The Karnataka Bank Ltd, Mangalore V. Deputy Commissioner of Income Tax, Circle-2(1), Mangalore

ITA 1906/BANG/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5564 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 31-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA
• Keywords: Earning of tax free income; Bad and doubtful debts; TDS; Rule 8D; Set aside
• Section: 143(3); 14A; 115JB; 40(a)(ia); 194J; 13; 22

Judgement Text

ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA No.1906/Bang/2018 Assessment Year : 2013-14 The Karnataka Bank Ltd. Head Office, Mahaveera Circle Kankanady Mangalore 575 002 PAN NO : AABCT5589K Vs. Deputy Commissioner of Income-tax Circle-2(1) Mangalore APPELLANT RESPONDENT ITA No.229/PAN/2018 Assessment Year : 2013-14 Deputy Commissioner of Income-tax Circle-2(1) Mangalore Vs. The Karnataka Bank Ltd. Head Office, Mahaveera Circle Kankanady Mangalore 575 002 APPELLANT RESPONDENT Appellant by : Shri Ananthan & Smt. R. Lalitha, A.Rs Respondent by : Shri Sumer Singh Meena, D.R. Date of Hearing : 10.11.2021 Date of Pronouncement : 27.12.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: These cross appeals are directed against the order dated 27-03-2018 passed by Ld CIT(A), Mangaluru and they relate to the assessment year 2013-14. ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 2 of 22 2. The assessee is a scheduled commercial Bank. The assessing officer completed the assessment for the year under consideration u/s 143(3) of the Income-tax Act,1961 ['the Act' for short] making various additions. The AO determined the total income at Rs.1356.29 crores and tax thereon at Rs.440.04 crores. The AO also determined book profit u/s 115JB of the Act at Rs.671.41 crores and tax thereon at Rs.134.14 crores. Since the tax payable on total income under normal provisions of the Act was higher than the tax payable u/s 115JB of the Act, the AO assessed total income under normal provisions of the Act. The assessee filed appeal challenging the assessment order by filing appeal before Ld CIT(A) and it was partly allowed. Aggrieved by the order passed by Ld CIT(A), both the parties have filed these appeals on the issues decided against each of them. 3. The assessee has filed additional ground of appeal besides original ground. In the additional ground, the assessee is seeking deduction of education cess and secondary & higher education cess as allowable expenditure. It is stated that it is a pure legal issue and all facts relating thereto are available on record. Accordingly, we admit the additional ground. The grounds and additional ground urged by the assessee give rise to the following issues:- (a) Disallowance of bad debts claimed u/s 36(1)(vii) of the Act. (b) Disallowance of payments made to VISA International u/s 40(a)(ia) of the Act. (c) Additions made while computing book profit u/s 115JB of the Act. (d) Plea for deduction of Education cess and Secondary & Higher education cess as allowable expenditure. ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 3 of 22 4. The grounds urged by the revenue give rise to the following issues:- (a) Disallowance u/s 14A of the Act (b) Disallowance u/s 40(a)(ia) of the Act (c) Disallowance made u/s 36(1)(viia) of the Act. 5. The first issue contested by the assessee relates to the deduction claimed u/s 36(1)(vii) of the Act. The assessee had claimed a sum of Rs.192.02 crores as bad debt u/s 36(1)(vii) of the Act. The AO noticed that the above said amount was included in “Provisions and Contingencies” account debited to the Profit and Loss account. Further, the above said amount has been found reduced from “Provision for bad and doubtful debts” (PBDD) as under:- Opening balance of PBDD - 2,18,45,20,286 Less:- Bad debts written off:- Urban debts written off - 1,92,02,88,780 Rural debts written off - 35,01,640 ------------------- 1,92,37,90,421 ------------------- 26,07,29,866 Add:- Provision for BDD made during the year 1,72,32,76,855 -------------------- Balance of PBDD as on 31.3.2013 1,98,40,06,721 ============== The AO noticed that the bad debts written off was not debited to Profit and Loss account. The AO also noticed that the new provision created during the year was Rs.172.32 crores, out of which the assessee claimed a sum of Rs.141.37 crores as deduction u/s 36(1)(viia) of the Act. Accordingly, the AO took the view that the assessee is claiming deduction both u/s 36(1)(vii) and 36(1)(viia) of the Act. The assessee submitted that the bad debts claimed by it included prudential write off of Rs.90.41 crores. The AO expressed the view that the Prudential ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 