ACIT, Hubli V. Karnataka Vikas Grameen Bank, Dharwad

ITA 673/BANG/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4838 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 30-08-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 19-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Opportunity of being heard; Bad and doubtful debts; Revised return; Revenue expenditure
• Section: 143(3); 37(1); 194C; 201(1); 27; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N.V VASUDEVAN, JUDICIAL MEMBE R AND SHRI JASON P BOAZ, ACCOUNTANT M EMBER ITA NOS.673 & 674/BANG/2014 (ASST. YEARS 2009-10 & 2010-11) THE JT. COMMISSIONER OF INCOME-TAX, RANGE-2, HUBLI. . RESPONDENT VS. M/S KARNATAKA VIKAS GRAMEENA BANK HEAD OFFICE, CTS NO. 52/B1/A1/D.H NO.133A, H.O BUILDING BELGAUM ROAD, D.N KOPPA, DHARWAD. . APPELLANT PAN NO. AAAAK6324Q. ITA NO.684/BANG/2014 (ASST. YEARS 2010-11) BY ASSESSEE) REVENUE BY : SHRI C.H SUNDAR RAO, CIT ASSESSEE BY : SHRI A SHANKAR, ADVOCATE DATE OF HEARING : 16-4-2018 DATE OF PRONOUNCEMENT : 25-4-2018 O R D E R PER SHRI N.V VASUDEVAN, JUDICIAL MEMBER : ITA NO. 673/BANG/2014 IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 26/2/2014 OF COMMISSIONER OF INCOME-TAX (APPE ALS), HUBLI RELATING TO THE ASSESSMENT YEAR 2009-10. ITA NO.684/BANG/2014 IS AN APPEAL BY THE ASSESSEE WHILE ITA NO.674/BANG/2014 IS AN APPEAL O F THE REVENUE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 26/2/2014 OF COMMISSIONER OF INCOME-TAX (APPEALS), HUBLI RELATING TO THE ASSE SSMENT YEAR 2010-110. SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEALS, THESE APPEALS WERE HEARD TOGETHER. WE DEEM IT CONVENIENT TO PASS A COMMON O RDER. ITA NOS.673, 674 & 684/B/14 2 673/BANG/2014 (REVENUES APPEAL FOR ASST. YEAR 2009-10) 2. GROUND NOS.1, 7 AND 8 RAISED BY THE REVENUE ARE GENERAL IN NATURE AND CALLS NO SPECIFIC ADJUDICATION. 3. GROUND NOS.2 TO 4 RAISED BY THE REVENUE READS AS FOLLOWS:- 2. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, IS THE LEARNED CIT(A) CORRECT IN ALLOWING DEDUCTION OF RS.177.38 C RORES U/S.36(1)(VIIA), EVEN WHEN THE PROVISION MADE IN BO OKS OF ACCOUNTS BY THE ASSESSEE WAS ONLY FOR RS.9.11 CRORES. 3. WHETHER QQ FACTS & CIRCUMSTANCES OF THE CASE, IS THE LEARNED CIT(A) RIGHT IN RELYING ON THE DECISION OF CATHOLIC SYRIAN BANK LTD VS. CIT - 343 ITR 270 IN RESPECT OF SEC.36(1)(VIIA) WHEN THE FACTS AND ISSUES INVOLVED IN BOTH CASES ARE DIFFERENT. 4. THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT DEDUCTION U/S. 36(1)(VIIA) CAN ONLY BE CLAIMED TO THE EXTENT OF PROVISION MADE IN BOOKS AND SUBJECTED TO THE RESTRICTIONS MENTIONED I N SEC.36(1)(VIIA). 