The Karnataka Bank Limited , Mangalore V. Principal Commissioner of Income Tax , Mangalore

ITA 2024/BANG/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5086 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 23-09-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 14-06-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOPINATH C.H.
• Keywords: Business income; Revision of order; Principle of natural justice; Earning of tax free income; Assessment record; Tax effect; Set aside
• Section: 143(3); 14A; 115JB; 22; 263; 12; 10; 11

Judgement Text

ITA NO.2024/BANG/2018 THE KARNATAKA BANK LIMITED, MANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.2024/BANG/2018 ASSESSMENT YEAR: 2014-15 THE KARNATAKA BANK LIMITED HEAD OFFICE, MAHAVEER CIRCLE KANKANADY MANGALORE 575 002 PAN NO : AABCT5589K VS. PRINCIPAL CIT MANGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI S. ANANTHAN, A.R. RESPONDENT BY : SHRI GOPINATH C.H., D.R. DATE OF H EARING : 23.09.2021 DATE OF PRONOUNCEMENT : 28.09.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING TH E REVISION ORDER DATED 28-03-2018 PASSED BY LD PR. CI T, MANGALURU U/S 263 OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR S HORT] FOR ASSESSMENT YEAR 2014-15. THE ASSESSEE IS CHALLENGI NG THE VALIDITY OF THE REVISION ORDER. 2. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSMENT IN THE HANDS OF THE ASSESSEE FOR AY 2014 -15 WAS COMPLETED BY THE AO ON 1.3.2016 U/S 143(3) OF THE A CT. ON EXAMINATION OF ASSESSMENT RECORD, THE LD PR CIT NOT ICED THAT THE ASSESSING OFFICER HAS MADE ADDITION U/S 14A OF THE ACT TO THE TUNE OF ITA NO.2024/BANG/2018 THE KARNATAKA BANK LIMITED, MANGALORE PAGE 2 OF 6 RS.51.44 CRORES, BUT HE DID NOT MAKE THE ADDITION O F SAME AMOUNT WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. THE LD PR. CIT NOTICED THAT THE AO HAS ACCEPTED THE BOOK PROFIT CO MPUTED BY THE ASSESSEE, WHEREIN THE ASSESSEE HAS NOT MADE ANY ADD ITION FOR EXPENSES RELATING TO EXEMPT INCOME AS REQUIRED UNDE R CLAUSE (F) OF EXPLANATION 1 TO SEC.115JB OF THE ACT. HENCE, THE LD PCIT TOOK THE VIEW THAT THE ASSESSMENT ORDER IS ERRONEOUS IN SO F AR AS IT IS PREJUDICIAL TO THE INTERESTS OF REVENUE. ACCORDING LY HE INITIATED REVISION PROCEEDINGS U/S 263 OF THE ACT. AFTER HEA RING THE ASSESSEE, LD PCIT SET ASIDE THE ASSESSMENT ORDER FOR THE PURP OSE OF RE- COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. ASSESS EE IS AGGRIEVED BY THE SAID ORDER PASSED BY LD PCIT. 3. THE LD A.R SUBMITTED THAT THE QUESTION WHETH ER THE PROVISIONS OF SEC.14A ARE APPLICABLE TO A BANKING COMPANY IS D EBATABLE ISSUE. HE SUBMITTED THAT THE HONBLE SUPREME COURT HAS DEL IVERED A JUDGEMENT RECENTLY IN THE CASE OF SOUTH INDIAN BANK LTD VS. CIT (2021 (9) TMI 566)(SC), WHEREIN THE HONBLE SUPREME COURT HAS EXPRESSED FOLLOWING VIEW:- 24. ANOTHER IMPORTANT JUDGMENT DEALING WITH SECTIO N 14A DISALLOWANCE