4 of 22 write off is not eligible for deduction u/s 36(1)(vii) of the Act, since it is not actual write off. He then relied upon the decision rendered by Hon’ble Supreme Court in the case of Southern Technologies vs. ACIT (352 ITR 577)(SC), wherein it was held that the mere making of provision for NPA cannot be considered as write off u/s 36(1)(vii) of the Act. He also relied upon the decision rendered by Hon’ble Kerala High Court in the case of CIT vs. Hotel Ambassador (2002)(253 ITR 430)(Ker), wherein it was held that the deduction u/s 36(1)(vii) of the Act only if the assessee debits the same into the accounts as irrecoverable. Accordingly, the AO took the view that the amount of Rs.172.32 crores claimed by the assessee was mere provision and not actual write off. Before the AO, the assessee had placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT (2010)(320 ITR 166 (SC)) to reiterate that it is entitled for deduction u/s 36(1)(vii) of the Act. The AO expressed the view that the issue considered by Hon’ble Supreme Court in the case of Vijaya Bank (supra) related to category of “Loss Assets” , which is required to be provided @ 100% of the outstanding amount. He further expressed the view that the Hon’ble Supreme Court did not consider the question viz., Whether the provision for non-performing assets created by the assessee bank by debiting P & L a/c and crediting the provision account amounts to bad debts written off as per sec. 36(1)(vii) of the Income tax Act? Accordingly, the AO held that the assessee cannot place reliance on the decision rendered by Hon’ble Supreme Court in the case of Vijaya Bank (supra). Accordingly the AO held that the amount of Rs.192.02 crores was mere prudential write off and hence not allowable as deduction. He also held that it is a clear case of double deduction, i.e., once u/s 36(1)(viia) and again u/s 36(1)(vii) of the Act. Accordingly he disallowed the claim of Rs.192.02 crores. It is pertinent to note that the above said claim was related to non-rural advances. ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 5 of 22 5.1 Before the Ld CIT(A), the assessee explained the manner of writing off bad debts in the books of account. Before Ld CIT(A), it was submitted that the net advances as per Balance sheet has been worked out after deducting bad debts written off as under:- Gross Advances as on 31.03.2013 25608,84,30,038 Less:- Bad debts written off 192,37,90,420 PBDD 208,78,51,444** --------------------- 401,16,41,864 --------------------- Net Advances as per B/S as on 31.3.2013 25207,67,88,174 ============== (** As per PBDD account extracted above, balance was 198.40 crores. However it is not relevant for the issue before us) Accordingly, the Ld CIT(A) summarised his view as under:- “6.5 Conclusion:- a) It seen that the write off at the branch (Rs.101.72 cr.) & HO level (Rs.90.65 cr) together amounting to Rs.192.37 crores was debited to Provision account (which is part of the accounts of the assessee) which has the effect of reducing the advances in the balance sheet. b) It is clear from the working of net advances and submissions that the assessee bank has not only debited provision a/c to the extent of bad debts, it simultaneously reduced the amount of loans and advances at the year end. In other words, the amount of loans and advances at the year end in the Balance sheet is shown as net of bad debts written off. In view of the above said position, the Ld CIT(A) did not agree with the view expressed by AO. Accordingly he held that the assessee’s case is covered by the decision rendered by Hon’ble Supreme Court ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 6 of 22 in the case of Vijaya Bank 323 ITR 166. We also notice that the revenue has not filed appeal challenging the above said decision of Ld CIT(A) and hence this view of Ld CIT(A) has attained finality. 5.2 The Ld CIT(A), however, proceeded to examine this aspect from another angle, i.e., he took the view that the AO has not examined the claim of write off ‘non-rural bad debts” of Rs.192.02 crores in terms of the proviso to sec. 36(1)(vii) read with 36(1)(viia) of the Act. Before Ld CIT(A), the assessee submitted that the provision allowed u/s 36(1)(viia) of the Act is related to rural debts only and hence, only rural debts written off as bad should be adjusted against the provision allowed u/s 36(1)(viia) of the Act. However, the Ld CIT(A) expressed the view that the PBDD allowed u/s 36(1)(viia) of the Act is applicable to both Rural and non-Rural debts. Accordingly, he held that the entire amount of bad debts written off (both rural