4. THE ASSESSEE IS A RURAL REGIONAL BANK ENGAGED IN THE BUSINESS OF BANKING. IN THE COURSE OF ASSESSMENT PROCEEDINGS U /S 143(3) OF THE INCOME- TAX ACT, 1961 (ACT) FOR AY 2009-10, THE AO NOTICED THAT THE ASSSESSEE HAD CLAIMED DEDUCTION ON ACCOUNT OF PROVISION FOR BAD A ND DOUBTFUL DEBTS FOR A SUM OF RS.9,11,50,296/-. THE SUM OF RS.9,11,50,296 /- IS THE SUM WHICH WAS DEBITED TOWARDS PROVISION FOR BAD AND DOUBTFUL DEBT S BY THE ASSESSEE IN ITS PROFIT & LOSS ACCOUNT. THE ASSESSEE FILED REVISED RETURN OF INCOME ON 13/1/2010 WITHDRAWING THE CLAIM FOR DEDUCTION ON AC COUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS U/S 36(1)(VIIA) OF THE OF RS .9,11,50,296/-AND SUBSTITUTED THE CLAIM FOR A SUM OF RS.177,38,45,734/-. IT IS N OT DISPUTED BY THE ASSESSEE THAT THE AMOUNT DEBITED IN THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS WAS ONLY A SU M OF RS.9,11,50,296/-. THE QUESTION BEFORE THE AO WAS WHETHER THE ASSESSEE CAN CLAIM DEDUCTION OF A SUM WHICH IS MUCH MORE THAN WHAT HAS BEEN DEBITED B Y THE ASSESSEE IN THE BOOKS OF ACCOUNT TOWARDS PROVISION FOR BAD AND DOUB TFUL DEBTS. THE AO HELD THAT DEDUCTION U/S 36(1)(VIIA) CANNOT BE MORE THAN WHAT HAS BEEN DEBITED BY THE ASSESSEE AS PROVISION IN THE PROFIT AND LOSS AC COUNT AND ACCORDINGLY REFUSED ITA NOS.673, 674 & 684/B/14 3 TO ALLOW THE CLAIM OF DEDUCTION AS MADE IN THE REVI SED RETURN OF INCOME FOR RS.177,38,45,734/-. 5. ON APPEAL BY THE ASSESSEE, THE CIT(A) ALLOWED TH E CLAIM OF THE ASSESSEE AS MADE IN THE REVISED RETURN OF INCOME AN D IN DOING SO FOLLOWED THE DECISION OF THE ITAT, BANGALORE BENCH IN THE CASE O F SYNDICATE BANK VS. DCIT, (2001) 72 TTJ (BANG) 744. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E HAS RAISED GROUND NOS.2 AND 3 BEFORE THE TRIBUNAL. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEARN ED DR SUBMITTED THAT AS LAID DOWN BY THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA VS. CIT 272 ITR 53 (P & H), C LAIM FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT CANNOT BE GREATER THAN T HE AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT AS PROVISION. OUR ATTENTIO N WAS DRAWN TO A DECISION OF THE ITAT BANGALORE IN THE CASE OF SYNDICATE BANK VS . DCIT (2014) 150 ITD 0103 (BANGALORE), WHEREIN THE HONBLE ITAT BANGALOR E BENCH PREFERRED TO FOLLOW THE VIEW TAKEN BY THE HONBLE PUNJAB & HARYA NA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA (SUPRA) RATHER THAN T HE DECISION OF THE SYNDICATE BANK (SUPRA) OF THE BANGALORE BENCH RELIED UPON BY THE LEARNED CIT(A) IN GIVING RELIEF TO THE ASSESSEE ON THIS ISSUE . THE LD. COUNSEL FOR THE ASSESSES SUBMITTED THAT THE DECISION OF THE BANGALORE BENCH OF ITAT IN THE CASE OF SYNDICATE BANK (SUPRA) SHOULD BE FOLLOWED BY THE TR IBUNAL IN PREFERENCE