT IN RS. 1 AVERAGE RURAL ADVANCES A) 2895,05,96,571 2 TOTAL INCOME BEFORE DEDUCTION U/S 36(1)(VIIA) & CHAPTER VI-A DEDUCTION B) 1790,54,30,542 3 10% OF A) 289,50,59,657 4 7.5% OF B) 134,29,07,91 5 TOTAL 423,79,66,948 6 PROVISION FOR BAD DEBTS MADE IN THE BOOKS 547,75,81,922 7 CLAIM FOR PROVISION FOR BAD DEBTS RESTRICTED TO ELIGIBILITY 423,79,66,948 SINCE THE TOTAL PROVISION FOR BAD DEBTS MADE FOR AS SESSEE CAME TO RS.547,75,81,922/-, THE AO CALLED FOR A BREAK UP. T HE BREAK UP FURNISHED BY THE ASSESSEE READ AS UNDER; ITA NOS.1264 & 1352(B)/13 3 PROVISION FOR BAD AND DOUBTFUL URBAN DEBTS AS PER B OOKS RS.510,31,14,809/- PROVISION FOR BAD AND DOUBTFUL RURAL DEBTS AS PER B OOKS RS. 37,44,67,183/ - TOTAL RS.547,75 ,81.992 AO WAS OF THE OPINION THAT AGAINST THE CLAIM OF RS. 423,79,66,948/- MADE BY THE ASSESSEE UNDER SECTION 36(1)(VIIA) THE ACTUA L PROVISION MADE FOR RURAL DEBTS IN THE BOOKS WAS ONLY RS.37,44,67,183/- . THEREAFTER, RELYING ON THE DECISION OF THE HONBLE APEX COURT IN THE CA SE OF CATHOLIC SYRIAN BANK VS CIT 343 ITR 270 AND ALSO OF THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PAT IALA VS CIT 272 ITR 54. LEARNED AO CONCLUDED THAT THE CLAIM MADE UNDE R SECTION 36(1)(VIIA) HAD TO BE RESTRICTED TO ACTUAL PROVISION FOR BAD AN D DOUBTFUL RURAL DEBTS MADE BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS. HE THEREFORE, RESTRICTED THE CLAIM OF THE ASSESSEE TO RS.37,44,67,183/-. 4. IN ITS APPEAL BEFORE THE CIT(A), ARGUMENT OF TH E ASSESSEE WAS THAT IT HAD MADE TOTAL PROVISION OF RS.547,75,81,922/- A ND THE SPLIT UP OF SUCH PROVISIONING IN THE BOOKS OF ACCOUNTS WAS NOT RELEV ANT, AS LONG AS THE WORKOUT OF THE PROVISION AMOUNT U/S 36(1)(VIIA) CAM E WITHIN THE TOTAL AMOUNT OF THE PROVISIONS. CIT(A) HOWEVER, DID NOT ACCEPT THIS CONTENTION. HE CONFIRMED THE ORDER OF THE AO. 5. NOW BEFORE US LEARNED AR SUBMITTED A SIMILAR I SSUED HAD COME UP BEFORE THIS TRIBUNAL IN THE CASE OF DCIT VS ING VYSYA BANK LTD.(2014) 149 ITD 611. ACCORDING TO HIM, AFTER CONSIDERING T HE DECISION OF THE ITA NOS.1264 & 1352(B)/13 4 HONBLE APEX COURT IN THE CASE OF CATHOLIC SYRIAN B ANK AND ALSO VARIOUS AMENDMENTS MADE TO SECTION 36(1)(VIIA) IT WAS HELD BY THE TRIBUNAL THAT THE ACTUAL PROVISION MADE IN THE BOOKS BY THE ASSE SSEE FOR BAD AND DOUBTFUL DEBTS ALONE WAS TO BE RECKONED FOR CONSIDE RING THE THRESHOLD LIMITS AND IT WAS NOT NECESSARY TO CONSIDER THE BRE AKUP THEREOF, WHILE ARRIVING THE ALLOWABILITY OF A CLAIM U/S 36(1)(VIII A) OF THE ACT. 6. PER CONTRA, LEARNED DR REITERATED THE SAME ARGU MENTS TAKEN BY THE REVENUE IN THE CASE OF M/S ING VYSYA BANK LTD ( SUPRA). STRESS WAS GIVEN TO THE AMENDMENT MADE TO SECTION 36(1)(VII) B Y FINANCE ACT, 2013 WHEREBY EXPLANATION 2 WAS INSERTED. ACCORDING TO HIM, THIS EXPLANATION WOULD SHOW THAT THE PROVISION MADE U/S 36(1)(VIIA) HAD TO BE FIRST DEDUCTED FROM THE CLAIM OF BAD DEBTS U/S 36(1)(VII OF THE ACT BEFORE ALLOWING DEDUCTION UNDER THE LATTER SECTION TO AN A SSESSEE. AS PER THE LEARNED DR IF THE LEGISLATURE IN ITS WISDOM THOUGHT IT FIT TO ADJUST THE PROVISION AGAINST THE BAD DEBTS IT WAS NOT FOR THE APPELLATE AUTHORITIES TO GIVE A DIFFERENT INTERPRETATION. RELIANCE WAS ALSO PLACED ON EXPLANATORY NOTE GIVEN BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) WITH REGARD TO FINANCE ACT, 2013. 7. IN REPLY LEARNED AR SUBMITTED THAT THE INTERPRET ATION SOUGHT TO BE GIVEN BY THE LEARNED DR ON EXPLANATION2 TO SECTION 36(1)(VII) WAS INCORRECT. ACCORDING TO HIM SET OFF OF BAD DEBT C OULD BE DONE ONLY AGAINST PROVISIONS AND NOT VICE-VERSA. ITA NOS.1264 & 1352(B)/13 5 8. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT ASSESSEE HAD MADE TOTAL PR OVISION FOR BAD DEBTS OF RS.547,75,81,922/- IN ITS BOOKS OF ACCOUNTS. WHEN ASSESSEE WAS REQUIRED TO GIVEN BREAK-UP OF THE ABOVE AMOUNT, IT CAME OUT THAT THE PROVISIONING WITH RESPECT TO RURAL DEBTS WERE ONLY RS.37,44,67,183/-. HOWEVER, AS PER THE ASSESSEE IT WOULD BE ELIGIBLE F OR DEDUCTION U/S 36(1)(VIIA) FOR AN AMOUNT OF RS.423,79,66,948/- WHI CH WAS LOWER THAN THE TOTAL PROVISIONING ENTITLING IT TO SUCH A CLAIM. W E FIND THAT A SIMILAR ISSUE HAD ALREADY CAME UP BEFORE THE TRIBUNAL IN THE CASE OF M/S ING VYSYA BANK LTD.(SUPRA). THE ARGUMENT MADE BY THE DEPARTM ENT AND THE ASSESSEE AND ALSO FINAL DECISION GIVEN BY THE TRIBU NAL IN THE ABOVE CASE ARE AVAILABLE AT PARAS 21 TO 41 OF THE SAID ORDER W HICH ARE REPRODUCED HERE UNDER; 21. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE AND THE LEARNED DR. THE LEARNED DR RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT ORIGINALLY WHEN SEC.36(1)(VIIA) OF THE ACT WAS INTR ODUCED, THE REQUIREMENT OF PBDD HAVING TO BE IN RELATION TO ADV ANCES MADE BY ITS RURAL BRANCH WAS A CONDITION FOR ALLOWING DE DUCTION ON ACCOUNT OF PBDD. AFTER AMENDMENT OF SEC.36(1)(VIIA) BY THE IT (AMENDMENT) ACT, 1985, THE REQUIREMENT THAT THE PBD D SHOULD BE IN RELATION TO RURAL ADVANCES WAS NOT A REQUIREM ENT. THE PBDD COULD BE IN RELATION TO ANY ADVANCE AND DEDUCTION W AS ALLOWED ONLY IN RESPECT OF RURAL ADVANCES SINCE THE CALCULA TION WAS MAINLY BASED ON RURAL ADVANCES. WHAT HAS TO BE SEEN IS AS TO WHETHER THE BANK HAD MADE ANY PROVISION FOR BAD AND DOUBTFU L DEBTS. THERE IS NO NEED TO BIFURCATE THE SAME INTO RURAL A ND NON-RURAL ITA NOS.1264 & 1352(B)/13 6 DEBTS. ONCE A BANK CREATES PROVISION FOR BAD AND DO UBTFUL DEBT, THEN THE DEDUCTION IS ALLOWED U/S.36(1)(VIIA) BASED ON THE CALCULATION AS PROVIDED IN THE SECTION. IT WAS SUBM ITTED THAT IN AY 03-04, THE ASSESSEE MADE A PBDD OF RS.88,30,47,000. AS PER THE CALCULATION PROVIDED IN SEC.36(1)(VIIA) IT WAS ENTI TLED TO DEDUCTION OF RS.25,15,44,262 BUT IT CLAIMED DEDUCTION OF RS.2 3,80,55,247. FOR AY 04-05, THE ASSESSEE MADE A PBDD OF RS.51,82, 00,000. AS PER CALCULATION PROVIDED IN SEC.36(1)(VIIA), IT WAS ENTITLED TO CLAIM DEDUCTION OF RS.25,89,19,631 AND HAD CLAIMED THE SA ID SUM AS DEDUCTION. 22. ELABORATING FURTHER, THE LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED BEFORE US THAT WHEN SEC.36(1)(VIIA) WAS I NTRODUCED IN THE YEAR 1979, THE PBDD HAD TO BE MADE IN RELATION TO ADVANCES MADE BY ITS RURAL BRANCHES. WHEN SEC.36(1)(VIIA) W AS SUBSTITUTED BY THE IT(AMENDMENT) ACT, 1985, THE REQ UIREMENT OF THE PBDD HAVING TO BE IN RELATION TO ADVANCES MADE BY RURAL BRANCHES WAS DISPENSED WITH AND THAT THE PBDD NEED NOT BE IN RELATION TO ADVANCES MADE BY ITS RURAL BRANCHES. IT WAS POINTED OUT BY HIM THAT UNDER THE PROVISIONS OF SEC.36(1)(V IIA) AS SUBSTITUTED BY THE IT (AMENDMENT) ACT, 1986 :- (A) A SCHEDULED BANK (NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA) OR (B) A CO-OPERATIVE BANK OTHER THAN A PRIMARY AGRICU LTURAL CREDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK, WOULD GET AN AMOUNT (I) NOT EXCEEDING SEVEN AND ONE-HALF PER CENT OF TH E TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A) AND ITA NOS.1264 & 1352(B)/13 7 (II) AN AMOUNT NOT EXCEEDING TEN PER CENT OF THE AG GREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER; AS DEDUCTION ON ACCOUNT OF PROVISION FOR BAD AND DO UBTFUL DEBTS WHILECOMPUTING ITS TOTAL INCOME. 23. ACCORDING TO HIM AFTER THE AFORESAID AMENDMENT, THE REQUIREMENT OF THE PROVISION HAVING TO BE MADE IN R ESPECT OF ADVANCES BY RURAL BRANCHES HAS BEEN DISPENSED WITH. AS LONG AS THE BANK MAKES ANY PROVISION FOR BAD AND DOUBTFUL D EBTS, IT IS ELIGIBLE TO CLAIM DEDUCTION U/S.36(1)(VIIA) AS PER THE CALCULATION PROVIDED THEREIN. IT WAS SUBMITTED THAT IN AY 03-04 , THE ASSESSEE MADE PBDD TO THE EXTENT OF RS.88,30,47,000 IN ITS B OOKS OF ACCOUNTS. OUT OF WHICH RS.10,00,000 WAS PBDD IN RES PECT OF RURAL ADVANCES AND RS.88,20,47,000 WAS PBDD IN RESPECT OF NON-RURAL ADVANCES. IT WAS ELIGIBLE TO CLAIM DEDUCTION OF RS. 25,15,44,262 AS PER THE CALCULATION MADE U/S.36(1)(VIIA) OF THE ACT. SINCE THE PROVISION MADE IN THE BOOKS OF PBDD FOR NON-RURAL A ND RURAL ADVANCES WAS MUCH MORE THAN THE DEDUCTION CLAIMED U/S.36(1)(VIIA)(A) OF THE ACT, THE DEDUCTION CLAIME D HAS TO BE ALLOWED. SIMILARLY FOR AY 04-05, THE ASSESSEE MADE PBDD IN RESPECT OF NON-RURAL ADVANCES OF RS.51,72,00,000 AN D IN RESPECT OF RURAL ADVANCES RS.10,00,000. THE ENTIRE PROVISIO N OF RS.51,82,00,000 DEBITED TO THE PROFIT AND LOSS ACCO UNT WAS ADDED TO THE PROFIT AS PER PROFIT AND LOSS ACCOUNT IN THE COMPUTATION OF TOTAL INCOME. BAD DEBT WRITTEN OFF IN RESPECT OF NO N-RURAL BRANCHES WAS RS.88,26,10,825 AND NON-RURAL BRANCHES WAS RS.1,59,60,631. A SUM OF RS.50,22,39,369 WAS CLAIME D AS DEDUCTION U/S.36(1)(VII) OF THE ACT AND A SUM OF RS .25,89,19,631 WAS CLAIMED AS DEDUCTION U/S.36(1)(VIIA) OF THE ACT . IT WAS CLAIMED THAT SINCE THE PBDD MADE BOTH RURAL AND NON -RURAL ADVANCES WAS MUCH MORE THAN THE AMOUNT CLAIMED AS D EDUCTION U/S.36(1)(VIIA)(A) OF THE ACT, THE DEDUCTION CLAIME D BY THE ASSESSEE HAS TO BE ALLOWED. IT WAS SUBMITTED THAT T HE CLAIM WAS ITA NOS.1264 & 1352(B)/13 8 RIGHTLY ALLOWED BY THE CIT(A) AND THE ORDERS OF CIT (A) DO NOT CALL FOR ANY INTERFERENCE. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TO AP PRECIATE THE CONTENTION PUT FORTH BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE NEED TO LOOK INTO THE HISTORY OF SEC.36(1 )(VIIA) A S IT EXISTS IN THE PRESENT FORM. STAGE-I: SEC.36(1)(VIIA) WAS INSERTED BY THE FINANCE ACT, 19 79 W.E.F. 1ST APRIL, 1980 AND AT THE TIME OF ITS INSERTION, THIS CLAUSE READ AS UNDER : '(VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOU BTFUL DEBTS MADE BY A SCHEDULED BANK IN RELATION TO THE ADVANCE S MADE BY ITS RURAL BRANCHES, AN AMOUNT NOT EXCEEDING ONE AND A HALF PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES, COMPUTED IN THE PRESCRIBED MANNER. EXPLANATION : FOR THE PURPOSES OF THIS CLAUSE,- (I) 'RURAL BRANCH' MEANS A BRANCH OF A SCHEDULED BA NK SITUATED IN A PLACE WHICH HAS A POPULATION OF NOT MORE THAN TEN THOUSAND ACCORDING TO THE LAST PRECEDING CENSUS OF WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIRST DAY OF THE PREVIOUS YEAR; (II) 'SCHEDULED BANK' HAS THE SAME MEANING AS IN TH E EXPLANATION AT THE END OF CL. (B) OF SUB-SECTION (2) OF SECTION 11, BUT DOES NOT INCLUDE A CO-OPERATIVE BANK.' THIS CLAUSE, AS EXPLAINED IN PARA 13 OF THE CBDT CI RCULAR NO. 258, DT. 14TH JUNE, 1979, WAS INSERTED TO PROMOTE RURAL BANKING AND TO ASSIST THE SCHEDULED COMMERCIAL BANKS IN MAKING ADEQUATE PROVISIONS IN RELATION TOTHEIR RURAL ADVANCES. THE CIRCULAR READS THUS:- ITA NOS.1264 & 1352(B)/13 9 'DEDUCTION IN RESPECT OF PROVISIONS MADE FOR BAD AN D DOUBTFUL DEBTS RELATING TO RURAL BRANCHES OF SCHEDULED COMME RCIAL BANKS SEC. 36(1 )(VIIA) 13.1 UNDER S. 36(1 )(VIIA) OF THE IT ACT, A TAXPAYE R CARRYING ON BUSINESS OR PROFESSION IS ENTITLED TO A DEDUCTION, IN THE COMPUTATION OF THE TAXABLE PROFITS, OF THE AMOUNT O F ANY DEBT WHICH IS ESTABLISHED TO HAVE BECOME BAD DURING THE PREVIOUS YEAR, SUBJECT TO CERTAIN CONDITIONS. HOWEVER, A MER E PROVISION FOR BAD AND DOUBTFUL DEBTS IS NOT ALLOWED AS A DEDUCTIO N IN THE COMPUTATION OF THE TAXABLE PROFITS. 