and non-rural) should be first adjusted against the provision allowed u/s 36(1)(viia) of the Act and only the excess should be allowed as deduction. He expressed the view that the decision by Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012)(343 ITR 270)(SC) was rendered under the assumption that the banks would maintain separate PBDD a/c in respect of rural branches and non- rural branches and therefore it is possible to distinguish PBDD as one in respect of rural branches and non-rural branches. The Ld CIT(A) expressed the view that the claim of the bank that the provisions of sec. 36(1)(viia) are distinct and independent of sec. 36(1)(vii) is based on the old circular no. 258 dated 14.6.1979 issued in connection with old law. Accordingly the Ld CIT(A) held that the provision allowed u/s 36(1)(viia) of the Act is for single account since introduction in 1985 for all types of advances including rural advances. Accordingly, the Ld CIT(A) held that the bad debts pertaining to non-rural advances should also be first adjusted ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 7 of 22 against PBDD u/s 36(1)(viia) of the Act. Accordingly, the Ld CIT(A) asked the assessee to furnish workings of PBDD a/c. As per the working so furnished, the opening credit balance in the Provision allowed account stood at Rs.613.18 crores. Since it is more than the bad debts pertaining to non-rural branches of Rs.192.02 crores, the Ld CIT(A) held that the bad debts claim of non-rural branches is not allowable as deduction u/s 36(1)(vii) of the Act. 5.3 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has expressed the view that the PBDD u/s 36(1)(viia) of the Act would cover bad debts pertaining to non- rural advances also. An identical issue has been examined by Hyderabad bench of ITAT in the case of State Bank of Hyderabad vs. DCIT (ITA No.450/Hyd/2015, ITA No.498 and 499/Hyd/2015 dated August 14, 2015), wherein the Tribunal has not accepted the above said view expressed by Ld CIT(A). The relevant observations made by the Tribunal are extracted below:- “19. We have considered the rival submissions and perused the materials on record as well as the orders of revenue authorities. As could be seen from the finding of AO as well as ld. CIT(A), only reason for which claim of deduction for Rs. 209,07,50,831 representing actual write off of bad debts relating to non-rural advances u/s 36(1)(vii) was denied is, assessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds the provision made u/s 36(1)(viia). If we examine the facts of the present case in the context of aforesaid statutory provision, it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 8 of 22 actual deduction claimed u/s 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created u/s 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon'ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience. "26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent this mischief. The contention of the Revenue, in our opinion, was rightly rejected by the Special Bench of the Tribunal and it correctly held that the Board itself had recognized the position that a bank would be entitled to both the deductions. Further, it concluded that the proviso had been introduced to protect the Revenue, but it would be meaningless to invoke the same where there was no threat of double deduction. 27. As per this proviso to cl. (vii), the 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). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances." Concurring with the aforesaid majority view, Hon'ble CJI, S.H. Kapadia, as the then he was, held as under: "2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation or taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 9 of 22 However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(11(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said 1 proviso where there is no threat of double deduction. In case of rural ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 10 of 22 advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii)." Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to non- rural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT (supra). Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to non- rural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A).” 5.4 Following the above said decision, we hold that the view expressed by Ld CIT(A) is not legally correct. Accordingly, we set aside the order passed by Ld CIT(A) with regard to his alternative decision, i.e., the view that the proviso to sec. 