TO THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA (SUPRA)AND IN THIS REGARD SUB MITTED THAT THE DECISION OF CO-ORDINATE BENCH OF THE TRIBUNAL SHOULD BE FOLLOWE D IN PREFERENCE TO THE DECISION OF NON JURISDICTIONAL HIGH COURT DECISION. IN THIS REGARD, THE LD COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DEC ISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF PATIL VIJAYAKUM AR & OTHERS VS. UNION OF INDIA 151 ITR 48 (KAR). 8. WE HAVE CONSIDERED THE RIVAL SUBMISSION. THE PR OVISIONS OF SECTION 36(1)(VIIA)(A) OF THE ACT LAYS DOWN AS FOLLOWS: ITA NOS.673, 674 & 684/B/14 4 VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOUB TFUL DEBTS MADE BY (A) A SCHEDULED BANK NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A CO- OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIE TY OR A PRIMARY CO- OPERATIVE AGRICULTURAL AND RURAL DEVELO PMENT BANK, AN AMOUNT NOT EXCEEDING SEVEN AND ONE-HALF PE R CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DED UCTION UNDER THIS CLAUSE AND CHAPTER VI-A) AND AN AMOUNT N OT EXCEEDING TEN PER CENT OF THE AGGREGATE AVERAGE ADV ANCES MADE BY THE RURAL BRANCHES 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 ALLOWED IN ANY OF THE RELEVANT ASSESSMENT YEARS, DEDUCTION IN RESPECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFI ED BY THE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS AS SETS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY IT IN THIS BEHALF, FOR AN AMOUNT NOT EXCEEDING FIVE PER CENT OF THE AMOUNT OF SUCH ASSETS SHOWN IN THE BOOKS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR. 9. IN THE CASE OF SYNDICATE BANK (SUPRA) 78 ITD 103 (BANG.), THE BANGALORE BENCH OF ITAT TOOK THE VIEW THAT IRRESPEC TIVE OF THE DEBIT TO THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS (PBDD), AN ASSESSEE IS ENTITLED TO 10 PERCENT OF TH E AARA AS DEDUCTION U/S.36(1)(VIIA) OF THE ACT. THE RELEVANT OBSERVATIO NS OF THE TRIBUNAL IN THE AFORESAID DECISION WAS AS FOLLOWS: 20. THE LEARNED CIT HAS ALSO ACTED UNDER THE MISCO NCEPTION THAT DEDUCTION UNDER CL. (VIIA) IS RELATED TO THE A CTUAL AMOUNT OF PROVISION MADE BY THE ASSESSEE FOR BAD AND DOUBT FUL DEBTS. THE TRUE MEANING OF THE CLAUSE, AS INDICATED EARLIE R, IS THAT ONCE A PROVISION FOR BAD AND DOUBTFUL DEBTS IS MADE BY A SCHEDULED BANK HAVING RURAL BRANCHES, THE ASSESSEE IS ENTITLED TO A DEDUCTION WHICH IS QUANTIFIED NOT WITH RESPECT TO THE AMOUNT PROVIDED FOR IN THE ACCOUNTS, BUT WITH RESPE CT TO A CERTAIN PERCENTAGE OF THE TOTAL INCOME AND ALSO A C ERTAIN PERCENTAGE OF THE AGGREGATE AVERAGE ADVANCES MADE B Y THE RURAL BRANCHES OF THE BANK. IN OTHER WORDS, THIS IS A SPECIFIC DEDUCTION GIVEN BY THE STATUTE IRRESPECTIVE OF THE QUANTUM PROVIDED BY THE ASSESSEE IN ITS ACCOUNTS TOWARDS PR OVISION FOR BAD AND DOUBTFUL DEBTS. ITA NOS.673, 674 & 684/B/14 5 10. HOWEVER THE BANGALORE BENCH OF ITAT IN THE CASE OF SYNDICATE BANK (SUPRA) 150 ITD 103 (BANG.) NOTICED THAT THE ITAT B ANGALORE BENCH IN THE CASE OF CANARA BANK IN ITA NO.58/BANG/2004 DATED 9. 