13.2 IN ORDER TO PROMOTE RURAL BANKING AND ASSIST T HE SCHEDULED COMMERCIAL BANKS IN MAKING ADEQUATE PROVISIONS FROM THEIR CURRENT PROFITS TO PROVIDE FOR RISKS IN RELATION TO THEIR RURAL ADVANCES, THE FINANCE ACT HAS INSERTED A NEW CL. (V IIA) IN SUB-S. (1) OF S. 36 OF THE IT ACT TO PROVIDE FOR A DEDUCTI ON, THE COMPUTATION OF THE TAXABLE PROFITS OF ALL SCHEDULED COMMERCIAL BANKS, IN RESPECT OF PROVISIONSMADE BY THEM FOR BAD AND DOUBTFUL DEBTS RELATING TO ADVANCESMADE BY THE RURAL BRANCHE S. THE DEDUCTION WILL BE LIMITED TO 1-1/2 PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES COMPUTE D IN THE MANNER TO BE PRESCRIBED BY RULES IN THE IT RULES, 1 962. FOR THIS PURPOSE, A 'RURAL BRANCH' MEANS A BRANCH OF A SCHED ULED BANK SITUATED IN A PLACE WITH A POPULATION NOT EXCEEDING 10,000 ACCORDING TO THE LAST PRECEDING CENSUS OF WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIRST DAY OF THE PREVIOUS YEAR. THE EXPRESSION 'SCHEDULED BANK' HAS THE SAME MEANING AS IN THE EXPLANATION BELOW S. 11 (2)(B) OF THE IT ACT BUT DOES NOT INCLUDE A COOPERATIVE BANK. THE EXPRESSION 'SCHEDUL ED BANK' WOULD, THEREFORE, COVER THE STATE BANK OF INDIA CON STITUTED UNDER THE STATE BANK OF INDIA ACT, 1955, ANY SUBSIDIARY B ANK OF THE STATE BANK OF INDIA AS DEFINED IN THE STATE BANK OF INDIA (SUBSIDIARY BANKS) ACT, 1959, A NATIONALISED BANK A S SPECIFIED IN S. 3 OF THE BANKING COMPANIES (ACQUISITION AND TRAN SFER OF ITA NOS.1264 & 1352(B)/13 10 UNDERTAKINGS) ACT, 1970 OR ANY OTHER BANK INCLUDED IN THE SECOND SCHEDULE TO THE RESERVE BANK OF INDIA ACT, 1934. IT MAY BE MENTIONED THAT ALL CO-OPERATIVE BANKS HAVE BEEN EXC LUDED FROM THE PURVIEW OF THIS PROVISION IN VIEW OF THE POSITI ON THAT UNDER S. 80P(2)(A)(I) OF THE IT ACT, THE PROFITS AND GAINS O F A CO-OPERATIVE SOCIETY ENGAGED IN THE BUSINESS OF BANKING OR PROVI DING CREDIT FACILITIES TO ITS MEMBERS ARE COMPLETELY EXEMPT FRO M INCOME-TAX. 13.3 IT MAY BE RELEVANT TO MENTION THAT THE PROVISI ONS OF NEW CL. (VIIA) OF S. 36(1) RELATING TO THE DEDUCTION ON ACC OUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS IS DISTINCT A ND INDEPENDENT OF THE PROVISIONS OF S. 36(1)(VII) RELATING TO ALLO WANCE OF THE BAD DEBTS. IN OTHER WORDS, THE SCHEDULED COMMERCIAL BAN KS WOULD CONTINUE TO GET THE FULLBENEFIT OF THE WRITE OFF OF THE IRRECOVERABLE DEBTS UNDER S. 36(1 )(VII) IN ADDITION TO THE BENEF IT OF DEDUCTION OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS UNDER S. 3 6(1)(VIIA). 13.4 THIS PROVISION WILL TAKE EFFECT FROM 1ST APRIL , 1980 AND WILL ACCORDINGLY APPLY IN RELATION TO THE ASST. YR. 1980 -81 AND SUBSEQUENT YEARS.' 25. BY SECTION 10(A) OF THE FINANCE ACT, 1982 IN TH E OPENING PORTION OF THE WORD (SCHEDULED BANK' WAS SUBSTITUTE D WITH THE WORDS 'SCHEDULED BANK OR A NON-SCHEDULED BANK.' FUR THER IN THE EXPLANATION TO THIS CLAUSE, THE EXISTING CL. (I) WA S RENUMBERED AS CL. (IA) AND THE FOLLOWING CLAUSE WAS INSERTED AS C L(I): 'NON-SCHEDULED BANK' MEANS A BANKING COMPANY AS DEF INED IN CL. (C) OF SECTION 5 OF THE BANKING REGULATION ACT, 194 5 (10 OF 1949) WHICH IS NOT A SCHEDULED BANK'. 26. AS EXPLAINED IN PARA 17 OF THE CBDT CIRCULAR NO . 346, DT. 30TH JUNE, 1982, THE OBJECT OF THE AMENDMENT WAS TO EXTEND THE BENEFIT OF THE DEDUCTION TO ADVANCES BY RURAL BRANC HES OF NON- SCHEDULED COMMERCIAL BANKS AS WELL. ITA NOS.1264 & 1352(B)/13 11 STAGE-II DEDUCTION ENHANCED - AMENDMENT BY THE FINANCE ACT, 1985 27. FOR THE PORTION BEGINNING WITH THE WORDS 'IN RE SPECT OF ANY PROVISION' AND ENDING WITH THE WORDS 'IN THE PRESCR IBED MANNER', THE FOLLOWING WAS SUBSTITUTED W.E.F. 1ST APRIL, 198 5 : 'IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED BANK [NOT BEING A BANK APPROVED BY THE CENTRAL GOVERNMENT FOR THE PURPOSES OF CL. (VII IA) OR A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A NON-SCHEDULED BANK, AN AMOUNT N OT EXCEEDING TEN PER CENT OF THE TOTAL INCOME (COMPUTE D BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A) OR AN AMOUNT NOT EXCEEDING TWO PER CE NT OF THEAGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OFSUCH BANKS, COMPUTED IN THE PRESCRIBED MANNER, WHICHEVER IS HIGHER.' 28. PROVISO TO SEC.36(1)(VII) OF THE ACT, WAS INTRO DUCED BY THE FINANCE ACT, 1985 AND IT READS THUS: 'PROVIDED THAT IN THE CASE OF AN ASSESSEE TO WHICH CL. (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO AN Y SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHIC H SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROV ISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE.' 29. SIMULTANEOUSLY, SEC.36(2)(V) WAS INTRODUCED BY THE FINANCE ACT, 1985 AND IT READS THUS: 'SEC. 36(2) IN MAKING ANY DEDUCTION FOR A BAD DEBT OR PART THEREOF, THE FOLLOWING PROVISIONS SHALL APPLY (I) TO (IV) .. ITA NOS.1264 & 1352(B)/13 12 (V) WHERE SUCH DEBT OR PART OF DEBT RELATES TO ADVA NCES MADE BY AN ASSESSEE TO WHICH CL. (VIIA) OF SUB-S. (1) APPLI ES, NO SUCH DEDUCTION SHALL BE ALLOWED UNLESS THE ASSESSEE HAS DEBITED THE AMOUNT OF SUCH DEBT OR PART OF DEBT IN THAT PREVIOU S YEAR TO THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE U NDER THAT CLAUSE.' 30. AS EXPLAINED IN PARA 17 OF THE CBDT CIRCULAR NO . 421, DT. 12TH JUNE, 1985, THE BENEFIT OF DEDUCTION UNDER THI S CLAUSE WAS ENHANCED HAVING REGARD TO THE INCREASING SOCIAL COM MITMENTS OF BANKS. 'DEDUCTION IN RESPECT OF PROVISIONS MADE BY BANKING COMPANIES FOR BAD AND DOUBTFUL DEBTS 17.1 SEC. 36(1 )(VII) OF THE IT ACT PROVIDES FOR A DEDUCTION IN THE COMPUTATION OF TAXABLE PROFITS OF THE AMOUNT OF ANY DEBT OR PART THEREOF WHICH IS ESTABLISHED TO HAVE BECOME A BAD D EBT IN THE PREVIOUS YEAR. THIS ALLOWANCE IS SUBJECT TO THE FUL FILMENT OF THE CONDITIONS SPECIFIED IN SUB-S. (2) OF S. 36. 17.2 SEC. 36(1 )(VIIA) OF THE IT ACT PROVIDES FOR A DEDUCTION IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED BANK OR A NON-SCHEDULED BANK IN RELATION TO ADVANCES MADE BY ITS RURAL BRANCHES, OF ANY AMOUNT NOT EXCEE DING 11/2 PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES. 17.3 HAVING REGARD TO THE INCREASING SOCIAL COMMITM ENTS OF BANKS, S. 36(1)(VIIA) HAS BEEN AMENDED TO PROVIDE T HAT IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED BANK [NOT BEING A BANK APPROVED BY THE CENTRAL GOVE RNMENT FOR THE PURPOSES OF S. 36(1 )(VIIIA) OR A BANK INCORPOR ATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A NON -SCHEDULED BANK, AN AMOUNT NOT EXCEEDING TEN PER CENT OF THE T OTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PRO POSED NEW ITA NOS.1264 & 1352(B)/13 13 PROVISION) OR TWO PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANKS, WHICHEVER IS HIGHER, SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE TAXABLE PROFITS. 17.4 SEC. 36(1 )(VII) OF THE ACT HAS ALSO BEEN AMEN DED TO PROVIDE THAT IN THE CASE OF A BANK TO WHICH S. 36(1 )(VIIA) APPLIES, THE AMOUNT OF BAD AND DOUBTFUL DEBTS SHALL BE DEBITED T O THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT AND TH AT THE DEDUCTION ADMISSIBLE UNDER S. 36(1 )(VII) SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS T HE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT. 17.5 SEC. 36(2) HAS BEEN AMENDED BY INSERTION OF A NEW CL. (V) TO PROVIDE THAT WHERE A DEBT OR A PART OF A DEBT CO NSIDERED BAD OR DOUBTFUL RELATES TO ADVANCES MADE BY A BANK TO WHIC H S. 36(1 )(VIIA) APPLIES, NO SUCH DEDUCTION SHALL BE ALLOWED UNLESS THE BANK HAS DEBITED THE AMOUNT OF SUCH DEBT OR PART OF DEBT IN THAT PREVIOUS YEAR TO THE PROVISION FOR BAD AND DOUBTFUL DEBT ACCOUNT MADE UNDER CL. (VIIA) OF S. 36(1).' STAGE-III: 31. THE IT (AMENDMENT) ACT, 1986 SUBSTITUTED THE PR ESENT CL. (VIIA) FOR THE ONE AS SUBSTITUTED BY THE FINANCE AC T, 1985. THESE PROVISIONS CAME INTO EFFECT FROM 1.4.1987. SECTION 36 - OTHER DEDUCTIONS THE SECTION READS AS UNDER : OTHER DEDUCTIONS.- (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF TH E MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO I N SECTION 28 - VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOUBT FUL DEBTS MADE BY - ITA NOS.1264 & 1352(B)/13 14 (A) A SCHEDULED BANK NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A CO-OPERAT IVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY OR A PRI MARY CO- OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK, AN AMOUNT NOT EXCEEDING SEVEN AND ONE-HALF PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A) AND AN AMOUNT NOT EXCEEDING TEN PER C ENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCH ES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER; PROVIDED THAT A SCHEDULED BANK OR A NON-SCHEDULED B ANK REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION, BE ALLO WED IN ANY OF THE RELEVANT ASSESSMENT YEARS, DEDUCTION IN RESPECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY THE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WIT H THE GUIDELINES ISSUED BY IT IN THIS BEHALF, FOR AN AMOUNT NOT EXCE EDING FIVE PER CENT. OF THE AMOUNT OF SUCH ASSETS SHOWN IN THE BOO KS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR. PROVIDED FURTHER THAT FOR THE RELEVANT ASSESSMENT Y EARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2003 A ND ENDINGBEFORE THE 1ST DAY OF APRIL, 2005, THE PROVIS IONS OF THE FIRST PROVISO SHALL HAVE EFFECT AS IF FOR THE WORDS 'FIVE PER CENT.', THE WORDS 'TEN PER CENT.' HAD BEEN SUBSTITUTED. PROVIDED ALSO THAT A SCHEDULED BANK OR A NONSCHEDUL ED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION , BE ALLOWED A FURTHER DEDUCTION IN EXCESS OF THE LIMITS SPECIFIED IN THE FOREGOING PROVISIONS, FOR AN AMOUNT NOT EXCEEDING THE INCOME DERIVED FROM REDEMPTION OF SECURITIES IN ACCORDANCE WITH A SCHEM E FRAMED BY THE CENTRAL GOVERNMENT: PROVIDED ALSO THAT NO DEDUCTION SHALL BE ALLOWED UN DER THE THIRD PROVISO UNLESS SUCH INCOME HAS BEEN DISCLOSED IN TH E RETURN OF INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINES S OR PROFESSION'. ITA NOS.1264 & 1352(B)/13 15 EXPLANATION : FOR THE PURPOSES OF THIS SUB-CLAUSE, 'RELEVANT ASSESSMENT YEARS' MEANS THE FIVE CONSECUTIVE ASSESS MENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2000 A ND ENDING BEFORE THE 1ST DAY OF APRIL, 2005. (B) A BANK, BEING A BANK INCORPORATED BY OR UNDER T HE LAWS OF A COUNTRY OUTSIDE INDIA, AN AMOUNT NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCT ION UNDER THIS CLAUSE AND CHAPTER VI-A); PROVIDED THAT A PUBLIC FINANCIAL INSTITUTION OR A S TATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPOR ATION REFERRED TO IN THIS SUB-CLAUSE SHALL, AT ITS OPTION, BE ALLO WED IN ANY OF THE TWO