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also. Accordingly, we direct the AO to delete the disallowance of Rs.192.02 crores. 6. The next issue urged by the assessee relates to disallowance of payments made to VISA International u/s 40(a)(ia) of the Act, which was confirmed by Ld CIT(A). The revenue is also in appeal in respect ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 11 of 22 of relief granted by the first appellate authority in respect of remaining amount of disallowance made u/s 40(a)(ia) of the Act. 6.1 The AO noticed that the assessee has claimed a sum of Rs.17.27 crores as expenditure towards expenses on ATM charges. The break- up details is given in the order of ld CIT(A) as under:- NPCI (NFS) (includes SWITCH FEE) - 16,17,01,971 Cash Tree network - 95,74,697 VISA Charges - 15,01,663 ----------------- 17,27,78,331 ----------------- The assessee submitted that these payments have been made to various agencies like NPCI, Cash tree networks and VISA international in connection with settling dues amongst the banks in respect of transactions entered by the customers of the assessee bank through ATM of other banks and vice versa. Accordingly, it was submitted that these payments are not liable for deduction of tax at source. However, the AO took the view that the assessee is liable to deduct tax at source u/s 194J of the Act. The assessee replied that the ATM machines are taken on hire by the assessee and hence there is no transfer of usage or right to use any industrial, commercial or scientific equipment subjecting ATM usage charges paid to NPCI to TDS. It was further explained that:- (a) SWITCH facility extended by NPCI is a standard facility without any human intervention. Hence TDS provisions are not applicable to ATM usage charges paid. (b) ATM usage charges debited to assessee’s account by RBI after netting of charges for usage of ATM of other bank by assessee’s customers and vice versa. Hence payment has not originated from bank’s end and hence TDS provisions are not applicable. (c) In respect of SWITCH fee of Rs.83,96,711/- retained by NPCI, the assessee has furnished a certificate as per the ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 12 of 22 first proviso to sec.201(1) and second proviso to sec. 40(a)(ia) of the Act. Further CBDT notification no.56/2012 dated 31.12.2012 provides exemption from TDS provisions for payments made to NPCI. The AO did not accept the explanations of the assessee and accordingly disallowed the amount of Rs.17,27,78,331/-. 6.2 The Ld CIT(A) deleted the disallowance of payments made NPCI and Cash Tree network by following the decision rendered by Hon’ble Supreme Court in the case of CIT vs. Kotak Securities Ltd (2016)(285 CTR (SC) 63) and also the decision rendered in the assessee’s own case by ITAT in ITA No.1264 & 1352 (B)/2013 for AY 2011-12. The Ld CIT(A), however, confirmed the addition of VISA charges of Rs.15,01,663/-. Hence both the parties are in appeal before us. 6.3 We notice that identical issues have been considered by the co- ordinate bench in the assessee’s own case in ITA No.89/PAN/2017 & CO No.07/PAN/2017 relating to AY 2012-13 and the Tribunal, vide its order dated 06.02.2020 has decided the issue as under:- “13. The next issue relates to disallowance made u/s 40(a)(ia) of the Act. The AO noticed that the assessee has claimed a sum of Rs.75.46 crores as other expenses details of which are given below:- i) ISC for provision of ATMs (Rs.18,14,31,425/-) ii) Payment to NFS Network towards ATM usage charges (Rs.15,04,34,326/- iii) Payment to Cash Tree Network towards ATM usage charges (Rs.99,87,801/-) iv) VISA fees paid to VISA International (Rs.96,87,529/-) 14. The AO asked the assessee to furnish details of tax deducted at source from the above said payments. The AO noticed that the assessee has not deducted tax at source from the following payments:- ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 13 of 22 i) Payment to NFS Network towards ATM usage charges (Rs.15,04,34,326/-) ii) Payment to Cash Tree Network towards ATM usage charges (Rs.99,87,801/-) iii) VISA fees paid to VISA International (Rs.96,87,529/-) Accordingly, he disallowed all the three expenses aggregating toRs.17.01 crore by invoking provisions of sec. 40(a)(ia) of the Act. The ld CIT(A) noticed that the Bengaluru Bench of Tribunal has held in the case of Corporation Bank in ITA No.1264 and 1352/Bang/2013 for asst. year 2011-12 that the payments made to National Financial Switch and Cash Tree could not be considered as commission or brokerage falling within the purview of sec. 194H of the Act. Accordingly the Tribunal had deleted identical disallowances made in the hands of Corporation Bank. Accordingly he directed the AO to delete the disallowance of payments made to NFS and Cash Tree. 15. In respect of payment of Rs.96.87 lakhs made to Visa International, the ld CIT(A) restored the issue to the file of the AO with the direction to verify the details of Tax deduction and allow deduction to the extent of TDS deducted. 