6.2006 CONSIDERED IN THE CASE OF CANARA BANK IN ITA NO.58/BANG/2004 DATE D 9.6.2006 CONSIDERED THE DECISION OF THE ITAT IN THE CASE OF SYNDICATE B ANK 78 ITD 103(BANG) AND THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA (SUPRA) AND HELD THAT THE DEC ISION RENDERED BY THE HONBLE HIGH COURT HAS TO BE FOLLOWED. THE ABOVE DE CISION THOUGH OF A NON JURISDICTION HIGH COURT WAS FOLLOWED AS THE SAID DE CISION OF THE HONBLE HIGH COURT WAS RENDERED AFTER THE DECISION IN THE CASE O F SYNDICATE BANK 78 ITD 103 (BANG.). THE TRIBUNAL HELD THAT JUDICIAL DISCI PLINE DEMANDS THAT THE TRIBUNAL SHOULD FOLLOW THE LATER DECISION WHICH HAS CONSIDERED BOTH THE DECISIONS ON THE ISSUE. THE TRIBUNAL FOLLOWING THE SAID DECISION HELD DEDUCTION ON ACCOUNT OF PROVISION FOR BAD AND DOUBT FUL DEBTS U/S.36(1)(VIIA) OF THE ACT HAS TO BE ALLOWED ONLY TO THE EXTENT SUC H PROVISION IS ACTUALLY DEBITED IN THE PROFIT & LOSS ACCOUNT BY THE ASSESSE E FOR THE RELEVANT PREVIOUS YEAR. WE THEREFORE RESPECTFULLY FOLLOWING THE DEC ISION OF THE TRIBUNAL IN THE CASE OF CANARA BANK (SUPRA), ALLOW GR.NO.2 TO 4 RAI SED BY THE REVENUE AND HOLD THAT THE DISALLOWANCE MADE BY THE AO WAS PROPE R AND THE ASSESSEE IS ENTITLED TO DEDUCTION ONLY TO THE EXTENT PBDD IS DE BITED TO THE P & L A/C. THUS GR.NO.2 TO 4 3 RAISED BY THE REVENUE ARE ALLOW ED. 11. AS FAR AS THE DECISION OF THE HONBLE KARNATAK A HIGH COURT IN THE CASE OF PATIL VIJAYAKUMAR (SUPRA) CITED BY THE LEARNED COUN SEL FOR THE ASSESSEE IS CONCERNED, WE FIND THAT THE ISSUE IN THE AFORESAID CASE WAS AS TO WHETHER THE INCOME-TAX ACT 1961 BEING ALL INDIA STATUTE, THE VI EW EXPRESSED BY ONE HIGH COURT SHOULD BE FOLLOWED BY THE OTHER HIGH COURTS O F DIFFERENT STATE. THE HONBLE KARNATAKA HIGH COURT TOOK THE VIEW THAT DEC ISION RENDERED BY THE HIGH COURT IS BINDING ONLY ON THE AUTHORITIES AND C OURTS SUBORDINATE TO THE SAID HIGH COURT AND WILL NOT BE BINDING ON THE HIGH COURT OF ANOTHER STATE AND COURTS AND TRIBUNALS FUNCTIONING IN THAT OTHER STAT E. THE TRIBUNAL IN THE CASE OF IN THE CASE OF CANARA BANK IN ITA NO.58/BANG/2004 DATED 9.6.2006 CONSIDERED THE DECISION OF THE ITAT IN THE CASE OF SYNDICATE BANK 78 ITD 103(BANG) AND THE DECISION OF THE HONBLE PUNJAB AN D HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA (SUPRA) AND HELD THAT THE DECISION RENDERED BY ITA