CONSECUTIVE ASSESSMENT YEARS COMMENCING ON OR A FTER THE 1ST DAY OF APRIL, 2003 AND ENDING BEFORE THE 1ST DA Y OF APRIL, 2005, DEDUCTION IN RESPECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY THE RESERVE BANK OF INDIA AS D OUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WITH THE GUIDELINES IS SUED BY IT IN THIS BEHALF, OF AN AMOUNT NOT EXCEEDING TEN PER CENT. OF THE AMOUNT OF SUCH ASSETS SHOWN IN THE BOOKS OF ACCOUNT OF SUC H INSTITUTION OR CORPORATION, AS THE CASE MAY BE, ON THE LAST DAY OF THE PREVIOUS YEAR. (C) A PUBLIC FINANCIAL INSTITUTION OR A STATE FINAN CIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPORATION, AN AMOUN T NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME (COMPUT ED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A). EXPLANATION : FOR THE PURPOSES OF THIS CLAUSE- (I) 'NON-SCHEDULED BANK' MEANS A BANKING COMPANY AS DEFINED IN CLAUSE (C) OF SECTION 5 OF THE BANKING REGULATION A CT, 1949 (10 OF 1949) WHICH IS NOT A SCHEDULED BANK;] (IA) 'RURAL BRANCH' MEANS A BRANCH OF A SCHEDULED B ANK OR A NON- SCHEDULED BANK SITUATED IN A PLACE WHICH HAS A POPU LATION OF NOT ITA NOS.1264 & 1352(B)/13 16 MORE THAN TEN THOUSAND ACCORDING TO THE LAST PRECED ING CENSUS OF WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFO RE THE FIRST DAY OF THE PREVIOUS YEAR; (II) 'SCHEDULED BANK' MEANS THE STATE BANK OF INDIA CONSTITUTED UNDER THE STATE BANK OF INDIA ACT, 1955, A SUBSIDIA RY BANK AS DEFINED IN THE STATE BANK OF INDIA (SUBSIDIARY BANK S) ACT, 1959, A CORRESPONDING NEW BANK CONSTITUTED UNDER SECTION 3 OF THE BANKING COMPANIES (ACQUISITION AND TRANSFER OF UNDE RTAKINGS) ACT, 1970, OR UNDER SECTION 3 OF THE BANKING COMPAN IES (ACQUISITION AND TRANSFER OF UNDERTAKINGS) ACT, 198 0, OR ANY OTHER BANK BEING A BANK INCLUDED IN THE SECOND SCHE DULE TO THE RESERVE BANK OF INDIA ACT, 1934; (III) 'PUBLIC FINANCIAL INSTITUTION' SHALL HAVE THE MEANING ASSIGNED TO IT IN SECTION 4A OF THE COMPANIES ACT, 1956 (1 O F 1956); (IV) 'STATE FINANCIAL CORPORATION' MEANS A FINANCIA L CORPORATION ESTABLISHED UNDER SECTION 3 OR SECTION 3A OR AN INS TITUTION NOTIFIED UNDER SECTION 46 OF THE STATE FINANCIAL CORPORATION S ACT, 1951 (63 OF 1951) ; (V) 'STATE INDUSTRIAL INVESTMENT CORPORATION' MEANS A GOVERNMENT COMPANY WITHIN THE MEANING OF SECTION 61 7 OF THE COMPANIES ACT, 1956 (1 OF 1956) ENGAGED IN THE BUSI NESS OF PROVIDING LONG-TERM FINANCE FOR INDUSTRIAL PROJECTS AND ELIGIBLE FOR DEDUCTION UNDER CLAUSE (VIII) OF THIS SUB-SECTION; (VI) 'CO-OPERATIVE BANK', 'PRIMARY AGRICULTURAL CRE DIT SOCIETY' AND 'PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELO PMENT BANK' SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO TH EM IN THE EXPLANATION TO SUB-SECTION (4) OF SECTION 80P' 32. THE OBJECT OF THE SUBSTITUTION, AS EXPLAINED IN PARA 5 OF THE CBDT CIRCULAR NO. 464, DT. 18TH JULY, 1986, WAS TO GIVE THE SEPARATE DEDUCTION, VIZ., ONE IN RESPECT OF RURAL A DVANCES AND THE ITA NOS.1264 & 1352(B)/13 17 OTHER FOR PROVISION FOR BAD AND DOUBTFUL DEBTS IN G ENERAL AND ALSO TO EXTEND THE BENEFIT OF DEDUCTION TO ALL BANKS INC LUDING FOREIGN BANKS. 'MODIFICATION IN RESPECT OF DEDUCTION ON PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY THE BANKS. 5.1 UNDER THE EXISTING PROVISIONS OF CL. (VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT INSERTED BY THE FINANCE ACT, 1979, PR OVISIONS FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED OR A NON-SCH EDULED INDIAN BANK IS ALLOWED AS DEDUCTION WITHIN PRESCRIB ED LIMITS. THE LIMIT PRESCRIBED IS 10% OF THE TOTAL INCOME OR 2% O F THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCH ES OF SUCH BANKS, WHICHEVER IS HIGHER. IT HAD BEEN REPRESENTED TO THE GOVERNMENT THAT THE FOREIGN BANKS WERE NOT ENTITLED TO ANY DEDUCTION UNDER THIS PROVISION AND TO THAT EXTENT T HEY WERE BEING DISCRIMINATED AGAINST. FURTHER, IT WAS FELT THAT TH E EXISTING CEILING IN THIS REGARD I.E. 10% OF THE TOTAL INCOME OR 2% O F THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF INDI AN BANKS, WHICHEVER IS HIGHER, SHOULD BE MODIFIED. ACCORDINGL Y, BY THE AMENDING ACT, THE DEDUCTION PRESENTLY AVAILABLE UND ER CL. (VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT HAS BEEN SPLIT IN TO TWO SEPARATE PROVISIONS. ONE OF THESE LIMITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF THE BANKS CONCERNED. IT MAY BE CLARIFIE D THAT FOREIGN BANKS DO NOT HAVE RURAL BRANCHES AND HENCE THIS AME NDMENT WILL NOT BE RELEVANT IN THE CASE OF THE FOREIGN BANKS. T HE OTHER PROVISION SECURES THAT A FURTHER DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY ALL BANKS NOT JUST THE BANKS INCORPORATED IN INDIA, LIM ITED TO 5% OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCT ION UNDER THIS CLAUSE AND CHAPTER VI-A). THIS WILL IMPLY THAT ALL SCHEDULED OR NON-SCHEDULED BANKS HAVING RURAL BRANCHES WOULD BE ALLOWED THE DEDUCTION UPTO 2% OF THE AGGREGATE AVERAGE ADVANCES MADE BY ITA NOS.1264 & 1352(B)/13 18 SUCH BRANCHES AND A FURTHER DEDUCTION UPTO 5% OF TH EIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS.' 33. TO COMPLETE THE SEQUENCE OF AMENDMENTS, WE MAY ALSO MAKE A REFERENCE TO THE AMENDMENT TO SEC.36(1)(VIIA ) OF THE ACT BY THE FINANCE ACT, 2013. BY THE FINANCE ACT, 2013, IN SECTION 36 OF THE INCOME-TAX ACT, IN SUB-SECTION (1), WITH EFF ECT FROM THE 1ST DAY OF APRIL, 2014, IN CLAUSE (VII), THE EXPLANATIO N WAS NUMBERED AS EXPLANATION 1 THEREOF AND AFTER EXPLANATION1 AS SO NUMBERED, THE FOLLOWING EXPLANATION WAS INSERTED, NAMELY: 'EXPLANATION 2.FOR THE REMOVAL OF DOUBTS, IT IS HE REBY CLARIFIED THAT FOR THE PURPOSES OF THE PROVISO TO CLAUSE (VII ) OF THIS SUB- SECTION AND CLAUSE (V) OF SUB-SECTION (2), THE ACCO UNT REFERRED TO THEREIN SHALL BE ONLY ONE ACCOUNT IN RESPECT OF PRO VISION FOR BAD AND DOUBTFUL DEBTS UNDER CLAUSE (VIIA) AND SUCH ACC OUNT SHALL RELATE TO ALL TYPES OF ADVANCES, INCLUDING ADVANCES MADE BY RURAL BRANCHES;' 34. IT CAN BE SEEN FROM THE HISTORY OF SEC.36(1)(VI IA) OF THE ACT THAT AT STAGE-I THE DEDUCTION WAS ALLOWED IN RESPEC T OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHE DULED BANK IN RELATION TO THE ADVANCESMADE BY ITS RURAL BRANCHES. AT THIS STAGE THE PBDD HAD TO BE LINKED TO THE ADVANCES MADE BY B ANKS RURAL BRANCHES. AT STAGE-II OF SEC.36(1)(VIIA), THE DEDUC TION WHILE COMPUTING THE TAXABLE PROFITS WAS ALLOWED OF AN AMO UNT NOT EXCEEDING TEN PER CENT OF THE TOTAL INCOME (COMPUTE D BEFORE MAKING ANY DEDUCTION UNDER THE PROPOSED NEW PROVISI ON) OR TWO PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANKS, WHICHEVER IS HIGHER. AT THI S STAGE ALSO THE PBDD HAD TO BE CREATED AND DEBITED TO THE PROFI T AND LOSS ACCOUNT BUT IT WAS NOT REQUIRED TO BE DONE IN RELAT ION TO ADVANCES MADE BY BANKS RURAL BRANCHES AND CAN BE IN RELATIO N TO ANY DEBT. PBDD NEED NOT BE IN RELATION TO RURAL ADVANCES BUT CAN BE IN RELATION TO ANY ADVANCES BOTH RURAL AND NON-RURAL A DVANCES. THE TWO PERCENT AAA MADE BY RURAL BRANCHES OF SUCH BANK S HAD TO BE ITA NOS.1264 & 1352(B)/13 19 COMPUTED AND THE PBDD MADE IN BOOKS HAS TO BE IN RE LATION TO RURAL ADVANCES. THE OTHER ELIGIBLE SUM WHICH CAN BE CONSIDERED FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT VIZ., TEN PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PROPOSED NEW PROVISION) DOES NOT REQUIRE COMPUTATIO N IN RELATION TO RURAL ADVANCES. NEVERTHELESS THE DEBIT OF PBDD T O PROFIT AND LOSS ACCOUNT IS NECESSARY OF THE HIGHER OF THE TWO SUMS TO CLAIM DEDUCTION U/S.36(1)(VIIA) OF THE ACT. IF THE CONCER NED BANK DOES NOT HAVE RURAL BRANCHES THEN THEY COULD NOT CLAIM T HE DEDUCTION. THEREFORE THE DEDUCTION WAS CONFINED ONLY TO BANKS THAT HAD RURAL BRANCHES. 35. AT STAGE-III OF THE PROVISIONS OF SEC.36(1)(VII A) OF THE ACT, THE DEDUCTION ALLOWED EARLIER WAS ENHANCED. THE ENH ANCEMENT OF THE DEDUCTION WAS CONSEQUENT TO REPRESENTATION TO T HE GOVERNMENT THAT THE EXISTING CEILING IN THIS REGARD I.E. 10% OF THE TOTAL INCOME OR 2% OF THE AGGREGATE AVERAGE ADVANCE S MADE BY THE RURAL BRANCHES OF INDIAN BANKS, WHICHEVER IS HI GHER, SHOULD BE MODIFIED. ACCORDINGLY, BY THE AMENDING ACT, THE DED UCTION PRESENTLY AVAILABLE UNDER CL. (VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT HAS BEEN SPLIT INTO TWO SEPARATE PROVISIONS. ON E OF THESE LIMITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% (AS IT EXISTED ORIGINALLY, NOW IT IS 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF THE BANKS CONCERNED. THIS WILL IMPLY THAT ALL SCHEDULED OR NON-SCHEDULED BANKS HAVING RU RAL BRANCHES WOULD BE ALLOWED THE DEDUCTION (A) UPTO 2% (NOW 10% ) OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AN D (B) A FURTHER DEDUCTION UPTO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. THE FURTHER D EDUCTION OF 5% OF TOTAL INCOME WAS AVAILABLE TO BANKS WHICH DID NO T HAVE RURAL BRANCHES. 36. THEREFORE AFTER 1.4.1987, SCHEDULED OR NON-SCHE DULED BANKS HAVING RURAL BRANCHES WERE ALLOWED DEDUCTION., (A) UPTO 2% (NOW 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES ITA NOS.1264 & 1352(B)/13 20 AND (B) SCHEDULE OR NON-SCHEDULED BANKS WHETHER IT HAD RURAL BRANCHES OR NOT A DEDUCTION UPTO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. EV EN UNDER THE NEW PROVISIONS CREATING A PBDD IN THE BOOKS OF ACCO UNTS IS NECESSARY. 37. THOUGH UNDER STAGE-II AND STAGE-III OF THE PROV ISIONS OF SEC.36(1)(VIIA) OF THE ACT, PBDD HAS TO BE CREATED BY DEBITING THE PROFIT AND LOSS ACCOUNT OF THE SUM CLAIMED AS DEDUC TION, THE CONDITION THAT THE PROVISION SHOULD BE IN RESPECT O F RURAL ADVANCES IS NOT NECESSARY. AT STAGE-II OF THE PROVISIONS OF SEC.36(1)(VIIA) OF THE ACT, THIS CONDITION WAS DONE AWAY WITH AND I T WAS ONLY NECESSARY TO CREATE PBDD IN THE BOOKS OF ACCOUNTS A ND DEBIT TO PROFIT AND LOSS ACCOUNT. THE QUANTIFICATION OF THE MAXIMUM DEDUCTION PERMISSIBLE U/S.36(1)(VIIA) OF THE ACT HA D TO BE DONE.FIRSTLY IT HAS TO BE ASCERTAINED AS TO WHAT IS 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES, IF THE BANK HAS RURAL BRANCHES, OTHERWISE THAT PART OF THE DEDU CTION U/S.36(1)(VIIA) OF THE ACT WILL NOT BE AVAILABLE TO THE BANK. THE SECOND PART OF THE DEDUCTION U/S.36(1)(VIIA) HAS TO BE ASCERTAINED VIZ., 7.5% SEVEN AND ONE-HALF PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A). THE ABOVE ARE THE PERMISSIBLE UPPER LIMITS OF DEDUCTIONS U/S.36(1)(VIIA) OF THE ACT. THE ACTUAL P ROVISION MADE IN THE BOOKS BY THE ASSESSEE ON ACCOUNT OF PBDD (IR RESPECTIVE OF WHETHER IT IS RURAL OR NON- RURAL) HAS TO BE SEEN. TO THE EXTENT PBDD IS SO CREATED, THEN SUBJECT TO THE PERMISSIBLE UPPER LIMITS REFERRED TO ABOVE, THE DEDUCTION HAS TO BE ALLOWED TO THE ASSESSEE. THE QUESTION OF BIFURCATING THE PBDD AS O NE RELATING TO RURAL ADVANCES AND OTHER ADVANCES (NON-RURAL ADVANC ES) DOES NOT ARISE FOR CONSIDERATION. 