16. The assessee has filed cross-objections in respect of addition of Rs.96.87 lakhs made to Visa International, which has been confirmed by ld CIT(A) by way of setting aside to the AO. 17. We heard the parties on this issue and perused the record. We noticed that an identical issue was considered by the coordinate bench in the assessee’s own case for asst. year 2008-09 and the disallowance of payments made to NFS and cash tree as well as visa Charges were deleted with the following observations :- “17.5 We heard the rival submissions and perused the material on record. The only issue in the present grounds of appeal is whether the assessee is liable for tax deduction at source on the charges paid to National Financial Switch and Cash Tree Consortium for use of ATM of other banks by its customers and whether failure to do so attracts the disallowance under section 40(a)(ia) of the Act. These charges are known as cash management service charges which does not attract the TDS provisions in the light of the Central Board of Direct Taxes Notification No, 56 of 2012 dated December 31, 2012 : Notification No. S. 0. .3069(E) [No. 56/2012 (F. No. 275/53/2012- ff(B)], dated December 31, 2012' [Superseded by Notification No. S. 0. 2143(E) (No. 47/2016 (F. No. 275/53/2012-11(B), dated June 17, 2016] ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 14 of 22 In exercise of the powers conferred by sub-section (iF) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax under Chapter X1711 of the said Act shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), excluding a foreign bank, namely (1) bank guarantee commission; (ii) cash management service charges (iii) depository charges on maintenance of demat accounts (iv) charges for warehousing services for commodities (v) underwriting service charges (vi) clearing charges (MICR charges) (vii) credit card or debit card commission for transaction ben-: the merchant establishment and the acquirer bank. 2. This notification shall come into force from the 1st day of- January, 2013. Furthermore, the Hon'ble Supreme Coup in the case of Kotak Securities Management 383 ITR 1 held that consultancy managerial services involving services rendered by human efforts where services are made available to all customers and there is nothing special, exclusive or customer service charges, it does not partake of the character of managerial or technical services. In the light of this decision we hold that the assessee-bank is not liable for tax deduction at source on these payments. We direct the Assessing Officer to delete addition on account of technical service.” 18. Following the above said decision, we uphold the order of ld CIT(A) in deleting the disallowance of payments made to NFS and Cash Tree. We also set aside the order passed by ld CIT(A) inspect of payment to Visa International towards visafee, as the same is not liable to tax deduction at source as per the decision rendered by Hon’ble Supreme Court in the case of Kotak Securities Management (supra). Accordingly we direct the AO to delete the said disallowance also.” ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 15 of 22 6.4 Following the above said decision we confirm the deletion of payments made to NPCI and Cash tree Network. We also set aside the order passed by Ld CIT(A) in respect of VISA charges and direct the AO to delete the disallowance of the same. 7. The next issue urged by the assessee relates to addition of Rs.39.48 crores made to the book profit computed by the assessee u/s 115JB of the Act. The above said addition relates to the disallowance computed u/s 14A of the Act in respect of exempt income. 7.1 We notice that the assessee has not agitated this addition before Ld CIT(A). Anyway, this issue is covered by the decision rendered by jurisdictional Hon’ble High Court of Karnataka in the case of Shobha Developers Ltd vs. DCIT (2021 (1) TMI 378), wherein it was held that the disallowance made u/s 14A is a notional disallowance and hence the same cannot be adopted for the purpose of clause (f) of Explanation 1 to sec.115JB of Act. Accordingly we restore this issue to the file of AO for computing disallowance for the purpose of clause (f) from the profit and loss account. 