WHICH MERITS CONSIDERATION IS GODREJ AND BOYCE MANU FACTURING COMPANY LTD. V. DCIT [(2017) 7 SCC 421. HERE THE ASSESSEE H AD ACCESS TO ADEQUATE INTEREST FREE FUNDS TO MAKE INVESTMENTS AND THE ISS UE PERTAINED TO DISALLOWANCE OF EXPENDITURE INCURRED TO EARN DIVIDE ND INCOME, WHICH WAS NOT FORMING PART OF TOTAL INCOME OF THE ASSESSEE. JUSTICE RANJAN GOGOI WRITING THE OPINION ON BEHALF OF THE DIVISION BENCH OBSERVED THAT FOR DISALLOWANCE OF EXPENDITURE INCURRED IN EARNING AN INCOME, IT IS A CONDITION PRECEDENT THAT SUCH INCOME SHOULD NOT BE INCLUDIBLE IN TOTAL INCOME OF ASSESSEE. THIS COURT ACCORDINGLY CONCLUDED THAT FOR ATTRACTING PROVISIONS OF SECTION 14A, THE PROOF OF FACT REGARDING SUCH EXPEN DITURE BEING INCURRED FOR EARNING EXEMPT INCOME IS NECESSARY. THE RELEVANT PO RTION OF JUSTICE GOGOIS JUDGMENT READS AS FOLLOW: 36. WHAT CANNOT BE DENIED IS THAT THE REQUIREM ENT FOR ATTRACTING THE PROVISIONS OF SECTION 14-A (1) OF TH E ACT IS PROOF OF THE FACT THAT THE EXPENDITURE SOUGHT TO BE DISALLOWED/D EDUCTED HAD ACTUALLY BEEN INCURRED IN EARNING THE DIVIDEND INCO ME. ITA NO.2024/BANG/2018 THE KARNATAKA BANK LIMITED, MANGALORE PAGE 3 OF 6 25. PROCEEDING NOW TO ANOTHER ASPECT, IT IS SEEN TH AT THE CENTRAL BOARD OF DIRECT TAXES (CBDT) HAD ISSUED THE CIRCULAR NO. 18 OF 2015 DATED 02.11.2015, WHICH HAD ANALYZED AND THEN EXPLAINED T HAT ALL SHARES AND SECURITIES HELD BY A BANK WHICH ARE NOT BOUGHT TO M AINTAIN STATUTORY LIQUIDITY RATIO (SLR) ARE ITS STOCK-IN-TRADE AND NO T INVESTMENTS AND INCOME ARISING OUT OF THOSE IS ATTRIBUTABLE, TO BUSINESS O F BANKING. THIS CIRCULAR CAME TO BE ISSUED IN THE AFTERMATH OF PAGE 18 OF 22 CIT VS. NAWANSHAHAR CENTRAL COOPERATIVE BANK LTD.12 WHEREIN THIS COURT HAD HELD THAT INVESTMENTS MADE BY A BANKING CONCERN IS PART OF TH EIR BANKING BUSINESS. HENCE THE INCOME EARNED THROUGH SUCH INVESTMENTS WO ULD FALL UNDER THE HEAD PROFITS & GAINS OF BUSINESS. THE PUNJAB AND HA RYANA HIGH COURT, IN THE CASE OF PR. CIT, VS. STATE BANK OF PATIALA13 WH ILE ADVERTING TO THE CBDT CIRCULAR, CONCLUDED CORRECTLY THAT SHARES AND SECUR ITIES HELD BY A BANK ARE STOCK IN TRADE, AND ALL INCOME RECEIVED ON SUCH SHA RES AND SECURITIES MUST BE CONSIDERED TO BE BUSINESS INCOME. THAT IS WHY SE CTION 14A WOULD NOT BE ATTRACTED TO SUCH INCOME. RELYING ON THIS DECISION, THE LD A.R SUBMITTED THAT THE QUESTION OF MAKING ANY DISALLOWANCE U/S 14A OF THE ACT FOR A BA NKING COMPANY IS A DEBATABLE ISSUE AND HENCE THE IMPUGNED ASSESSM ENT ORDER CANNOT BE CONSIDERED AS ERRONEOUS AND PREJUDICIAL T O THE INTERESTS OF REVENUE. HE FURTHER SUBMITTED THAT THE CO-ORDINATE BENCH OF TRIBUNAL HAS QUASHED REVISION ORDER PASSED ON IDENT ICAL SET OF FACTS IN THE CASE OF M/S ROBERT BOSCH ENGINEERING & BUSIN ESS SOLUTIONS P LTD VS. DCIT (2020)(1) TMI 451). THE LD A.R ALSO F AIRLY ADMITTED THAT ANOTHER CO-ORDINATE BENCH HAS UPHELD REVISION PROCE EDINGS ON IDENTICAL