38. IN THE PRESENT CASE AS FAR AY 03-04 IS CONCERNE D, THE ASSESSEE DEBITED IN THE PROFIT AND LOSS A/C. ON ACC OUNT OF PBDD IN RESPECT OF RURAL AND NON- RURAL ADVANCES OF RS.8 8,30,47,000 ITA NOS.1264 & 1352(B)/13 21 (RS.88,20,47,000 FOR NON-RURAL ADVANCES AND RS.10,0 0,000 FOR RURAL ADVANCES). A SUM OF RS.4,36,165 WAS ACTUALLY WRITTEN OFF OUT OF THE PBDD OF RURAL ADVANCES. THE ASSESSEE WRO TE OFF A SUM OF RS.88,26,10,825 AS BAD DEBTS ON ACCOUNT OF NON-R URAL ADVANCES AND CLAIMED THE SAME AS DEDUCTION U/S.36(1 )(VII) OF THE ACT. THE SAID CLAIM FOR DEDUCTION WAS ALLOWED BY TH E AO. THE ASSESSEE MADE A CLAIM FOR DEDUCTION U/S.36(1)(VIIA) (A) OF THE ACT OF RS.23,80,55,247. THIS WAS REJECTED BY THE AO FOR THE REASON THAT THE DEDUCTION U/S.36(1)(VIIA) OF THE ACT IS AL LOWED ONLY TO THE EXTENT PBDD IN RESPECT OF RURAL ADVANCES IS CREATED IN THE BOOKS OF ACCOUNTS. AS WE HAVE ALREADY EXPLAINED ABOVE, TH IS IS NOT A RELEVANT CONSIDERATION. WHAT HAS TO BE SEEN BY THE AO IS AS TO WHETHER PBDD IS CREATED (IRRESPECTIVE OF WHETHER IT IS IN RESPECT OF RURAL OR NON-RURAL ADVANCES) BY DEBITING THE PRO FIT & LOSS A/C. TO THE EXTENT PBDD IS SO CREATED, THE ASSESSEE IS E NTITLED TO DEDUCTION SUBJECT TO THE UPPER LIMIT OF DEDUCTION L AID DOWN IN SEC.36(1)(VIIA) OF THE ACT. TO AVOID POSSIBLE CLAIM FOR DOUBLE DEDUCTION IN RESPECT OF ONE AND THE SAME DEBT FIRST AS PBDD AND THEREAFTER AS BAD DEBTS, THE LEGISLATURE HAS ALREAD Y PROVIDED IN SEC.36(2)(V) OF THE ACT THAT WHERE SUCH DEBT OR PAR T OF DEBT RELATES TO ADVANCES MADE BY AN ASSESSEE TO WHICH CL . (VIIA) OF SUB-S. (1) APPLIES, NO SUCH DEDUCTION SHALL BE ALLO WED UNLESS THE ASSESSEE HAS DEBITED THE AMOUNT OF SUCH DEBT OR PAR T OF DEBT IN THAT PREVIOUS YEAR TO THE PROVISION FOR BAD AND DOU BTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE. FURTHER THE PROVISO ALSO LIMITS THE CLAIM FOR DEDUCTION U/S.36(1)(VII) OF THE ACT T O AN ASSESSEE TO WHICH SEC.36(1)(VIIA) OF THE ACT APPLIES TO THE AMO UNT BY WHICH SUCH DEBT OR PART THEREOF (WRITTEN OFF AS BAD DEBTS ) EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFU L DEBTS ACCOUNT MADE UNDER CLAUSE(VIIA) TO SEC.36(1) OF THE ACT. IT WOULD BE JUST AND FAIR IF THE ORDER OF CIT(A) IS SET ASIDE AND TH E AO DIRECTED TO EXAMINE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF T HE DISCUSSION MADE ABOVE. SIMILAR ORDER WOULD BE JUST AND FAIR IN AY 04-05 ALSO. WE HOLD AND DIRECT ACCORDINGLY BY ALLOWING TH E RELEVANT GROUNDS RAISED BY THE REVENUE FOR STATISTICAL PURPO SE. ITA NOS.1264 & 1352(B)/13 22 39. WE MAY ALSO CLARIFY THAT THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) HAS NO RELEVANCE TO THE PRESENT CASE. THE FACTS OF THE CASE BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) WAS THAT THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF IN RESPECT OF NON-RURAL BRANC HES U/S.36(1)(VII) OF THE ACT. THE AO NOTICED THAT THER E WAS ALREADY CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFU L DEBTS ACCOUNT U/S.36(1)(VIIA)(A) OF THE ACT, WHICH WAS IN EXCESS OF THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF B AD DEBTS. THE AO AFTER MAKING REFERENCE TO PROVISO TO SEC.36(1)(V II) OF THE ACT AND ALSO SEC.36(2)(V) OF THE ACT WAS OF THE VIEW TH AT THE ASSESSEE COULD NOT BE ALLOWED THE DEDUCTION CLAIMED BECAUSE (I) THE AMOUNT CLAIMED AS DEDUCTION ON ACCOUNT OF BAD D EBTS WAS NOT THE EXCESS AVAILABLE IN THE CREDIT OF THE PROVI SION FOR BAD AND DOUBTFUL DEBTS ACCOUNT CREATED U/S.36(1)(VIIA)(A) O F THE ACT AND;(I) THAT U/S.36(2)(V) OF THE ACT THE AMOUNT OF BAD DEBTS WRITTEN OFF SHOULD FIRST BE DEBITED IN THE PROVISIO N FOR BAD AND DOUBTFUL DEBTS ACCOUNT CREATED U/S.36(1)(VIIA)(A) O F THE ACT. THE STAND OF THE ASSESSEE WAS THAT SINCE THE CLAIM OF D EDUCTION OF BAD DEBTS MADE BY THE ASSESSEE WAS U/S.36(1)(VII) O F THE ACT AND PERTAINED TO BAD DEBTS OF NON-RURAL ADVANCES,TH E CREDIT BALANCE IN THE PBDD ACCOUNT SHOULD NOT BE LOOKED IN TO AT ALL.THE HONBLE SUPREME COURT HELD: (I) THE PROVISIONS OF SECTION 36(1)(VII) AND 36(1)( VIIA) ARE SEPARATE ITEMS OF DEDUCTION. THESE ARE INDEPENDENT PROVISIONS AND, THEREFORE, CANNOT BE INTERMINGLED OR READ INTO EACH OTHER. (II) CLEAR LEGISLATIVE INTENT OF THE RELEVANT PROVI SIONS AND UNAMBIGUOUS LANGUAGE OF THE CIRCULARS WITH REFERENC E TO THE AMENDMENTS TO S. 36 DEMONSTRATE THAT THE DEDUCTION ON ACCOUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS UNDER S. 3 6(1)(VIIA) IS DISTINCT AND INDEPENDENT OF THE PROVISIONS OF S. 36 (1)(VII) RELATING TO ALLOWANCE OF THE BAD DEBTS. THE LEGISLATIVE INTE NT WAS TO ITA NOS.1264 & 1352(B)/13 23 ENCOURAGE RURAL ADVANCES AND THE MAKING OF PROVISIO NS FOR BAD DEBTS IN RELATION TO SUCH RURAL BRANCHES. (III) THE LANGUAGE OF S. 36(1)(VII) IS UNAMBIGUOUS AND DOES NOT ADMIT OF TWO INTERPRETATIONS. IT APPLIES TO ALL BAN KS, COMMERCIAL OR RURAL, SCHEDULED OR UNSCHEDULED. IT GIVES A BENE FIT TO THE ASSESSEE TO CLAIM A DEDUCTION ON ANY BAD DEBT OR PA RT THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUN TS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THIS BENEFIT IS SUB JECT ONLY TO S. 36(2). IT IS OBLIGATORY UPON THE ASSESSEE TO PROVE TO THE AO THAT THE CASE SATISFIES THE ING REDIENTS OF S. 36(1)(VII) ON THE ONE HAND AND THAT IT SATISFIES THE REQUIREMENTS STATED IN S. 36(2) ON THE OTHER. THE PROVISO TO S. 36(1)(VII) DOES NOT, IN AB SOLUTE TERMS, CONTROL THE APPLICATION OF THIS PROVISION AS IT COM ES INTO OPERATION ONLY WHEN THE CASE OF THE ASSESSEE IS ONE WHICH FAL LS SQUARELY UNDER S. 36(1)(VIIA). THE EXPLANATION TO S. 36(1)(V II) SPECIFICALLY EXCLUDED ANY PROVISION FOR BAD AND DOUBTFUL DEBTS M ADE IN THE ACCOUNT OF THE ASSESSEE FROM THE AMBIT AND SCOPE OF 'ANY BAD DEBT, OR PART THEREOF, WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE'. THUS, THE CONCEPT OF MAKING A PRO VISION FOR BAD AND DOUBTFUL DEBTS WILL FALL OUTSIDE THE SCOPE OF S . 36(1)(VII) SIMPLICITER. (IV) AS PER THE PROVISO TO CL. (VII) OF S. 36(1), T HE DEDUCTION ON ACCOUNT OF THE ACTUAL WRITE OFF OF BAD DEBTS WOULD BE LIMITED TO EXCESS OF THE AMOUNT WRITTEN OFF OVER THE AMOUNT OF THE PROVISION WHICH HAD ALREADY BEEN ALLOWED UNDER CL. (VIIA). TH E PROVISO BY AND LARGE PROTECTS THE INTERESTS OF THE REVENUE. IN CASE OF RURALADVANCES WHICH ARE COVERED BY CL. (VIIA), THER E WOULD BE NO SUCH DOUBLE DEDUCTION. THE PROVISO, IN ITS TERMS, L IMITS ITS APPLICATION TO THE CASE OF A BANK TO WHICH CL. (VII A) APPLIES. INDISPUTABLY, CL. (VIIA)(A) APPLIES ONLY TO RURAL A DVANCES. 40. THUS, IT CAN BE SEEN THAT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA), THE CASE MADE OUT BY THE AO WAS THAT PBDD IS ONE ACCOUNT AND WHENEVER CLAIM FOR DEDUCTION IS MADE U/ S.36(1)(VII) ITA NOS.1264 & 1352(B)/13 24 THE SAME SHOULD BE DEBITED TO THE PBDD ACCOUNT. FUR THER THE LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) HAS TO BE UNDERSTOOD IN THE CON TEXT OF ITS ASSUMPTION THAT BANKS WOULD MAINTAIN SEPARATE PBDD A/C. IN RESPECT OF RURAL BRANCHES AND NON-RURAL BRANCHES AN D THEREFORE IT IS POSSIBLE TO DISCERN PBDD AS ONE IN RESPECT OF RU RAL BRANCHES AND NON-RURAL BRANCHES AND THEREFORE THERE IS NO BA SIS FOR THE ASSUMPTION THAT BANKS WOULD GET DOUBLE BENEFIT OF DEDUCTION BY WAY OF PROVISION FOR BAD AND DOUBTFUL DEBTS AND ALS O BY WAY OF BAD DEBTS WRITTEN OFF. THE FOLLOWING OBSERVATIONS O F THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA) WOULD BE RELEVANT IN THIS REGARD. '30. THE SCOPE OF THE PROVISO TO CL. (VII) OF S. 36 (1) HAS TO BE ASCERTAINED FROM A CUMULATIVE READING OF THE PROVIS IONS OF CLS. (VII), (VIIA) OF S. 36(1) AND CL. (V) OF S. 36(2) A ND ONLY SHOWS THAT A DOUBLE BENEFIT IN RESPECT OF THE SAME DEBT IS NOT GIVEN TO A SCHEDULED BANK. A SCHEDULED BANK MAY HAVE BOTH URBA N AND RURAL BRANCHES. IT MAY GIVE ADVANCES FROM BOTH BRANCHES W ITH SEPARATE PROVISION ACCOUNTS FOR EACH. 31. IT WAS NEITHER IN DISPUTE EARLIER, NOR DISPUTED BEFORE US, THAT THE ASSESSEE BANK IS MAINTAINING TWO SEPARATE ACCOU NTS, ONE BEING A PROVISION FOR BAD AND DOUBTFUL DEBTS OTHER THAN PROVISIONS FOR BAD DEBTS IN RURAL BRANCHES AND ANOTHER PROVISI ON ACCOUNT FOR BAD DEBTSIN RURAL BRANCHES FOR WHICH SEPARATE ACCOU NTS ARE MAINTAINED. THIS FACT IS EVINCED BY THE ENTRIES IN THE P&L A/C, BALANCE SHEET AND BREAK UP DETAILS. WE NEED NOT DEL IBERATE THIS ASPECT WITH REFERENCE TO RECORDS AT ANY GREATER LEN GTH AS THIS IS NOT A MATTER IN ISSUE BEFORE US. IT WAS CONTENDED O N BEHALF OF THE REVENUE THAT THE REVENUE IS ONLY CONCERNED WITH THE ASSESSEE AS A SINGLE UNIT AND NOT WITH HOW MANY SEPARATE ACCOUN TS ARE BEING MAINTAINED BY THE ASSESSEE AND UNDER WHAT ITEMS. TH E DEPARTMENT, THEREFORE, WOULD ASSESS AN ASSESSEE WIT H REFERENCE TO A SINGLE ACCOUNT MAINTAINED IN THE HEAD OFFICE O F THE CONCERNED ITA NOS.1264 & 1352(B)/13 25 BANK. THIS, ACCORDING TO THE LEARNED COUNSEL APPEAR ING FOR THE DEPARTMENT, WOULD FURTHER SUBSTANTIATE THE ARGUMENT OF THE DEPARTMENT THAT THE INTERPRETATION GIVEN BY THE FUL L BENCH OF THE HIGH COURT IS THE CORRECT INTERPRETATION OF S. 36(1 )(VII). THIS ARGUMENT HAS TO BE REJECTED, BEING WITHOUT MERIT. 32. IN THE NORMAL COURSE OF ITS BUSINESS, AN ASSESS EE BANK IS TO MAINTAIN DIFFERENT ACCOUNTS FOR THE RURAL DEBTS FOR NON-RURAL/URBAN DEBTS. IT IS OBVIOUS THAT THE BRANCHES IN THE RURAL AREAS WOULD PRIMARILY BE DEALING WITH RURAL DEBTS WHILE THE URB AN BRANCHES WOULD DEAL WITH COMMERCIAL DEBTS. MAINTENANCE OF SU CH SEPARATE ACCOUNTS WOULD NOT ONLY BE A MATTER OF MERE CONVENI ENCE BUT WOULD BE THE REQUIREMENT OF ACCOUNTING STANDARDS. 33. IT IS CONTENDED, AND RIGHTLY SO, ON BEHALF OF T HE ASSESSEE BANK THAT UNDER LAW, IT IS OBLIGED TO MAINTAIN ACCOUNTS WHICH WOULD CORRECTLY DEPICT ITS STATEMENT OF AFFAIRS. THIS OBL IGATION ARISES IMPLICITLY FROM THE REQUIREMENTS OF THE ACT AND CER TAINLY UNDER THE MANDATE OF ACCOUNTING STANDARDS. 34. INTER ALIA, FOLLOWING ARE THE REASONS THAT WOUL D FULLY SUPPORT THE VIEW THAT A BANK SHOULD MAINTAIN THE ACCOUNTS W ITH SEPARATE ITEMS FOR ACTUAL BAD AND IRRECOVERABLE DEBTS AS WEL L AS PROVISION FOR SUCH DEBTS. IT COULD, FOR VALID REASONS, HAVE R URAL ACCOUNTS MORE DISTINCT FROM THE URBAN, COMMERCIAL ACCOUNTS : (A) IT IS OBLIGATORY UPON EACH BANK TO ENSURE THAT THE ACCOUNTS REPRESENT THE CORRECT STATEMENT OF AFFAIRS OF THE B ANK. (B) MAINTAINING THE COMMON ACCOUNT MAY RESULT IN OV ERSTATING THE PROFITS OR THE PROFITS WILL SHOOT UP WHICH WOUL D RESULT IN ACCRUING OF LIABILITIES NOT DUE. (C) ACCOUNTING STANDARD (AS) 29, ISSUED IN 2003, WH ICH CONCERNS TREATMENT OF 'PROVISIONS, CONTINGENT LIABILITIES AN DCONTINGENT ITA NOS.1264 & 1352(B)/13 26 ASSETS'. UNDER THE HEAD 'USE OF PROVISIONS', CLS. 5 3 AND 54 STATE AS UNDER : '53. A PROVISION SHOULD BE USED ONLY FOR EXPENDITUR ES FOR WHICH THE PROVISION WAS ORIGINALLY RECOGNISED. 