NOS.673, 674 & 684/B/14 6 THE HONBLE HIGH COURT HAS TO BE FOLLOWED. THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF PATIL VIJAYAKUMAR (SUPRA) DEAL T WITH ARGUMENT THAT DECISION OF ONE HIGH COURT OF A STATE IS NOT BINDIN G ON THE HIGH COURT OF ANOTHER STATE. IN THE PRESENT CASE THE ONLY DECISI ON OF HONBLE HIGH COURT AVAILABLE ON THE ISSUE WHETHER DEDUCTION U/S.36(1)( VIIA) OF THE ACT HAS TO BE ALLOWED ONLY ON THE BASIS OF ACTUAL DEBIT TOWARDS P BDD IN THE PROFIT & LOSS ACCOUNT BY THE ASSESSEE, IS THE DECISION OF THE HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA (SU PRA). THE QUESTION THEREFORE IS AS TO WHETHER THE CO-ORDINATE TRIBUNAL DECISION HAS TO BE FOLLOWED IN PREFERENCE TO A NON JURISDICTIONAL HIGH COURT DE CISION. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF PATIL VIJAYAKUM AR (SUPRA) HAS NOT DEALT WITH ANY SUCH ISSUE. GOING BY THE HIERARCHICAL SYS TEM IN OUR COUNTRY, THIS TRIBUNAL IN THE CASE OF CANARA BANK ITA NO. 58/BANG /2004 DATED 9.6.2006, AFTER CONSIDERING THE DECISION RENDERED IN THE CASE OF SYNDICATE BANK 78 ITD 103(BANG.) PREFERRED TO FOLLOW THE DECISION OF HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF STATE BANK OF PATIALA (SU PRA) THOUGH OF A NON JURISDICTIONAL HIGH COURT THAN THE DECISION OF CO-O RDINATE BENCH IN THE CASE OF SYNDICATE BANK 78 ITD 103 (BANG.). IN OUR VIEW THEREFORE THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF PATIL V IJAYAKUMAR (SUPRA), DOES NOT SUPPORT THE PLEA OF THE ASSESSEE. WE, THEREFOR E HOLD THAT THE RELIEF ALLOWED BY THE CIT(A) IN THE MATTER OF ALLOWING DEDUCTION F OR PROVISION FOR BAD AND DOUBTFUL DEBTS WAS NOT IN ACCORDANCE WITH LAW. THE ADDITION MADE BY THE AO IS, THEREFORE, RESTORED. THE GROUND NOS. 2 AND 4 R AISED BY THE REVENUE ARE ALLOWED. 12. GROUND NOS. 5 AND 6 RAISED BY THE REVENUE IN IT S APPEAL READS AS FOLLOWS:- 5. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, I S THE LEARNED CIT(A) CORRECT IN HOLDING THAT RS.778.48 CR ORES AS ELIGIBLE FOR DEDUCTION U/S.36(1)(VIII) OF THE ACT. 6. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, IS THE LEARNED CIT(A) CORRECT IN ALLOWING DEDUCTION EVEN T HOUGH THE FOLLOWING ADVANCES PRIMA FADE ARE NOT ELIGIBLE U/S. 36(1)(VIII) FOR DEDUCTION. ITA NOS.673, 674 & 684/B/14 7 13. BEFORE WE PROCEED TO DISCUSS THESE GROUNDS, IT IS USEFUL TO SET OUT THE PROVISION OF SEC. 36(1)(VIII) OF THE ACT WHICH ALLO WS CERTAIN DEDUCTIONS TO BANKING COMPANIES AND IT READS AS FOLLOWS:- (VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED A ND MAINTAINED BY A SPECIFIED ENTITY, AN AMOUNT NOT EXCEEDING TWENTY PE R CENT. OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UND