SET OF FACTS BY MODIFYING THE DIRECTION G IVEN BY LD PCIT IN THE CASE OF TANGLIN DEVELOPMENT LTD (ITA NO.1527 (B ANG)/2018 DATED 29-06-2020. HE FURTHER SUBMITTED THAT THE DELHI SP ECIAL BENCH HAS HELD IN THE CASE OF VIREET INVESTMENTS P LTD (2017) (82 TAXMANN.COM 415)(SB) THAT THE DISALLOWANCE COMPUTED U/S 14A CAN NOT BE ADOPTED FOR MAKING ADDITION UNDER CLAUSE (F) TO EXPLANATION 1 TO SEC.115JB OF THE ACT. ACCORDINGLY HE SUBMITTED THAT THE DIRECTI ON GIVEN BY LD PCIT TO MAKE ADDITION OF RS.51.44 CRORES, BEING THE AMOU NT COMPUTED U/S 14A OF THE ACT, UNDER CLAUSE (F) WHILE COMPUTING BO OK PROFIT IS CONTRARY TO THE DECISION RENDERED BY THE SPECIAL BE NCH. ITA NO.2024/BANG/2018 THE KARNATAKA BANK LIMITED, MANGALORE PAGE 4 OF 6 4. ON THE CONTRARY, THE LD D.R SUPPORTED THE ORD ER PASSED BY LD PR. CIT AND SUBMITTED THAT THE ASSESSING OFFICER HA S FAILED TO APPLY LAW PROPERLY AND HENCE THE ASSESSMENT ORDER WAS REN DERED ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVEN UE. 5. WE HEARD THE PARTIES AND PERUSED THE RECORD. IN MALABAR INDUSTRIAL CO. LTD. V. CIT [2000] 243 ITR 83, THE H ON'BLE SUPREME COURT HELD THAT THE PROVISION OF 263 OF THE ACT CAN NOT BE INVOKED TO CORRECT EACH AND EVERY TYPE OF MISTAKE OR ERROR COM MITTED BY THE ASSESSING OFFICER AND IT IS ONLY WHEN AN ORDER IS E RRONEOUS THAT THE SECTION WILL BE ATTRACTED. THE SUPREME COURT HELD T HAT AN INCORRECT ASSUMPTION OF FACT OR AN INCORRECT APPLICATION OF L AW, WILL SATISFY THE REQUIREMENT OF THE ORDER BEING ERRONEOUS. AN ORDER PASSED IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE OR WITHOUT APP LICATION OF MIND, WOULD BE AN ORDER FALLING IN THAT CATEGORY. WITH RE GARD TO THE EXPRESSION 'PREJUDICIAL TO THE INTERESTS OF THE REV ENUE', THE SUPREME COURT HELD, IT IS OF WIDE IMPORT AND IS NOT CONFINE D TO A LOSS OF TAX. WHAT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE IS EXPLAINED IN THE JUDGMENT OF THE SUPREME COURT (HEAD NOTE) : 'THE PHRASE 'PREJUDICIAL TO THE INTERESTS OF THE RE VENUE' HAS TO BE READ IN CONJUNCTION WITH AN ERRONEOUS ORDER PASSED BY THE A SSESSING OFFICER. EVERY LOSS OF REVENUE AS A CONSEQUENCE OF AN ORDER OF THE ASSESSING OFFICER, CANNOT BE TREATED AS PREJUDICIAL TO THE INTERESTS OF THE R EVENUE, FOR ITA NO.1527(BANG/2018 EXAMPLE, WHEN AN INCOME-TAX OFFIC ER ADOPTED ONE OF THE COURSES PERMISSIBLE IN LAW AND IT HAS RESULTED IN LOSS OF REVENUE, OR WHERE TWO VIEWS ARE POSSIBLE AND THE INCOME- TAX OFFICER HAS TAKEN ONE VIEW WITH WHICH THE COMMISSIONER DOES NOT AGREE, IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE U NLESS THE VIEW TAKEN BY THE INCOME-TAX OFFICER IS UNSUSTAINABLE IN LAW.' 6. A PERUSAL OF THE IMPUGNED ASSESSMENT ORDER W OULD SHOW THAT THE ASSESSING OFFICER HAS ACCEPTED THE BOOK PROFIT DECLARED BY THE ASSESSEE U/S 115JB OF THE ACT WITHOUT EXAMINING THE SAME. IT IS PERTINENT TO NOTE THAT CLAUSE (F) OF EXPLANATION 1 TO SEC.115JB OF THE ACT PROVIDES THAT THE EXPENDITURE RELATABLE TO ANY INCOME TO WHICH ITA NO.2024/BANG/2018 THE KARNATAKA BANK LIMITED, MANGALORE PAGE 5 OF 6 SEC. 