54. ONLY EXPENDITURES THAT RELATE TO THE ORIGINAL P ROVISION ARE ADJUSTED AGAINST IT. ADJUSTING EXPENDITURES AGAINST A PROVISION THAT WAS ORIGINALLY RECOGNISED FOR ANOTHER PURPOSE WOULD CONCEAL THE IMPACT OF TWO DIFFERENT EVENTS.' 35. THE ABOVE CLAUSES JUSTIFY MAINTENANCE OF DISTIN CT AND DIFFERENT ACCOUNTS. 36. MERELY BECAUSE THE DEPARTMENT HAS SOME APPREHEN SION OF THE POSSIBILITY OF DOUBLE BENEFIT TO THE ASSESSEE, THIS WOULD NOT BY ITSELF BE A SUFFICIENT GROUND FOR ACCEPTING ITS INT ERPRETATION. FURTHERMORE, THE PROVISIONS OF A SECTION HAVE TO BE INTERPRETED ON THEIR PLAIN LANGUAGE AND COULD NOT BE INTERPRETED O N THE BASIS OF APPREHENSION OF THE DEPARTMENT. THIS COURT, IN THE CASE OF VIJAYA BANK VS. CIT &ANR. (2010) 231 CTR (SC) 209 : (2010) 37 DTR (SC) 401 : (2010) 5 SCC 416, HELD THAT UNDER THE AC COUNTING PRACTICE, THE ACCOUNTS OF THE RURAL BRANCHES HAVE T O TALLY WITH THE ACCOUNTS OF THE HEAD OFFICE. IF THE REPAID AMOUNT I N SUBSEQUENT YEARS IS NOT CREDITED TO THE P&L A/C OF THE HEAD OF FICE, WHICH IS WHAT ULTIMATELY MATTERS, THEN THERE WOULD BE A MISM ATCH BETWEEN THE RURAL BRANCH ACCOUNTS AND THE HEAD OFFI CE ACCOUNTS. THEREFORE, IN ORDER TO PREVENT SUCH MISMATCH AND TO BE IN CONFORMITY WITH THE ACCOUNTING PRACTICE, THE BANKS SHOULD MAINTAIN SEPARATE ACCOUNTS. OF COURSE, ALL ACCOUNTS WOULD ULTIMATELY GET MERGED INTO THE ACCOUNT OF THE HEAD OFFICE, WHICH WILL ULTIMATELY REFLECT ONE ACCOUNT (BALANCE SHEET) , THOUGH CONTAINING DIFFERENT ITEMS. 37. ANOTHER EXAMPLE THAT WOULD SUPPORT THIS VIEW IS THAT, A BANK CAN WRITE OFF A LOAN AGAINST THE ACCOUNT OF 'A' ALO NE WHERE IT HAS ITA NOS.1264 & 1352(B)/13 27 ADVANCED THE LOAN TO PARTY 'A'. IT CANNOT WRITE OFF SUCH LOAN AGAINST THE ACCOUNT OF 'B'. SIMILARLY, A LOAN ADVAN CED UNDER THE RURAL SCHEMES CANNOT BE WRITTEN OFF AGAINST AN URBA N OR A COMMERCIAL LOAN BY THE BANK IN THE NORMAL COURSE OF ITS BUSINESS.' 41. IN THE PRESENT CASE, ACCORDING TO THE AO, THE D EDUCTION U/S.36(1)(VIIA)(A) IS ALLOWED ONLY TO THE EXTENT PB DD IN RESPECT OF RURAL ADVANCES IS CREATED IN THE BOOKS OF ACCOUNTS. ACCORDING TO HIM, THE LIMITS UPTO TO WHICH SUCH DEDUCTION IS ALL OWED ALONE IS LAID DOWN IN RULE 6ABA OF THE RULES. ACCORDING TO T HE ASSESSEE, IT IS ENTITLED TO DEDUCTION OF THE IRRESPECTIVE OF CON SIDERATIONS WHETHER PBDD CREATED IN THE BOOKS OF ACCOUNTS IS IN RESPECT OF RURAL ADVANCES OR NON-RURAL ADVANCES, SUBJECT TO TH E UPPER LIMITS LAID DOWN IN SEC.36(1)(VIIA)(A) OF THE ACT. THUS TH E CASE MADE OUT BY THE AO STANDS ON A TOTALLY DIFFERENT FOOTING . THEREFORE THE DECISION IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA), IN OUR VIEW, IS NOT RELEVANT TO THE ISSUE IN THE PRESENT C ASE. 42. FOR THE REASONS GIVEN ABOVE, WE ALLOW FOR STATI STICAL PURPOSES GR.NO.3 TO 5 RAISED BY THE REVENUE IN ITA NO.53/B/1 3 AND THE GROUNDS RAISED IN ITA NO.54/B/13 AND RESTORE THE IS SUE TO THE AO FOR FRESH CONSIDERATION IN ACCORDANCE WITH THE DIRE CTIONS GIVEN IN THIS ORDER. ALL THE ARGUMENTS NOW RAISED BY THE LEARNED DR INCL UDING THE EFFECT OF EXPLANATION2 TO SECTION 36(1)(VII) BY FINANCE AC T 2013, WERE CONSIDERED IN THE ABOVE ORDER. ACCORDINGLY, IN THE CASE OF AS SESSEE ALSO WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DIRECT THE AO TO EXAMINE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE DISCUSSION OF T HE TRIBUNAL IN THE CASE OF ITA NOS.1264 & 1352(B)/13 28 M/S ING VYSA BANK LTD (SUPRA). GROUND NO.2 OF THE ASSESSEE IS THEREFORE ALLOWED FOR STATISTICAL PURPOSES. 10. VIDE ITS GROUND NO.3 ASSESSEE IS AGGRIEVED ON A DISALLOWANCE OF RS.10,04,77,356/- MADE UNDER SECTION 14A OF THE ACT . 11. FACTS APROPOS THAT ASSESSEE HAD CLAIMED EXEMPT DIVIDEND INCOME OF RS.10,93,02,392.50. THE ABOVE EXEMPT INC OME WAS ARRIVED AT AFTER DEDUCTING RS.57,52,757.50 FROM THE GROSS EXEM PT INCOME OF RS.11,50,55,150/-. THE DEDUCTION WAS TOWARDS COST OF EARNING THE EXEMPT INCOME. THROUGH A REVISED RETURN ASSESSEE CHANGED T HE CLAIM OF EXPENDITURE TO RS.52,88,281.90. AO REQUIRED THE AS SESSEE TO EXPLAIN WHY A DISALLOWANCE UNDER RULE 8D OF INCOME-TAX RULES, 1 961 SHOULD NOT BE MADE. REPLY OF THE ASSESSEE WAS THAT IT AS HAVING TOTAL INTEREST FREE FUNDS AT RS.21,208.59 CRORES AGAINST WHICH THE VALUE OF I NVESTMENT THAT COULD GIVE RISE TO TAX FREE INCOME WAS ONLY RS.1444.02 CR ORES. AS PER THE ASSESSEE IN ORDER TO COVER THE OVER HEAD EXPENDITUR E IT HAD ITSELF MADE A DISALLOWANCE OF EXPENDITURE CALCULATED AT 5% OF THE TAX FREE INCOME. AS PER THE ASSESSEE THERE WAS NO QUESTION OF ANY FURTH ER DISALLOWANCE U/S 14A, IN ADDITION TO WHAT WAS SUOMOTO DONE BY IT. HOWEVER, THE AO TOOK SECTION 14A A PRESUMPTIVE IN NATURE AND MADE A WORK OUT OF THE DISALLOWANCE AT RS.10,57,65,638/-APPLYING RULE 8D. AFTER DEDUCTING THE SUOMOTU DISALLOWANCE OF RS.52,88,282/- MADE BY THE ASSESSEE THE ITA NOS.1264 & 1352(B)/13 29 ADDITION CAME TO RS.10,04,77,356/-. ASSESSEES APP EAL BEFORE THE CIT(A) DID NOT MEET WITH ANY SUCCESS. 12. NOW BEFORE US, LEARNED AR RELYING ON A COPY OF THE DECISION IN ITA NO.1310 & 1393(B)/2012 DATED 19-09-2014, IN ASS ESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11, PLACED AT PAPER BOOK PAGES 18 -40 SUBMITTED THAT A SIMILAR DISALLOWANCE STOOD DELETED IN ASSESSMENT YEAR 2010-11. ACCORDING TO HIM, THE FACT SITUATION REM AINED VERY SAME FOR THE IMPUGNED ASSESSMENT YEAR ALSO. 13. PER CONTRA, LEARNED DR SUPPORTED THE ORDERS F THE AUTHORITIES BELOW. 14. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. IT IS NOT DISPUTED THAT ASSESSEE HAD INTEREST FREE FUN DS OF RS.21,280.59 CRORES WITH IT. AGAINST THIS, INVESTMENTS THAT COU LD GIVE RISE TO TAX FREE INCOME WAS RS.1444.02 CRORES. THIS HAS NOT BEEN D ISPUTED. ASSESSEE HAD ITSELF MADE A DISALLOWANCE OF RS.52,88,281.90 B EING 5% OF THE EXEMPT INCOME FOR COVERING THE OVER HEAD EXPENDITURE IN RE LATION TO EARNING OF THE EXEMPT INCOME. IN ASSESSEES OWN CASE FOR ASSESSME NT YEAR 2010-11 A SIMILAR ISSUE HAD COME UP BEFORE THIS TRIBUNAL. A T PARAS 12 TO 12 OF THE ORDER DATED 19-09-2014 IN ITA NOS.1310 & 1393(B)/ 2 012 IT WAS HELD AS UNDER; ITA NOS.1264 & 1352(B)/13 30 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. ON A PERUSAL OF THE ORDER OF ASSESSMENT AS WELL AS THE ORDER OF THE CIT (A), IT IS CLEAR THAT THE FACTUM OF THE ASSESSEE'S OWN F UNDS AVAILABLE AS RS.19,227.86 CRORES, WHEREAS THE VALUE OF INVESTMENTS IN TAX-FREE SECURITIES WAS ONLY TO THE TUNE OF RS.496.56 CRORES HAS NOT BEEN DISPUTED. FACTUALL Y, THERE CAN BE NO DISPUTE THAT THE INTEREST-FREE FUNDS FAR EXCEEDED THE INVESTMENT IN TAX FREE SECURITIES. THEREFORE, ONE HAS TO COME TO A CONCLUSION THAT INVESTMENTS IN TAX-FREE SECURI TIES WAS MADE OUT OF OWN FUNDS AND THEREFORE, NO DISALLOWANC E IN TERMS OF RULE 8D(2)(I) OR (II) OF THE RULES CAN BE MADE ON ACCOUNT OF INTEREST EXPENDITURE. THEREFORE THE ADD ITION OF RS.21,03,21,812 MADE BY THE AO BY INVOKING THE PROV ISIONS OF RULE 8D(2)(II) OF THE RULES HAS TO BE DELETED FO LLOWING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF HDFC BANK LTD. (SUPRA). 13. WITH REGARD TO DISALLOWANCE UNDER RULE 8D(2)(II I) OF THE RULES, IT IS SEEN THAT EVEN IN ASSESSEE'S OWN CASE IN THE PAST, THE DISALLOWANCE OF 5% OF THE EXEMPT INCOME WAS CON SIDERED AS APPROPRIATE DISALLOWANCE U/S.14A OF THE ACT. TH E HON'BLE ITAT IN A. YS. 2001-02 AND 2003-04 HAS UPHELD SUCH DISALLOWANCE AS REASONABLE. THE ASSESSING OFFICER HAS HOWEVER PROCEEDED TO APPLY THE PROVISIONS OF RULE 8 D WITHOUT HAVING REGARD TO THE CLAIM OF THE ASSESSEE THAT PRO VISIONS OF RULE 8D(2)(III) OF THE RULES COULD NOT BE APPLIED. AS LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE O F ITA NOS.1264 & 1352(B)/13 31 GODREJ & BOYCE MANUFACTURING CO. LTD., (328 ITR 81) , A CLAIM MADE BY THE ASSESSEE WITH REGARD TO DISALLOWA NCE U/S.14A OF THE ACT HAD TO BE OBJECTIVELY EXAMINED B Y THE ASSESSING OFFICER. IT IS NOT NECESSARY FOR THE ASS ESSING OFFICER TO RESORT TO RULE 8D OF THE RULES WHEN A RE ASONABLE AND PROPER BASIS FOR DISALLOWANCE U/S.14A OF THE AC T EXISTS. IN THE PRESENT CASE, SUCH BASIS EXISTED IN THE FORM OF ACCEPTANCE OF THE SIMILAR CLAIM OF THE ASSESSEE IN THE PAST BY THE TRIBUNAL. THE ASSESSING OFFICER HAS NOT BROUGH T ON RECORD ANY FACTS TO JUSTIFY A HIGHER DISALLOWANCE T HAN WHAT IS CLAIMED BY THE ASSESSEE. THE BANGALORE BENCH OF TH E ITAT IN THE CASE OF BHARATIYA RESERVE BANK NOTE MUDRAN PRIV ATE LTD (SUPRA) HAS TAKEN THE VIEW THAT RESORT TO RULE 8D(2 ) CANNOT BE HAD AS A MATTER OF COURSE AND IT IS ONLY WHEN NO RE ASONABLE AND PROPER PARAMETER FOR MAKING DISALLOWANCE U/S.14 A OF THE ACT EXISTS, RESORT TO RULE 8D(2) CAN BE HAD BY THE ASSESSING OFFICER. WE ARE OF THE VIEW THAT IN THE PRESENT CAS E, THE ASSESSING OFFICER HAS COMPLETELY IGNORED THE SUBMIS SIONS MADE BY THE ASSESSEE IN THIS REGARD AND HAS BLINDLY APPLIED RULE 8D(2)(III) OF THE RULES AND MADE DISALLOWANCE U/S.14A OF THE ACT. IN OUR VIEW, SUCH AN ACTION CANNOT BE SUS TAINED. WE ARE ALSO OF THE VIEW THAT THE BASIS OF DISALLOWANCE MADE BY THE ASSESSEE IN THE LIGHT OF EXPLANATION PROVIDED BY TH E ASSESSEE BEFORE THE ASSESSING OFFICER IS REASONABLE AND THE SAME DESERVES TO BE ACCEPTED. FOR THE REASONS GIVEN ABO VE, WE ITA NOS.1264 & 1352(B)/13 32 DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFIC ER U/S.14A OF THE ACT. RESPECTFULLY FOLLOWING THE ABOVE ORDER, WE ALLOW GR OUND NO.3 OF THE ASSESSEE. 15. VIDE ITS GROUND NO.4 GRIEVANCE RAISED BY THE A SSESSEE IS THAT CLAIM OF RS.50.21 CRORES MADE BY IT U/S 36(1)(VIII) OF THE IT ACT WAS DISALLOWED AND SUCH DISALLOWANCE WAS CONFIRMED BY T HE CIT(A). 16. FACTS APROPOS ARE THAT THE ASSESSEE HAD CLAIME D DEDUCTION OF RS.141.21 CRORES U/S 36(1)(VIII) OF THE IT ACT BEIN G INCOME EARNED BY IT ON LONG TERM FINANCE. AO ON VERIFICATION OF THE ACCOU NT FOUND THAT ASSESSEE HAD CREATED SPECIAL RESERVES OF RS.91.00 CRORES ONL Y. ACCORDING TO HIM, ONLY THE AMOUNTS CARRIED TO THE SPECIAL RESERVES NO T EXCEEDING 20% OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COULD BE AL LOWED AS A DEDUCTION U/S 36(1)(VIII) OF THE ACT. THOUGH, ASSESSEE HAD CLAIM ED THE DEDUCTION OF RS.141,21 CRORES WHAT WAS CARRIED TO THE RESERVES W AS ONLY RS.91.00 CRORES. HE THUS, RESTRICTED THE CLAIM TO RS.91.00 CRORES. ASSESSEES APPEAL BEFORE THE CIT(A) DID NOT MEET WITH ANY SUCC ESS. 17. NOW BEFORE US LEARNED AR STRONGLY ASSAILING TH E ORDER OF THE AUTHORITIES BELOW SUBMITTED THAT WHAT WAS NECESSARY WAS CREATION OF RESERVES AND IT WAS NOT ESSENTIAL FOR THE RESERVE T O BE CREATED IN THE VERY SAME YEAR. AS PER THE LEARNED AR ASSESSEE HAD CRE ATED FURTHER RESERVES ITA NOS.1264 & 1352(B)/13 33 OF RS.50.21. CRORES IN THE SUCCEEDING YEAR IN ADDIT ION TO A SUM OF RS.91.00 CRORES CREATED IN THE IMPUGNED ASSESSMENT YEAR. THEREFORE, ACCORDING TO HIM, ASSESSEE WAS ELIGIBLE FOR RS.141. 