ER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION (BEFO RE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RE SERVE ACCOUNT: PROVIDED THAT WHERE THE AGGREGATE OF THE AMOUNTS CARRIED TO SUCH RESERVE ACCOUNT FROM TIME TO TIME EXCEEDS TWICE THE AMOUNT OF THE PAID UP SHARE CAPITAL AND OF THE GENERAL RESERV ES OF THE SPECIFIED ENTITY, NO ALLOWANCE UNDER THIS CLAUSE SH ALL BE MADE IN RESPECT OF SUCH EXCESS. EXPLANATION.IN THIS CLAUSE, (A) SPECIFIED ENTITY MEANS, (I) A FINANCIAL CORPORATION SPECIFIED IN SECTION 4A OF THE COMPANIES ACT, 1956 (1 OF 1956); (II) A FINANCIAL CORPORATION WHICH IS A PUBLIC SECT OR COMPANY; (III) A BANKING COMPANY; (IV) A CO-OPERATIVE BANK OTHER THAN A PRIMARY AGRIC ULTURAL CREDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK; (V) A HOUSING FINANCE COMPANY; AND (VI) ANY OTHER FINANCIAL CORPORATION INCLUDING A PU BLIC COMPANY; (B) ELIGIBLE BUSINESS MEANS, ITA NOS.673, 674 & 684/B/14 8 (I) IN RESPECT OF THE SPECIFIED ENTITY REFERRED TO IN SUB-CLAUSE (I) OR SUB-CLAUSE (II) OR SUB-CLAUSE (III) OR SUB-CLAUSE ( IV) OF CLAUSE (A), THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR (A) INDUSTRIAL OR AGRICULTURAL DEVELOPMENT; (B) DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA ; OR (C) DEVELOPMENT OF HOUSING IN INDIA;] (II) IN RESPECT OF THE SPECIFIED ENTITY REFERRED TO IN SUB-CLAUSE (V) OF CLAUSE (A), THE BUSINESS OF PROVIDING LONG-TERM FIN ANCE FOR THE CONSTRUCTION OR PURCHASE OF HOUSES IN INDIA FOR RES IDENTIAL PURPOSES; AND (III) IN RESPECT OF THE SPECIFIED ENTITY REFERRED T O IN SUB-CLAUSE (VI) OF CLAUSE (A), THE BUSINESS OF PROVIDING LONG-TERM FIN ANCE FOR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA; (C) BANKING COMPANY MEANS A COMPANY TO WHICH THE BANKING REGULATION ACT, 1949 (10 OF 1949) APPLIES AND INCLU DES ANY BANK OR BANKING INSTITUTION REFERRED TO IN SECTION 51 OF THAT ACT; (D) CO-OPERATIVE BANK, PRIMARY AGRICULTURAL CRED IT SOCIETY AND PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELO PMENT BANK SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN THE EXPLANATION TO SUB-SECTION (4) OF SECTION 80P; (E) HOUSING FINANCE COMPANY MEANS A PUBLIC COMPAN Y FORMED OR REGISTERED IN INDIA WITH THE MAIN OBJECT OF CARRYIN G ON THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR CONSTRU CTION OR PURCHASE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSE S; (F) PUBLIC COMPANY SHALL HAVE THE MEANING ASSIGNE D TO IT IN SECTION 3 OF THE COMPANIES ACT, 1956 (1 OF 1956); (G) INFRASTRUCTURE FACILITY MEANS (I) AN INFRASTRUCTURE FACILITY AS DEFINED IN THE EX PLANATION TO CLAUSE (I) OF SUB-SECTION (4) OF SECTION 80-IA, OR ANY OTH ER PUBLIC FACILITY OF A SIMILAR NATURE AS MAY BE NOTIFIED BY