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLA USE (38) THEREOF) OR SECTION 11 OR SECTION 12 APPLY, SHOULD BE ADDED TO NET PROFIT WHILE COMPUTING THE BOOK PROFIT. EVEN THOUGH THE ASSESSIN G OFFICER HAS WORKED DISALLOWANCE U/S 14A OF THE ACT WHILE COMPUT ING TOTAL INCOME UNDER NORMAL PROVISIONS OF THE ACT, YET HE H AS OMITTED TO EXAMINE THE APPLICABILITY OF CLAUSE (F) OF EXPLANAT ION 1 TO SEC.115JB. HENCE OMISSION TO APPLY PROVISIONS OF THE ACT WOULD MAKE THE ASSESSMENT ORDER ERRONEOUS AND IN VIEW OF THE CORRE SPONDING TAX EFFECT, IT IS PREJUDICIAL TO THE INTERESTS OF REVEN UE ALSO. 7. WE NOTICE THAT THE LD PR CIT HAS TAKEN THE VIE W THAT THE AMOUNT DISALLOWED U/S 14A OF THE ACT WHILE COMPUTING TOTAL INCOME UNDER NORMAL PROVISIONS OF THE ACT SHOULD BE ADOPTED FOR MAKING ADDITION TO NET PROFIT UNDER CLAUSE (F) TO EXPLANATION 1 TO SEC. 115JB OF THE ACT. WE NOTICE THAT THE VIEW SO EXPRESSED BY LD PR. CIT WAS AGAINST THE DECISION RENDERED BY SPECIAL BENCH OF TRIBUNAL IN THE CASE OF VIREET INVESTMENTS (P) LTD (SUPRA), WHEREIN IT WAS HELD THAT THE DISALLOWANCE COMPUTED U/S 14A FOR THE PURPOSE OF CO MPUTING INCOME UNDER NORMAL PROVISIONS OF THE ACT CANNOT BE IMPORT ED FOR THE PURPOSE OF ADDITION TO BE MADE UNDER CLAUSE (F) TO EXPLANATION 1 TO SEC.115JB FOR COMPUTING BOOK PROFIT, I.E., THE AMOU NT TO BE ADDED UNDER ABOVE SAID CLAUSE HAS TO BE COMPUTED FROM THE PROFIT AND LOSS ACCOUNT INDEPENDENTLY. 8. EVEN THOUGH THE LD A.R RAISED THE CONTENTIO NS ON APPLICABILITY OF PROVISIONS OF SEC.14A, YET WE ARE OF THE VIEW TH AT THE ISSUE AGITATED HERE RELATES TO THE COMPUTATION OF BOOK PROFIT U/S 115JB OF THE ACT AND FURTHER THE AO DID NOT EXAMINE APPLICABILITY OF CLAUSE (F) TO EXPLANATION 1 TO SEC. 115JB WHILE FRAMING THE ASSES SMENT ORDER. THE SAME RENDERS THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. ITA NO.2024/BANG/2018 THE KARNATAKA BANK LIMITED, MANGALORE PAGE 6 OF 6 9. WE HAVE NOTICED EARLIER THAT THE LD PCIT HAS EXPRESSED THE VIEW, WHICH IS CONTRARY TO THE DECISION RENDERED BY THE S PECIAL BENCH IN THE CASE OF VIREET INVESTMENTS P LTD (SUPRA). ACCO RDINGLY, WE MODIFY THE ORDER PASSED BY LD PR. CIT AND DIRECT THE AO TO EXAMINE APPLICABILITY OF CLAUSE (F) TO EXPLANATION 1 TO SEC .115JB OF THE ACT INDEPENDENTLY WITHOUT HAVING REGARD TO THE PROVISIO NS OF SEC.14A OF THE ACT. AFTER AFFORDING ADEQUATE OPPORTUNITY OF B EING HEARD AND UNTRAMMELED BY THE VIEW EXPRESSED BY LD PCIT, THE A O MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. 10. IN THE RESULT, THE APPEAL FILED BY THE ASS ESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH SEPT, 2021 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 28 TH SEPT, 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.