8. The last issue relates to the claim of deduction of education cess and Secondary & Higher education cess paid during the year as deduction. The assessee has raised this claim by way of additional ground. The Ld A.R submitted that the claim of the assessee is allowable as per the decision rendered by Hon’ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd (ITA No.52/2018 dated 31.7.2017). The Ld A.R also submitted that the Hon’ble Bombay High Court has expressed the view in the case of Sesa Goa Ltd that the education cess, secondary and higher education cess is allowable as deduction. ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 16 of 22 8.1. Accordingly, following the above said decision, we restore this issue to the file of AO to examine the claim of the assessee in accordance with the decision rendered in the cases cited supra. 9. We shall now take up the appeal filed by the revenue. The first issue contested by the revenue relates to the disallowance made u/s 14A of the Act. The assessee had earned exempt income of Rs.3,41,60,914/- and did not make any disallowance u/s 14A of the Act. The AO computed disallowance as per Rule 8D at Rs.49,98,92,324/- and added the same to the total income. The Ld CIT(A) deleted the disallowance by holding that the AO has not recorded dissatisfaction on the claim made by the assessee. 9.1 We heard the parties on this issue and perused the record. We notice that an identical issue was examined by the co-ordinate bench in the assessee’s own case in ITA 89/PAN/2017 dated 06-02-2020 relating to AY 2012-13. The co-ordinate bench had expressed the view that the dissatisfaction is discernible from the assessment order passed by AO. Accordingly the decision rendered by Ld CIT(A) on this issue was set aside and the matter was restored to the file of AO for examining this issue afresh. The relevant discussions are available in paragraph 4 to 12 of the order passed by the Tribunal and they are extracted below:- “4. The first issue relates to disallowance made u/s 14A of the Act. During the year under consideration the assessee earned exempt income of Rs.2.14 crore. The assessee did not make any disallowance u/s 14A of the Act. However, the AO noticed that the tax auditor has calculated expenditure relatable to the exempt income at Rs.14.96 crore. Hence the AO asked the assessee as to why disallowance u/s 14A should not be made. The assessee contended that the exempt income earned by the assessee is incidental to the banking business carried on by it. It was further submitted that the investments have been made out of surplus funds available with the bank. It was also submitted that the securities have been held by the assessee as ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 17 of 22 stock in trade and it did not have any intention of earning any exempt income. The AO did not accept the contentions of the assessee. He took the view that the assessee would have incurred expenses for earning these exempted income and those expenses are disallowable u/s 14A of the Act. The AO also took support of decision rendered by Hon’ble Bombay High Court inthe case of Godrej Boyce Vs. DCIT 328 ITR 81. CIT Vs. Walfort Share and Stock Broker Ltd., 326 ITR 1. Accordingly he computed disallowance u/s 14A of the Act by applying Rule 8D which worked out to Rs.14.96 crore. 5. In the appellate proceedings, the ld CIT(A) appreciated the fact that the interest free funds available with the assessee is more than the value of investments. Hence, as per decision rendered by Hon’ble Karnataka High Court inthe case of Micro Labs Ltd., 383 ITR 490, no disallowance of interest expenditure u/s 14A is called for. He also noticed that the Hon’ble Karnataka High Court has held in the case of Karnataka State Industrial and Infrastructure Development Corporation Ltd., 65 Taxmann.com 295 that no disallowance u/s 14A can be made if the AO has not recorded non satisfaction. The ld CIT(A) took the view that the AO has not recorded non satisfaction in the assessment order and accordingly deleted the disallowance made u/s 14A of the Act. 6. The ld DR submitted that the AO has made the disallowance u/s 14A of the Act after due application of mind and after recording satisfaction. He further submitted that the assessee has not disallowed any expenditure u/s 14A of the Act, even though it has earned exempt income. 7. On the contrary, the ld AR submitted that this issue has been decided in favour of the assessee by the co-ordinate bench in the assessee’s own case for asst. year 2008-09 wherein the Tribunal had deleted the disallowance by following the decision rendered in the case of Canara Bank (2015) 228 Taxmann.com 212. 