THE BOARD IN THIS BEHALF IN THE OFFICIAL GAZETTE AND WHICH FULFILS THE CONDI TIONS AS MAY BE PRESCRIBED; (II) AN UNDERTAKING REFERRED TO IN CLAUSE (II) OR C LAUSE (III) OR CLAUSE (IV) OR CLAUSE (VI) OF SUB-SECTION (4) OF SECTION 8 0-IA; AND (III) AN UNDERTAKING REFERRED TO IN SUB-SECTION (10 ) OF SECTION 80-IB; (H) LONG-TERM FINANCE MEANS ANY LOAN OR ADVANCE W HERE THE TERMS UNDER WHICH MONEYS ARE LOANED OR ADVANCED PROVIDE F OR ITA NOS.673, 674 & 684/B/14 9 REPAYMENT ALONG WITH INTEREST THEREOF DURING A PERI OD OF NOT LESS THAN FIVE YEARS. 14. AS CAN BE SEEN FROM THE AFORESAID PROVISION, DE DUCTION IS ALLOWED TO SPECIFIED ENTITY (THE ASSESSEE IS A SPECIFIED ENTIT Y) OF 20% PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS OR PROFESSION (BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE). THE ASSESSEE HAS TO CREATE AND MAINTAIN A SPECIAL RESER VE A/C AND TRANSFER TO SUCH RESERVE ACCOUNT THE SUM WHICH IS CLAIMED AS DE DUCTION U/S.36(1)(VIII) OF THE ACT. ELIGIBLE BUSINESS HAS BEEN DEFINED IN EXPLANATIO N (B) TO SEC. 36(1)(VIII) OF THE ACT WHICH IS PROVIDING LONG TERM FINANCE FOR DEVELOPMENT OF INFRASTRUCTURE FACILITY. EXPLANATION (G) TO SEC. 3 6(1)(VIII) DEFINES WHAT IS INFRASTRUCTURE FACILITY FOR THE PURPOSE OF THE AC T. THE DISPUTE BETWEEN THE ASSESSEE AND THE REVENUE IN THE PRESENT CASE IS THE MANNER IN WHICH THE DEDUCTION U/S 36(1)((VIII) OF THE ACT HAS BEEN ALLO WED BY THE AO AND THE CIT(A). THE AO ALLOWED DEDUCTION OF RS.1,58,62,378 /- AS AGAINST THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF A SUM OF RS.2.91 C RORES. THE BASIS ON WHICH THE AO ARRIVED AT THE AMOUNT ALLOWED BY HIM AS DEDU CTION WAS AS FOLLOWS:- 15. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THE B ASIS ON WHICH THE AO ARRIVED AT A SUM OF RS.374.56 CRORES AS ADVANCES GI VEN FOR ELIGIBLE BUSINESS WAS NOT CORRECT. THE ASSESSEE POINTED OUT TO THE C IT(A) THAT ITS GROSS LOANS AND ADVANCES AS ON 31.03.2009 WAS RS. 2626.29 CRORE S ( AS PER SCHEDULE 9 OF BALANCE SHEET). THE LOANS AND ADVANCES SHOWN IN THE BALANCE SHEET AS AT ITA NOS.673, 674 & 684/B/14 10 31.03.2009 WAS RS. 2526.28 CRORES WHICH WAS NET OF RS. 100.01 CRORES PROVISION FOR BAD AND DEBTS (DEDUCTED FROM THE GROS S ADVANCES). FURTHER OUT OF RS. 2626.29 CRORES GROSS OUTSTANDING, ADVANCES AND THE LOANS GIVEN FOR A PERIOD OF FIVE YEARS AND MORE PERTAINING TO ELIGIBL E BUSINESS WAS RS. 778.48 CRORES AND THE LIST OF SUCH ADVANCES WAS GIVEN TO T HE ASSESSING OFFICER IN THE COURSE OF ASSESSMENT PROCEEDINGS. THE ASSESSEE FUR THER POINTED OUT THAT AT PAGE 68 OF THE ANNUAL ACCOUNTS OF THE ASSESSEE, IT HAS GIVEN MATURITY WISE ASSETS AND LIABILITIES MANAGEMENT FIGURES (ALM) WHI CH WAS AS FOLLOWS: 16. THE ASSESSEE POINTED OUT THAT THE AO HAD TAKEN THE LONG TERM FINANCE FROM THE TABLE ABOVE AT RS.374.56 CRORES BY CONSIDE RING THE LOANS GIVEN BY THE ASSESSEE FOR A PERIOD ABOVE 5 YEARS WAS RS.374. 