21 CRORES, IN THE IMPUGNED ASSESSMENT YEAR ITSELF. RELIANCE WAS PLAC ED ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S POWER FINANCE CORPN.LTD (PFCL) VS JCIT(2008) 16 DTR 519. ACCORDI NG TO HIM, IT WAS HELD BY THE DELHI BENCH THAT READING OF SECTION 36( 1)(VIII) DID NOT PUT ANY TIME LIMIT FOR CREATION OF ANY SPECIAL RESERVES SO AS TO CLAIM A DEDUCTION UNDER THAT SECTION. 18. PER CONTRA, LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 19. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. SECTION 36(1) (VIII) IS REPRODUCED HEREUNDER; (VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED AND MAINTAINED BY A SPECIFIED ENTITY, AN AMOUNT NOT EXC EEDING TWENTY PER CENT OF THE PROFITS DERIVED FROM ELIGIBL E BUSINESS COMPUTED UNDER THE HEAD PROFITS & GAINS OF BUSINES S OR PROFESSION (BEFORE MAKING ANY DEDUCTION UNDER ITS CLAUSE) CARRIED TO SUCH RESERVE ACCOUNT WE FIND THAT DELHI BENCH IN THE CASE OF M/S PFCL (S UPRA) HAD CONSIDERED THE VERY SAME ISSUE AS TO WHETHER THE SPECIAL RESER VE WAS REQUIRED TO BE CREATED IN THE VERY SAME YEAR OF THE CLAIM OF DEDUC TION OF WHETHER IT COULD ITA NOS.1264 & 1352(B)/13 34 BE CREATED IN A SUCCEEDING YEAR. IN ITS ORDER DATE D 31-07-2008 IT WAS HELD AS UNDER AT PARAS 18 TO 24. 18. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOTH T HE PARTIES, PERUSED THE RECORDS AND CAREFULLY GONE THROUGH THE ORDERS OF THE TAX AUTHORITIES BELOW. 19. WE WOULD FIRST LIKE TO REPRODUCE THE RELEVANT SECT ION REFERRED TO BY BOTH THE PARTIES IN THEIR ARGUMENTS : SEC. 36(1) OTHER DEDUCTIONS 36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWIN G CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN S. 28. SEC. 36(1)(VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED (AND MAIN TAINED) BY A FINANCIAL CORPORATION WHICH IS ENGAGED IN PROVIDING LONG-TERM FINANCE FOR INDUSTRIAL OR AGRICULTURAL DEVELOPMENT OR DEVE LOPMENT OF INFRASTRUCTURE FACILITY IN INDIA OR BY A PUBLIC COMPANY FORMED AND REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARRYIN G ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSES, AN AMOUNT NOT EXCEEDING FORTY PER CENT OF THE PROFITS DERIVED FROM SUCH BUS INESS OF PROVIDING LONG-TERM FINANCE COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' (BEFORE MAKING ANY DEDUCTIO N UNDER THIS CLAUSE) CARRIED TO SUCH RESERVE ACCOUNT : SEC. 28(1) PROFITS AND GAINS OF BUSINESS OR PROFESSION 28. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INC OME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON', ITA NOS.1264 & 1352(B)/13 35 (I) THE PROFITS AND GAINS OF ANY BUSINESS OR PROFES SION WHICH WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE P REVIOUS YEAR; SEC. 2(34) 'PREVIOUS YEAR' MEANS THE PREVIOUS YEAR AS DEFINED IN S. 3; SEC. 3 'PREVIOUS YEAR' DEFINED 3 FOR THE PURPOSES OF THIS ACT, PREVIOUS YEAR MEA NS THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR : SEC. 4 CHARGE OF INCOME-TAX 4 (1) WHERE ANY CENTRAL ACT ENACTS THAT INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATE S, INCOME-TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND SUBJECT TO THE PROVISIONS (INCLUDING PROV ISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF, THIS ACT IN RESPECT O F THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. 20. A PLAIN READING OF S. 36(1)(VIII) DOES NOT INDICAT E ANY TIME-LIMIT FOR CREATION OF SPECIAL RESERVE FOR CLAIMING DEDUCT ION UNDER S. 36(1)(VIII) OF THE ACT, HENCE, THE CONTENTION OF LE ARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE THAT TH IS PROVISION DOES NOT PERMIT THE DEDUCTION IN CASE THE SPECIAL R ESERVE IS CREATED IN SUBSEQUENT YEAR, HAS NO FORCE AS IT DOES NOT FIN D SUPPORT FROM THE PLAIN LANGUAGE OF S. 36(1)(VIII) OF THE ACT. PE RHAPS, THE WORDS '......... (BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RESERVE ACCOUNT' PROMPT SUCH INFERENCE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE BUT TO OUR MIND ANSWER TO SUCH INFERENCE DRAWN BY THE LEARNED DEPAR TMENTAL REPRESENTATIVE FOR THE REVENUE IS THAT BEFORE MAKIN G ANY DEDUCTION ITA NOS.1264 & 1352(B)/13 36 DOES NOT MEAN BEFORE MAKING ANY CLAIM BUT MEANS AT THE TIME OF CONSIDERING SUCH DEDUCTION CLAIMED BY THE ASSESSEE. 21. HONBLE JURISDICTIONAL HIGH COURT OF DELHI WHILE I NTERPRETING SIMILAR WORDINGS IN THE CONTEXT OF S. 32A OF THE AC T IN THE CASE OF CIT VS. ORIENT EXPRESS CO. (P) LTD. (SUPRA) WHILE D EALING WITH CREATION OF RESERVE REQUIRED UNDER S. 32A OF THE AC T AT P. 896 HELD THAT SECTION PRESCRIBES NO POINT OF TIME BY WHICH T HE RESERVE SHOULD BE CREATED AND IN THIS REGARD ACCEPTED THAT A RESER VE CREATED AFTER THE CLOSURE OF THE ACCOUNTS OF THE YEAR QUALIFIES B Y OBSERVING AS UNDER : 'THE SECOND QUESTION WHICH IS RAISED ONLY IN ITC NO S. 44 AND 45 OF 1986 IS WHETHER THE ASSESSEE IS DISENTITLED TO THE INVESTMENT ALLOWANCE SCHEME BECAUSE NO REQUISITE RESERVE HAS B EEN CREATED BY THE ASSESSEE COMPANY BEFORE THE CLOSE OF BOOKS OF T HE RELEVANT PREVIOUS YEAR. ON THIS, THE FINDING IS THAT THE REQ UISITE RESERVE HAS BEEN CREATED BY HOLDING A SECOND ANNUAL GENERAL MEE TING OF THE MEMBERS OF THE COMPANY AND THAT THE ACCOUNTS HAD BE EN DULY AMENDED SO AS TO PROVIDE FOR THE RESERVE BEFORE THE ASSESSMENT WAS COMPLETED. IN VIEW OF THE FACT THAT THE SECTION PRESCRIBES NO POINT OF TIME BY WHICH THE RESERVE SHOULD BE CREATE D AND IN VIEW OF THE VARIOUS DECISIONS ALSO REFERRED TO BY THE TRIBU NAL, WE THINK, NO QUESTION OF LAW ARISES IN REGARD TO THIS ASPECT. WE , THEREFORE, DECLINE TO REFER THIS QUESTION.' THE OBSERVATION MADE BY THE HONBLE DELHI HIGH COUR T IN THIS REGARD IS THUS CLEARLY APPLICABLE TO THE INSTANT CASE UNDE R CONSIDERATION ALSO. 22. WE FURTHER FIND THAT THE SPECIAL BENCH OF TRIBUNAL (CHANDIGARH) IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. (SUPRA) ALSO CLEARLY HELD THAT IN CASE OF CLAI M UNDER S. 36(1)(VIII) OF THE ACT FURTHER RESERVE COULD BE CRE ATED AFTER CLOSURE OF THE ACCOUNT AND AO SHOULD OFFER AN OPPORTUNITY T O THE ASSESSEE ITA NOS.1264 & 1352(B)/13 37 TO DO THE SAME FOR CLAIMING THE DEDUCTION UNDER S. 36(1)(VIII) OF THE ACT. 23. SIMILAR VIEW AS TAKEN BY THE APEX COURT IN THE CAS E OF KARIMJEE (P) LTD. (SUPRA) WHEREIN WHILE DEALING WITH DEDUCTI ON UNDER S. 80HHC OF THE ACT, THEIR LORDSHIPS OBSERVED THAT CRE ATION OF RESERVE AFTER CLOSURE OF THE ACCOUNTS WAS CONSTRUED AS COMP LYING WITH THE REQUIREMENT OF GRANTING DEDUCTION UNDER S. 80HHC OF THE ACT AND IN THIS CASE THE TIMING OF CREATION OF RESERVE WAS WHI LE THE MATTER WAS BEING DEALT WITH BY THE APEX COURT. 24. RESPECTFULLY FOLLOWING THE CASE LAW (SUPRA) AS DIS CUSSED HEREINABOVE, WE HOLD THAT A RESERVE CREATED IN SUBS EQUENT YEARS, HOWEVER, BEFORE FINALIZATION OF GRANT OF DEDUCTION, IS REQUIRED TO BE CONSIDERED WHILE ALLOWING ASSESSEES CLAIM OF DEDUC TION MADE UNDER S. 36(1)(VIII) OF THE ACT. WHETHER ASSESSEE HAD INDEED MADE A FURTHER CREATION OF SPECIAL RESERVE IN THE SUCCEEDING YEAR AND ALSO WHETHER SU CH RESERVES WERE CREATED BEFORE FINALIZATION OF THE GRANT OF DEDUCTI ON U/S 36(1)(VIII) HAD NOT BEEN VERIFIED BY ANY OF THE AUTHORITIES BELOW. WE THEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND REMAND THE ISSU E TO THE FILE OF THE AO FOR FRESH CONSIDERATION IN ACCORDANCE WITH LAW. GRO UND NO.4 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 20. IN ITS LAST GROUND ASSESSEE ASSAILS THE DISALL OWANCE OF RS.1,35,01,835/- U/S 40A(IA) OF THE ACT WHICH WAS C ONFIRMED BY THE CIT(A). ITA NOS.1264 & 1352(B)/13 38 21. FACTS APROPOS ARE THAT THE ASSESSEE HAD CLAIME D DEDUCTION OF RS.273,76,25,645/- UNDER THE HEAD OTHER EXPENDITUR E. FROM THE BREAK- UP OF THIS SUM PROVIDED BY THE ASSESSEE, AO FOUND T HAT A PAYMENT OF RS.1,35,01,835/- WAS MADE TOWARDS ATM USER CHARGES OF OTHER BANKS. AS PER THE AO SUCH PAYMENTS WHICH WERE MADE TO NATI ONAL FINANCIAL SWITCH AND CASH TREE ( NFS IN SHORT) CONSORTIUM FELL WITHIN THE AMBIT OF SECTION 194H OF THE ACT. AS PER THE AO ASSESSEE HA VING NOT DEDUCTED TAX AT SOURCE ON THE AMOUNT PAID TO NFS SECTION 40A(IA) OF THE ACT STOOD BE ATTRACTED. A DISALLOWANCE OF RS.1,35,01,835/- WAS MADE. AS SESSEES APPEAL ON THIS ISSUE BEFORE THE CIT(A) DID NOT MEET WITH ANY SUCCESS. 22. ASSAILING THE ORDERS OF THE AUTHORITIES BELOW L EARNED AR SUBMITTED THAT THE ISSUE STOOD SQUARELY COVERED BY THE JUDGMENT OF HONBLE DELI HIGH COURT IN THE CASE OF CIT VS JDS A PPARELS PVT.LTD. 370 ITR 454. 23. PER CONTRA, LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 24. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. SECTION 194H OF THE ACT DEALS WITH COMMISSION AND B ROKERAGE. AO HAS NOT SPECIFIED IN ITS ORDER AS TO UNDER WHAT HEAD HE CLASSIFIED THE PAYMENTS MADE BY THE ASSESSEE TO M/S NFS. HE SIMPLY STATED THAT THE PAYMENTS WERE IN RESPECT OF SERVICE USED BY THE ACC OUNT HOLDERS OF THE ITA NOS.1264 & 1352(B)/13 39 BANK AND THEREFORE, SECTION 194H OF THE ACT STOOD A TTRACTED. WHETHER SECTION 194H OF THE ACT WAS ATTRACTED ON BANKING SE RVICES PROVIDED BY BANK TO ITS CLIENTS WAS AN ISSUE HAD CAME UP BEFORE THE HONLE DELHI HIGH COURT IN THE CASE OF JDS APPARELS PVT.LTD (SUPRA) THEIR LORDSHIPS HELD AS UNDER; 6. SECTION 194H OF THE ACT READS AS UNDER:- 'COMMISSION OR BROKERAGE. 194H. ANY PERSON, NOT BEING AN INDIVIDUAL OR A HIND U UNDIVIDED FAMILY, WHO IS RESPONSIBLE FOR PAYING, ON OR AFTER THE 1ST DAY OF JUNE, 2001, TO A RESIDENT, ANY INCOME BY WAY OF COM MISSION (NOT BEING INSURANCE COMMISSION REFERRED TO IN SECT ION 194D) OR BROKERAGE, SHALL, AT THE TIME OF CREDIT OF SUCH INC OME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT OF S UCH INCOME IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME-TAX THEREON AT THE RATE OF TEN PER CENT : PROVIDED THAT NO DEDUCTION SHALL BE MADE UNDER THIS SECTION IN A CASE WHERE THE AMOUNT OF SUCH INCOME OR, AS THE CAS E MAY BE, THE AGGREGATE OF THE AMOUNTS OF SUCH INCOME CREDITE D OR PAID OR LIKELY TO BE CREDITED OR PAID DURING THE FINANCIAL YEAR TO THE ACCOUNT OF, OR TO, THE PAYEE, DOES NOT EXCEED FIVE THOUSAND RUPEES : PROVIDED FURTHER THAT AN INDIVIDUAL OR A HINDU UNDI VIDED FAMILY, WHOSE TOTAL SALES, GROSS RECEIPTS OR TURNOV ER FROM THE BUSINESS OR PROFESSION CARRIED ON BY HIM EXCEED THE MONETARY LIMITS SPECIFIED UNDER CLAUSE (A) OR CLAUSE (B) OF SECTION 44AB DURING THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE FINANCIAL ITA NOS.1264 & 1352(B)/13 40 YEAR IN WHICH SUCH COMMISSION OR BROKERAGE IS CREDI TED OR PAID, SHALL BE LIABLE TO DEDUCT INCOME-TAX UNDER THIS SEC TION: PROVIDED ALSO THAT NO DEDUCTION SHALL BE MADE UNDER THIS SECTION ON ANY COMMISSION OR BROKERAGE PAYABLE BY BHARAT SA NCHAR NIGAM LIMITED OR MAHANAGAR TELEPHONE NIGAM LIMITED TO THEIR PUBLIC CALL OFFICE FRANCHISEES. EXPLANATION.