8. We have heard the parties on this issue and perused the record. We have noticed that the assessee has not disallowed any expenditure u/s 14A of the Act, even though it has earned exempt income. From the asst. order we noticed that the AO has made following observations with regard to the claim of the assessee. “It is a known fact that there are certain expenses for earning these exempted income. The actual income which qualifies for exemption can be ascertained only after considering the expenses related to it and such expenses are disallowable under the provisions of Sec.14A of the Income Tax Act. Without utilising the resources and the existing establishment of the assessee Bank, it would not have been possible to earn this income. Any income earned should have related expenditures attributed to it. The words "in relation to" in section 14A encompass not only the direct expenses but also the indirect expenses which has any relation to the exempt income. The banks contention that being a banking Company it does not ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 18 of 22 incur any expenditure on earning exempt income is not acceptable as the investments made on shares/bonds/mutual fund etc. for earning exempt income will always have a notional interest cost attached to it. So, the explanation given by the assessee bank is not acceptable. The investments (generating tax free income) are made by the assessee bank from the common pool of funds. As per the provisions of section 14A, no deduction shall be allowed in respect of the expenditure incurred by the assessee against the income claimed as exempt from the tax. Apportionment of the expenditure is inherent part of section 14A. In the absence of direct nexus between the assesee's own funds and investment, the investment will be treated from common pool of account having both borrowed as well as own funds of the assessee.” 9. Thus we noticed that the AO has recorded his dissatisfaction over the claim made by the assessee that it did not incur any expenditure to earn exempt income. There is no particular method/manner to record satisfaction or dissatisfaction. The satisfaction or dissatisfaction has to be inferred from the discussions made by the assessing officer. It is so held by Hon’ble Supreme Court in the case of MAK Data (P) Ltd vs. CIT (2013)(358 ITR 593)(SC). Hence, whether the AO has recorded his satisfaction/dissatisfaction has to be found out from the discussions made by him in the assessment order. The discussions made by the AO in the assessment order, which are extracted above, in our view, show that the AO was not satisfied with the contentions of the assessee and hence the same satisfies the requirement of recording of dissatisfaction by the assessing officer. We notice that the co-ordinate benches in the earlier year in the assessee’s own case as well as in the case of Canara Bank had upheld the deletion of disallowance made u/s 14A of the Act only on the reasoning that the AO has not recorded dissatisfaction. However, in the instant year, we are of the view that the assessing officer has recorded dissatisfaction. Accordingly, the decision rendered by the co-ordinate bench for asst. year 2008-09 is distinguishable. 10. The Hon’ble Supreme Court has settled the issue relating to disallowance to be made u/s 14A of the Act in the case of Maxopp Investments Ltd., Vs. CIT (Civil Appeal No.104-109 of 2015 dated 12/2/2018). The following observations made by the Hon’ble Supreme Court in para 39 of the order are relevant here. “39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits there from. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10 (34) of the Act, this dividend income is not to be included in the total income and is exempt from tax.This triggers the applicability of Section 14A of the Act which is ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 19 of 22 based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. (bold portions highlighted by us) The observations made by the Hon’ble Supreme Court in the above said case, which have been highlighted by us, would clearly show that the Hon’ble Supreme Court, in clear terms, has clarified that (a) the provisions of sec.14A would be triggered when exempt income is earned while carrying on the activity of trading in shares. (b) the theory of “dominant intention” is not applicable to the provisions of sec.14A of the Act. Hence, the claim that shares are held as stock in trade (which is dominant intention), would not absolve the liability of the assessee to make disallowance u/s 14A of the Act, when exemption is claimed in respect of any part of its income. 11. In the instant case the assessee has claimed that the investments are held as stock in trade and hence earning of dividend income is incidental to its business activity. However as noticed earlier, the said theory of dominant intention should not be applied as per the decision rendered by the Hon’ble Supreme Court in the case of Maxopp Investments (supra) and hence disallowance u/s 14A is called for even in respect of investments held as stock in trade, when the exempt income is earned by the assessee. 12. We noticed that the AO has disallowed interest expenditure also under Rule 8D(2)(ii). It is the submission of the assessee that the interest free funds available with it is more than the value of investments. Hence, as per the decision rendered by Hon’ble jurisdictional high court in the case of Micro Labs Ltd. (Supra), interest disallowance is not called for. However, this contention of the assessee requires verification at the end of the AO. Since the assessee has earned dividend income, the disallowance u/s 14A is, in any way, called for. In view of the foregoing ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 20 of 22 discussions, we are of the view that this issue requires fresh examination at the end of AO. Accordingly, we set aside the order passed by ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh.” Following the above said decision of the co-ordinate bench, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO with similar directions. Before us, the Ld A.R placed his reliance on the decisions rendered by Hon’ble Supreme Court to contend that no disallowance u/s 14A is called for in the case of the assessee. The Ld AO should consider those decision and should take appropriate decision in accordance with law. 10. The next issue relates to the relief granted by Ld CIT(A) in respect of disallowance made u/s 40(a)(ia) of the Act. This issue was examined by us in the earlier paragraph 6.3, while considering the appeal of the assessee, and we have confirmed the decision rendered by Ld CIT(A) on this issue. 11. The last issue contested by the revenue relates to the relief granted in respect of disallowance of claim made u/s 36(1)(viia) of the Act. The assessee had made provision for Bad and doubtful debts (PBDD) of Rs,172.32 crores. However, the amount allowable as per the formula given in sec.36(1)(viia) of the Act was Rs.141.36 crores. Accordingly, the assessee claimed the above said sum of Rs.141.36 crores as deduction u/s 36(1)(viia) of the Act as PBDD. The AO noticed that the provision of Rs.172.32 crores made by the assessee consisted of following amounts:- PBDD relating to Rural branches - 77,92,976 PBDD relating to non-rural branches - 171,54,83,879 --------------------- Total 172,32,76,855 ============== ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 21 of 22 The AO, however, took the view that the PBDD u/s 36(1)(viia) is allowable for PBDD created for rural debts only. Accordingly, against the claim of Rs.141.36 crores made by the assessee u/s 36(1)(viia) of the Act, the AO allowed the PBDD relating to rural advances of Rs.77,92,976/- and accordingly disallowed balance amount of Rs.140.59 crores. 11.1 The Ld CIT(A) noticed that the ITAT, Bangalore benches in the case of Corporation Bank (ITA No.1264 & 1352 (B) 2013) relating to AY 2012-13 has expressed view that 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 Profit & Loss a/c. To the extent PBDD is created, the assessee is entitled to deduction subject to upper limit of deduction laid down in Sec.36(1)(viia) of the Act. Accordingly, following the above said decision, the Ld CIT(A) held that the assessee is entitled for deduction u/s 36(1)(viia) of the Act and accordingly directed the AO to allow deduction as per the decision of ITAT. 11.2 We heard the parties and perused the record. We notice that the Ld CIT(A) has rendered his decision on this issue following the decision rendered by co-ordinate bench of ITAT on an identical issue. Accordingly, we do not find any reason to interfere with the decision rendered by Ld CIT(A) on this issue. ITA No.1906/Bang/2018 & ITA No.229/PAN/2018 M/s. The Karnataka Bank Ltd., Mangalore Page 22 of 22 12. In the result, the appeal filed by the assessee is treated as allowed and the appeal of the revenue is treated as partly allowed for statistical purposes. Order pronounced in the open court on 27 th Dec, 2021 Sd/- (George George K.) Judicial Member Sd/- (B.R. Baskaran) Accountant Member Bangalore, Dated 27 th Dec, 2021. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.