--FOR THE PURPOSES OF THIS SECTION,-- (I) 'COMMISSION OR BROKERAGE' INCLUDES ANY PAYMENT RECEIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PROFESSIONAL SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUYI NG OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES; (II) THE EXPRESSION 'PROFESSIONAL SERVICES' MEANS S ERVICES RENDERED BY A PERSON IN THE COURSE OF CARRYING ON A LEGAL, MEDICAL, ENGINEERING OR ARCHITECTURAL PROFESSION OR THE PROFESSION OF ACCOUNTANCY OR TECHNICAL CONSULTANCY OR INTERIOR DECORATION OR SUCH OTHER PROFESSION AS IS NOTIFIED BY THE BOARD FOR THE PURPOSES OF SECTION 44AA; (III) THE EXPRESSION 'SECURITIES' SHALL HAVE THE ME ANING ASSIGNED TO IT IN CLAUSE (H) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) ; (IV) WHERE ANY INCOME IS CREDITED TO ANY ACCOUNT, W HETHER CALLED 'SUSPENSE ACCOUNT' OR BY ANY OTHER NAME, IN THE BOO KS OF ACCOUNT OF THE PERSON LIABLE TO PAY SUCH INCOME, SU CH CREDITING SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE AND THE PROVISIONS OF THIS SECTION SHALL APPL Y ACCORDINGLY.' ITA NOS.1264 & 1352(B)/13 41 7. SECTION 194H OF THE ACT APPLIES TO INCOME BY WAY OF COMMISSION OR BROKERAGE EXCLUDING INSURANCE COMMISS ION REFERRED TO IN SECTION 194D OF THE ACT. TAX AT SOUR CE IS TO BE DEDUCTED AT THE TIME OF CREDIT OF SUCH INCOME TO TH E ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT OF SUCH INCOME IN CASH OR BY WAY OF CHEQUE/DRAFT OR ANY OTHER MODE. THE EXPLANAT ION CLAUSE (I) STATES THAT FOR THE PURPOSE OF THIS SECTION, CO MMISSION OR BROKERAGE INCLUDES ANY PAYMENT RECEIVED OR RECEIVAB LE DIRECTLY OR INDIRECTLY BY A PERSON ACTING ON BEHALF OF ANOTH ER PERSON, (I) FOR SERVICES RENDERED, NOT BEING IN THE NATURE OF P ROFESSIONAL SERVICES; (II) ANY SERVICE RENDERED IN THE COURSE O F BUYING OR SELLING OF GOODS; AND, (III) IN RELATION TO ANY TRA NSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES. THE EXPRESSION SECURITIES HAS BEEN DEFINED CLAUSE (III) TO THE EXPLANATION. 8. THE HIGH COURT OF GUJARAT IN AHMEDABAD STAMP VEN DORS ASSOCIATION VERSUS UNION OF INDIA [2002] 257 ITR 20 2 EXAMINED CLAUSE (I) OF THE EXPLANATION AND WHETHER IT WOULD BE APPL ICABLE TO PERSONS CARRYING ON THE BUSINESS OF STAMP VENDORS W HO PURCHASE STAMPS FROM THE GOVERNMENT TREASURY AND SE LL THEM TO THE PUBLIC. THE GUJARAT HIGH COURT DREW A DISTINCTI ON BETWEEN A CONTRACT OF SALE AND A CONTRACT OF AGENCY BY WHICH AN AGENT IS AUTHORIZED TO BUY OR SELL ON BEHALF OF THE PRINCIPA L. IN A CASE OF AGENCY, THE AGENT IS NOT THE OWNER OF THE PROPERTY AND DOES NOT SELL THE SAME OF HIS OWN ACCORD BUT AS PER THE DIRE CTIONS AND INSTRUCTIONS OF THE PRINCIPAL, WHO IS THE OWNER OF THE PROPERTY. THE PROFIT AND LOSS IS THAT OF THE PRINCIPAL, AND W HAT IS PAID TO THE AGENT IS THE COMMISSION OR BROKERAGE. THE EXPRE SSIONS ITA NOS.1264 & 1352(B)/13 42 'COMMISSION' AND 'DISCOUNT' WERE DISTINGUISHED AFTE R MAKING REFERENCE TO THE DEFINITIONS IN THE BLACK S LAW DICTIONARY. THE EXPRESSION 'DISCOUNT', IT WAS OBSERVED, IS AN ALLOW ANCE OR DEDUCTION MADE FROM THE GROSS SALE ON ANY ACCOUNT W HATSOEVER. A 'DEDUCTION' NORMALLY REPRESENTS A REDUCTION IN TH E ORIGINAL PRICE OR A DEBT SUCH AS IN CASE OF SECURITIES (E.G. TREASURY BILLS), WHICH ARE ISSUED BELOW THE FACE VALUE AND ARE REDEE MED AT THE FACE VALUE. COMMISSION, IT WAS HELD, IS A REWARD PA ID TO AN AGENT AS WELL AS TO A SALESMAN, EXECUTOR, TRUSTEE, BROKER OR BAILEE AND IS CALCULATED AS A PERCENTAGE OF THE AMO UNT OF THE TRANSACTION OR ON THE PROFIT OF THE PRINCIPAL. IT I S A FEE PAID TO AN AGENT OR AN EMPLOYEE FOR GENERATING A PIECE OF BUSI NESS OR PERFORMING A SERVICE. IN SUCH CASES, NORMALLY, THER E EXISTS A FIDUCIARY DUTY, WHICH HAS TO BE DISCHARGED BY THE P ERSON TO WHOM COMMISSION IS PAID. THE FOLLOWING EXCERPT FROM THE DECISION OF THE BOMBAY HIGH IN HARIHAR COTTON PROCE SSING FACTORY VERSUS CIT, (1960) 391 ITR 594 (BOM.) WAS R EFERRED TO WITH APPROVAL:- 'THE EXPRESSION 'COMMISSION' HAS NO TECHNICAL MEANI NG BUT BOTH IN LEGAL AND COMMERCIAL ACCEPTATION OF THE TER M IT HAS DEFINITE SIGNIFICATION AND IS UNDERSTOOD AS AN ALLO WANCE FOR SERVICE OR LABOUR IN DISCHARGING CERTAIN DUTIES SUC H AS FOR INSTANCE OF AN AGENT, FACTOR, BROKER OR ANY OTH ER PERSON WHO MANAGES THE AFFAIRS OR UNDERTAKES TO DO SOME WORK O R RENDERS SOME SERVICE TO ANOTHER. MOSTLY IT IS A PERCENTAGE ON PRICE OR VALUE OF UPON THE AMOUNT OF MONEY INVOLVED IN A TRA NSACTION. IT CAN BE FOR A VARIETY OF SERVICES AND IS OF THE NATU RE OF RECOMPENSE OR REWARD FOR SUCH SERVICES. 'REBATE', O N THE OTHER HAND, IS A REMISSION OR A PAYMENT BACK AND OF THE N ATURE OF A DEDUCTION FROM THE GROSS AMOUNT. IT IS SOMETIMES SP OKEN OF AS A ITA NOS.1264 & 1352(B)/13 43 DISCOUNT OR A DRAW-BACK. THE DICTIONARY MEANING OF THE TERM INCLUDES A REFUND TO THE PURCHASER OF A THING OR CO MMODITY OF A PORTION OF THE PRICE PAID BY HIM. IT IS NOT CONFINE D TO A TRANSACTION OF SALE AND INCLUDES ANY DEDUCTION OR D ISCOUNT FROM A STIPULATED PAYMENT, CHARGE OR RATE. IT NEED NOT N ECESSARILY BE TAKEN OUT IN ADVANCE OF PAYMENT BUT MAY BE HANDED B ACK TO THE PAYER AFTER HE HAS PAID THE STIPULATED SUM. THE REP AYMENT NEED NOT BE IMMEDIATE. IT CAN BE MADE LATER AND IN CASE OF PERSONS WHO HAVE CONTINUOUS DEALINGS WITH ONE ANOTHER IT IS NOTHING UNUSUAL TO DO SO.' IMPORTANTLY, THE GUJARAT HIGH COURT HELD THAT THERE SHOULD BE AN ELEMENT OF AGENCY IN ALL THE THREE SITUATIONS AS ENVISAGED IN CLAUSE (I) OF THE EXPLANATION TO SECTION 194H OF TH E ACT. 9. ON APPEAL BEFORE THE SUPREME COURT, THE DECISION WAS UPHELD BY A SHORT ORDER, WHICH IS REPORTED AS (2012) 348 I TR 378 (SC), OBSERVING THAT THE STAMP VENDORS HAD PURCHASED STAM PS IN BULK AND HAD RECEIVED A CASH DISCOUNT. THE SUPREME COURT CONCURRED WITH THE JUDGMENT OF THE HIGH COURT THAT THE TRANSA CTION WAS OF SALE AND SECTION 194H OF THE ACT HAD NO APPLICATION . THUS, HOLDING THAT A CONTRACT OF AGENCY DID NOT EXIST. 10. SIMILAR VIEW HAS BEEN EXPRESSED BY THE KERALA H IGH COURT IN KERALA STATE STAMP VENDORS ASSOCIATION VERSUS OFFIC E OF THE ACCOUNTANT GENERAL AND OTHERS (2006) 282 ITR 7 (KER ALA), WHEREIN IT HELD:- 'NO DOUBT, PAYMENT OF COMMISSION OR BROKERAGE IN RE LATION TO SALE OR PURCHASE OF GOODS ALSO WOULD ATTRACT DEDUCT ION OF TAX AT SOURCE UNDER SECTION 194H OF THE ACT. HOWEVER, SUCH SITUATION ARISES ONLY WHEN THERE IS INVOLVEMENT OF SERVICES O F A THIRD ITA NOS.1264 & 1352(B)/13 44 PARTY ON PAYMENT OTHER THAN THE SELLER AND THE PURC HASER OF GOODS OR WHEN THE RECIPIENT OF THE BENEFIT MARKETS GOODS AS 'AGENT' OF THE OWNER AND NOT AS INDEPENDENT DEALER. ' 11. ALLAHABAD HIGH COURT IN CHIEF TREASURY OFFICER VERSUS UNION OF INDIA (2013) 355 ITR 484 HAS HELD THAT THE WORDS 'BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON' IMPLY EL EMENT OF AGENCY AND MUST BE PRESENT IN ALL SUCH SERVICES OR TRANSACTIONS IN ORDER TO FALL WITHIN THE EXPRESSION 'COMMISSION' AND 'BROKERAGE'. REFERENCE WAS MADE TO DEFINITION OF TH E TERM 'AGENT' IN THE INDIAN CONTRACT ACT AND THE IMPLICAT ION THEREOF AND IT WAS OBSERVED THAT THE CONTRACT BETWEEN A PRI NCIPAL AND AN AGENT PRIMARILY IS A CONTRACT OF EMPLOYMENT TO B RING ABOUT A LEGAL RELATIONSHIP WITH A THIRD PARTY AND THE AGENT EITHER ACTUALLY OR BY LAW IS HELD TO BE AUTHORIZED OR EMPL OYED BY THE FIRST I.E. THE PRINCIPAL, WHOM HE REPRESENTS. REPRE SENTATIVE CHARACTER AND DERIVATIVE AUTHORITY ARE DISTINGUISHI NG FEATURES OF AN AGENT. IT WAS ACCORDINGLY HELD THAT PROVISION S OF SECTIONS 194H OF THE ACT WERE NOT ATTRACTED IN THE CASE OF S TAMP VENDORS. 12. THE EXPRESSIONS 'COMMISSION' OR 'BROKERAGE' ARE WORDS OF GENERAL AND COMMON PARLANCE USED BOTH COMMERCIALLY AND BY THE COMMON MAN ON THE STREET. CLAUSE (I) EXPRESSLY SEEKS TO DEFINE THE EXPRESSION 'COMMISSION' OR 'BROKERAGE' B UT STATES THAT IT WILL INCLUDE PAYMENTS RECEIVED OR RECEIVABL E, DIRECTLY OR INDIRECTLY BY A PERSON ACTING ON BEHALF OF ANOTHER IF THEY FALL IN THE THREE CATEGORIES. A DEFINITION MAY BE EXHAUSTIV E OR RESTRICTIVE OF ITS COMMON MEANING OR MAY BE AN EXTE NSIVE ONE. INDEED, THERE ARE DECISIONS WHICH OBSERVE THAT USE OF THE WORD 'INCLUDES' IN THE CLAUSE CAN SHOW LEGISLATIVE INTEN T TO ENLARGE THE MEANING OF THE WORDS OR PHRASES OCCURRING SO AS TO NOT ONLY MEAN AND COMPREHEND SUCH THINGS AS THEY SIGNIFY ACC ORDING TO ITA NOS.1264 & 1352(B)/13 45 THEIR NATURE AND IMPORT, BUT ALSO THINGS WHICH THE INTERPRETATION CLAUSE DECLARES THAT THEY SHALL INCL UDE. (SEE CIT VERSUS TAJ MAHAL HOTEL, (1971) 3 SCC 550). BUT, THI S MAY NOT ALWAYS BE THE CASE AND IN CERTAIN CASES, THE EXPRES SION 'INCLUDES' HAS BEEN CONSTRUED AS 'EQUIVALENT TO' AN D, THEREFORE, GIVEN A NARROWER MEANING (SEE SOUTH GUJARAT ROOFING TILES MANUFACTURERS ASSOCIATION VERSUS STATE OF GUJARAT A ND OTHERS AIR 1977 SC 90). THUS, THE WORD 'INCLUDES' CAN BE U SED IN THE SENSE OF THE WORD 'MEANS'. THE DEFINITION CLAUSE IN SUCH CASES IS TREATED AS AN EXHAUSTIVE ONE (SEE RESERVE BANK OF I NDIA VERSUS PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD . (1987) 1 SCC 424). THUS, IN A PARTICULAR CONTEXT THE WORD 'INCLUDES' WHEN USED, MAY ONLY MEAN 'COMPRISE OF' OR 'CONSIST OF'. 13. IT IS APPARENT FROM THE DECISION OF THE SUPREME COURT IN THE CASE OF AHMEDABAD STAMP VENDORS ASSOCIATION (SUPRA) THAT CLAUSE (I) OF THE EXPLANATION TO SECTION 194H OF TH E ACT HAS BEEN READ AS EXHAUSTIVE AND NOT AS EXPANSIVE. THIS IS TH E REASON WHY THE SUPREME COURT IN THE SHORT ORDER DREW DISTINCTI ON BETWEEN A TRANSACTION OF SALE AND A CONTRACT OF AGENCY AND AL SO BETWEEN DISCOUNT AND COMMISSION/BROKERAGE. OTHERWISE, THE E XPRESSION 'ANY SERVICE RENDERED IN THE COURSE OF BUYING OR SE LLING OF GOODS' POSSIBLY WOULD HAVE ENCOMPASSED AND INCLUDED THE 'DISCOUNT' GIVEN TO THE STAMP VENDORS, WHO RENDER S ERVICE DURING THE COURSE OF BUYING AND SELLING OF GOODS, I .E. THE STAMP PAPERS. 14. CONTENTION COULD BE RAISED THAT PAYMENT RECEIVE D OR RECEIVABLE DIRECTLY OR INDIRECTLY FOR ANY SERVICES IN COURSE OF BUYING OR SELLING OF GOODS NEED NOT ARISE OUT OF A CONTRACT OF AGENCY OR FROM A RELATIONSHIP OF A PRINCIPAL AND AN AGENT. THE SAID CONTENTION HAS TO BE REJECTED IN VIEW OF THE A FORESAID ITA NOS.1264 & 1352(B)/13 46 JUDGMENTS, WHICH POSITIVELY HOLD THAT THE THREE SEP ARATE CONDITIONS WHEN TAX AT SOURCE IS REQUIRED TO BE DED UCTED WOULD ONLY APPLY PROVIDED THE RECIPIENT IS ACTING ON BEHA LF OF ANOTHER, I.E. RELATIONSHIP OF A PRINCIPAL AND AN AGENT EXIST S AND NOT OTHERWISE. THIS INTERPRETATION HAS BEEN CONSISTENT AND UNIFORMLY APPLIED WHILE INTERPRETING CLAUSE (I) OF THE EXPLANATION TO SECTION 194H OF THE ACT. APPROPR IATE IN THIS REGARD WOULD BE TO REFER TO THE DECISION OF THE HIG H COURT OF DELHI IN COMMISSIONER OF INCOME TAX VERSUS IDEA CEL LULAR LIMITED, (2010) 325 ITR 148 (DELHI) WHEREIN EXPLANA TION CLAUSE (I) TO SECTION 194H OF THE ACT HAD COME UP FOR CONS IDERATION AND ON INTERPRETATION IT WAS HELD THAT IT WOULD APPLY O NLY IF PAYMENT WAS RECEIVED OR RECEIVABLE DIRECTLY OR INDI RECTLY BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON FOR (I) S ERVICES RENDERED (NOT BEING PROFESSIONAL) AND (II) FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO AN ASSET, VALUABLE ARTICLE OR THING. THE JUDGMENT RECORDS THAT THE COUNSEL FOR BOTH THE PART IES, I.E. THE REVENUE AND THE ASSESSEE, HAD AGREED THAT THE ELEME NT OF AGENCY WAS TO BE ESTABLISHED IN ALL THE AFORESAID C IRCUMSTANCES (SEE PAGE 156 PLACITUM 9 OF THE ITR CITATION). THUS , THIS CONTENTION IF RAISED WOULD NOT STAND JUDICIAL SCRUT INY ON THE PRINCIPLES OF CONSISTENCY AND CERTAINTY. EVEN OTHER WISE, THE VIEW EXPOUNDED AND ACCEPTED IS PLAUSIBLE, BESIDES B EING REASONABLE. 15. APPLYING THE ABOVE CITED CASE LAW TO THE FACTUA L MATRIX OF THE PRESENT CASE, WE FEEL THAT SECTION 194H OF THE ACT WOULD NOT BE ATTRACTED. HDFC WAS NOT ACTING AS AN AGENT OF THE R ESPONDENT- ASSESSEE. ONCE THE PAYMENT WAS MADE BY HDFC, IT WAS RECEIVED AND CREDITED TO THE ACCOUNT OF THE RESPONDENT-ASSES SEE. IN THE ITA NOS.1264 & 1352(B)/13 47 PROCESS, A SMALL FEE WAS DEDUCTED BY THE ACQUIRING BANK, I.E. THE BANK WHOSE SWIPING MACHINE WAS USED. ON SWIPING THE CREDIT CARD ON THE SWIPING MACHINE, THE CUSTOMER WHOSE CRE DIT CARD WAS USED, GOT ACCESS TO THE INTERNET GATEWAY OF THE ACQUIRING BANK RESULTING IN THE REALISATION OF PAYMENT. SUBSE QUENTLY, THE ACQUIRING BANK REALISED AND RECOVERED THE PAYMENT F ROM THE BANK WHICH HAD ISSUED THE CREDIT CARD. HDFC HAD NOT UNDERTAKEN ANY ACT ON 'BEHALF' OF THE RESPONDENT-AS SESSEE. THE RELATIONSHIP BETWEEN HDFC AND THE RESPONDENT-ASSESS EE WAS NOT OF AN AGENCY BUT THAT OF TWO INDEPENDENT PARTIE S ON PRINCIPAL TO PRINCIPAL BASIS. HDFC WAS ALSO ACTING AND EQUALLY PROTECTING THE INTEREST OF THE CUSTOMER WHOSE CREDI T CARD WAS USED IN THE SWIPING MACHINES. IT IS NOTICEABLE THAT THE BANK IN QUESTION OR THEIR EMPLOYEES WERE NOT PRESENT AT THE SPOT AND WERE NOT ASSOCIATED WITH BUYING OR SELLING OF GOODS AS SUCH. UPON SWIPING THE CARD, THE BANK MADE PAYMENT OF THE BILL AMOUNT TO THE RESPONDENT- ASSESSEE. THUS, THE RESPO NDENT ASSESSEE RECEIVED THE SALE CONSIDERATION. IN TURN, THE BANK IN QUESTION HAD TO COLLECT THE AMOUNT FROM THE BANKERS OF THE CREDIT CARD HOLDER. THE BANK HAD TAKEN THE RISK AND ALSO R EMAINED OUT OF POCKET FOR SOMETIME AS THERE WOULD BE A TIME GAP BETWEEN THE DATE OF PAYMENT AND RECOVERY OF THE AMOUNT PAID. WE ARE OF THE OPINION, THAT THE PAYMENTS MADE BY TH E ASSESSEE TO M/S NFS COULD NOT BE CONSIDERED AS COMMISSION OR BROKERAGE, IN ANY SENSE ALL THESE TERMS. ASSESSEE WAS THEREFORE,NOT BOUND TO DEDUCT TAX ON SUCH PAYMENTS U/S 194H OF THE ACT. DISALLOWANCE U/S 40 A(IA) OF THE ACT IS NOT ITA NOS.1264 & 1352(B)/13 48 WARRANTED. SUCH DISALLOWANCE STANDS DELETED. GROU ND NO.4 OF THE ASSESSEE IS ALLOWED. 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOW ED PRO-TANTO. 26. NOW WE TAKE UP THE CROSS APPEAL OF THE REVENUE . THE ONLY ISSUE RAISED BY THE REVENUE IS THAT ASSESSEES CLAIM OF D EPRECIATION ON ITS INVESTMENT PORTFOLIO BY TREATING THE INVESTMENT AS STOCK IN TRADE WAS ALLOWED BY THE CIT(A). WHEN THE MATTER CAME UP L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE STOOD SQUARELY CO VERED BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSM ENT YEAR 2010-11, IN ITA NO.1310(B)/2012 DATED 19-09-2014. RELYING ON PARAS- 21 & 22 OF THE ORDER DATED 19-09-2014, LEARNED AR SUBMITTED TH AT THIS TRIBUNAL HAD HELD SUCH CLAIM TO BE ALLOWABLE. AS PER THE LEARNE D AR THE CIT(A) HAD RIGHTLY FOLLOWED THE ABOVE DECISION AND GIVEN RELIE F TO THE ASSESSEE. 27. PER CONTRA, LEARNED AR FAIRLY ADMITTED THAT T HE ISSUE AT THIS POINT OF TIME STOOD IN FAVOUR OF THE ASSESSEE. 28. WE HAVE PERUSED THE ORDERS AND HEARD THE CONTE NTIONS. IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2010-11 IN ITA NO.1310 & 1393(B)2012 DATED 19-09-2014 IT WAS HELD AS UNDER A T PARAS-21 TO 22 OF ITS ORDER; 21.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIMILAR ISSUE AS TO WHETHER DEPRECIATION ON INVESTM ENTS ITA NOS.1264 & 1352(B)/13 49 HELD UNDER THE CATEGORY HELD TO MATURITY CAN BE ALLOWED AS DEDUCTION CAME UP FOR CONSIDERATION IN T HE CASE OF SYNDICATE BANK (SUPRA) BEFORE THE ITAT BANGALORE BENCH. THE TRIBUNAL ON THE ISSUE HELD AS FOLLOWS: 58. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR A ND THE LD. COUNSEL FOR THE ASSESSEE. THE LD. DR RELIE D ON THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT V. ING VYSYA BANK LTD. IN ITA NO.2886/2 005 DATED 06.06.2012. IN THE AFORESAID DECISION, THE H ONBLE HIGH COURT OF KARNATAKA TOOK A VIEW THAT THE GUIDEL INES ISSUED BY THE RBI WILL NOT BE RELEVANT WHILE COMPUT ING INCOME UNDER THE INCOME-TAX ACT. THE HONBLE COURT FURTHER TOOK THE VIEW THAT EVERY INVESTMENT HELD BY A BANK CANNOT BE CONSIDERED AS STOCK-IN-TRADE. THE HONBLE HIGH COURT FINALLY CONCLUDED THAT 30% OF TH E INVESTMENTS CAN BE CLOTHED TO THE CHARACTER OF STOC K-IN- TRADE AND THAT THE REMAINING AMOUNTS WILL BE INVEST MENTS AND THEREFORE DIMINUTION IN THEIR VALUE CANNOT BE ALLOWED AS A DEDUCTION. 59. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, SUBMITTED THAT IN THE ASSESSEES OWN CASE FOR THE A .Y. 2005-06, THIS TRIBUNAL HAS CONFIRMED THE ORDER OF T HE CIT(A), DELETING IDENTICAL ADDITION MADE BY THE AO. OUR ATTENTION WAS ALSO DRAWN TO THE ORDER OF THE TRIBUN AL IN ITA NOS.1264 & 1352(B)/13 50 ASSESSEES OWN CASE IN ITA NO.492/BANG/2009 FOR THE A.Y. 2005-06, ORDER DATED 13.01.2012, WHEREIN THE TRIBUNAL HAD TO DEAL WITH IDENTICAL ISSUE AS TO WHE THER THE CIT(A) WAS CORRECT IN DELETING THE ADDITION MAD E BY THE AO ON ACCOUNT OF PROFIT ON SALE OF INVESTMENTS OF RS.200,77,13,662/- AND DELETING THE ACTION OF THE A O IN DISALLOWING LOSS CLAIMED ON TREATING INVESTMENTS AS STOCK-IN-TRADE BY DRAWING THE INVESTMENT TRADING AC COUNT OF RS.775,96,55,047. THE TRIBUNAL HELD 16. WE HAVE HEARD BOTH SIDES AND FIND THAT THE SUPREME COURT IN THE CASE OF UCO BANK IN 240 ITR 35 5 HAS HELD AS UNDER : 'IN OUR VIEW, AS STATED ABOVE, CONSISTENTLY FOR 30 YEARS, THE ASSESSEE WAS VALUING THE STOCK-IN-TRADE AT COST FOR THE PURPOSE OF STATUTORY BALANCE-SHEET, AND FOR THE INC OME- TAX RETURN, VALUATION WAS AT COST OR MARKET VALUE,WHICHEVER WAS LOWER. THAT PRACTICE WAS ACCEP TED BY THE DEPARTMENT AND THERE WAS NO JUSTIFIABLE REAS ON FOR NOT ACCEPTING THE SAME. PREPARATION OF THE BAL ANCE- SHEET IN ACCORDANCE WITH THE STATUTORY PROVISION WO ULD NOT DISENTITLE THE ASSESSEE IN SUBMITTING THE INCOM E-TAX RETURN ON THE REAL TAXABLE INCOME IN ACCORDANCE WIT H THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE CONSISTENTLY AND REGULARLY. THAT CANNOT BE DISCARD ED BY THE DEPARTMENTAL AUTHORITIES ON THE GROUND THAT THE ITA NOS.1264 & 1352(B)/13 51 ASSESSEE WAS MAINTAINING THE BALANCE-SHEET IN THE STATUTORY FORM ON THE BASIS OF THE COST OF THE INVE STMENTS. IN SUCH CASES, THERE IS NO QUESTION OF FOLLOWING TW O DIFFERENT METHODS FOR VALUING ITS STOCK-IN-TRADE (INVESTMENTS) BECAUSE THE BANK WAS REQUIRED TO PREP ARE THE BALANCE-SHEET IN THE PRESCRIBED FORM AND IT HAD NO OPTION TO CHANGE IT. FOR THE PURPOSE OF INCOME TAX AS STATED EARLIER, WHAT IS TO BE TAXED IS THE REAL INC OME WHICH IS TO BE DEDUCED ON THE BASIS OF THE ACCOUNTI NG SYSTEM REGULARLY MAINTAINED BY THE ASSESSEE AND THA T WAS DONE BY THE ASSESSEE IN THE PRESENT CASE.' THE BANGALORE BENCH OF ITAT IN CORPORATION BANK (SUPRA) HAS ALSO FOLLOWED THE ABOVE DECISION OF THE HON'BLE SUPREME COURT AS ALSO THE ITAT, MUMBAI AND ITAT, CHENNAI. FOLLOWING THE ABOVE DECISIONS, WE A RE DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE. THI S GROUND OF APPEAL BY THE REVENUE IS DISMISSED. 60. APART FROM THE ABOVE, THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE DECISION RENDERED BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF ING VYSYA BANK (SUPRA) IS PER INCURIAM THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF UCO BANK V. CI T, 240 ITR 355 (SC). HE BROUGHT TO OUR NOTICE THAT TH E HONBLE SUPREME COURT APPROVED THE PRACTICE OF NATIONALIZED BANK GOVERNED BY BANKING REGULATION AC T, ITA NOS.1264 & 1352(B)/13 52 FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING BOTH FOR BOOK KEEPING AS WELL FOR INCOME-TAX PURPOSES. THE HON BLE APEX COURT UPHELD THE METHOD ADOPTED BY THE BANKS VALUING STOCK-IN-TRADE (INVESTMENTS) AT COST IN BAL ANCE SHEET IN ACCORDANCE WITH THE BANKING REGULATION ACT AND VALUING THE SAME AT COST OR MARKET VALUE, WHICHEVER WAS LOWER FOR INCOME-TAX PURPOSES. THE HONBLE COURT TOOK THE VIEW THAT ALL INVESTMENTS HELD BY A BANK ARE TO BE REGARDED AS STOCK-IN-TRADE. 61. THE LD. COUNSEL FOR THE ASSESSEE FURTHER DREW OUR ATTENTION TO A VERY RECENT DECISION OF THE HONBLE HIGH COURT OF KARNATAKA RENDERED ON 11.03.2013 IN THE CA SE OF CIT V. VIJAYA BANK, ITA NO.687/2008. THE HONBL E HIGH COURT OF KARNATAKA IN THE AFORESAID CASE FOLLO WED ITS OWN DECISION RENDERED IN THE CASE OF KARNATAKA BANK LTD. V. CIT IN ITA NO.172/2009 RENDERED ON 11.01.2 013, WHEREIN THE COURT TOOK THE VIEW THAT DEPRECIATION CLAIMED ON INVESTMENTS HELD ON MATURITY BY A BANK HAS TO BE TREATED AS STOCK-IN-TRADE IN ACCORDANCE WITH RBI GUIDELINES AND CBDT CIRCULAR. IT WAS HIS SUBMISSI ON THAT THE LATER DECISION OF THE HONBLE KARNATAKA HI GH COURT HAS TO BE FOLLOWED. 62. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE CONTENTION S PUT FORTH ON BEHALF OF THE ASSESSEE DESERVE TO BE ACCEP TED. ITA NOS.1264 & 1352(B)/13 53 THE TRIBUNAL IN ASSESSEES OWN CASE ON AN IDENTICAL ISSUE FOR THE A.Y. 2005-06 HAS UPHELD THE CLAIM OF THE AS SESSEE. THE LATER DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IS ALSO IN FAVOUR OF THE ASSESSEE. IN SU CH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ISSUE RA ISED BY THE REVENUE IN ITS APPEAL IS WITHOUT MERIT. CONSEQ UENTLY, THE SAME IS DISMISSED. 22. THE ABOVE DECISION SQUARELY COVERS THE ISSUE I N FAVOUR OF THE ASSESSEE. RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE RELEVANT GROUNDS OF APPEAL OF THE REVENUE. ACCORDINGLY, WE HOLD THAT THE CIT(A) WAS JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. 29. IN THE RESULT, APPEAL OF THE REVENUE STANDS DI SMISSED. 30. TO SUMMARIZE THE APPEAL OF THE ASSESSEE ALLOWE D PRO-TANTO WHEREAS THE APPEAL OF THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 11 TH MARCH, 2015. SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (ABRAHAM P GEORGE) (ACCOUNTANT MEMBER) PLACE: BANGALORE: D A T E D : 11-03-2015 AM* ITA NOS.1264 & 1352(B)/13 54 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE AR, ITAT, BANGALORE