56 CRORES. THE ASSESSEE POINTED OUT THAT THE ABOVE TABLE SHOWED THE REMAINI NG TERM OF LOANS AND ADVANCES AS ON 31.03.2009 (MATURITY PATTERN) AND NO T THE TENURE OF THE LOANS GIVEN. THE ASSESSEE ALSO SUBMITTED THAT AS PER RB I, THE BANKS HAVE TO GIVE ASSETS AND LIABILITIES MANAGEMENT (ALM) STATEMENT A S ON BALANCE SHEET DATE SHOWING MATURITY PATTERN OF DEPOSITS, ADVANCES , INVESTMENTS, ETC BUT IT DOES NOT INDICATE THE TENURE OF THE LOAN OR DEPOSIT S BUT ONLY MATURITY PATTERN OF DEPOSITS AND ADVANCES. THE ASSESSEE POINTED OUT THAT THE LEARNED ASSESSING OFFICER WITHOUT DISCUSSING THE ALM STATEMENT GIVEN IN THE ANNUAL REPORT WITH THE ASSESSEE HAS MISTAKEN THE MATURITY PATTERN OF LOANS AND ADVANCES AS ITA NOS.673, 674 & 684/B/14 11 ON 3103.2009 AS TENURE OF LOAN SANCTIONED AND ARRIV ED THE ELIGIBLE ADVANCES AT RS. 374.56 CRORES AS THE LOANS FOR MORE THAN 5 Y EARS PERIOD AND ELIGIBLE LONG TERM LOANS AS PER SECTION 36 (I)(VIII). THE EL IGIBLE ADVANCES SANCTIONED FOR A PERIOD OF FIVE YEARS AND MORE WAS RS. 778.48 CRORES AS ON 31.03.2009. THE ASSESSEE THUS SUBMITTED THAT THE LEARNED ASSESS ING OFFICER HAS ERRED IN TAKING ELIGIBLE ADVANCES FOR THE PURPOSE 20%, DEDUC TION TOWARDS SPECIAL RESERVE U/S 36(I)(VIII) AND MISTAKEN THE MATURITY P ATTERN OF LOANS AS ON 31.03.2009 AS TENURE OF LOANS FOR THE PURPOSE OF DE DUCTION UNDER SECTION 36(I)(VIII). THE ASSESSEE PRAYED THAT THE ACTION O F THE AO WAS UNJUSTIFIED AND WRONGFUL DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS. 1,32,37,622.00 SHOULD BE ALLOWED. 17. AFTER EXAMINING THE VARIOUS CONTENTIONS PUT FO RTH BY THE ASSESSEE BEFORE HIM, THE CIT(A) ALLOWED THE RELIEF TO THE AS SESSEE OBSERVING AS FOLLOWS:- I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTENT S OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSIONS OF THE ASS ESSEE. THE HON'BLE JURISDICTIONAL ITAT, 'C' BENCH, BANGALORE I N THE CASE OF KARNATAKA VIKAS GRAMEENA BANK VS. ACIT, C-2(1), HUB LI ITA NO. 226 & 227/BANG/2012 (AY 2007-08 & 2008-09) IT WAS H ELD THAT: ' THE RIVAL ARGUMENTS AT LENGTH AND PERUSED AND CAR EFULLY CONSIDERED THE MATERIAL ON RECORD. ON AN APPRECIATI ON OF THE FACTS OF THE MATTER, WE FIND THAT THE LEARNED C IT (APPEALS) HAS ACCEPTED THAT THE ELIGIBLE ADVANCES A MOUNT TO RS. 1055.01 CRORES AND NOT RS. 456 CRORES AS ADO PTED BY THE AO. IT APPEARS THAT THE ERROR ON THE PART OF THE AO WAS DUE TO THE FACT THAT IN THE BREAK-UP OF ADVANCE S BASED ON AGEING ANALYSIS AS ON 31.03.2008, THE AMOUNT OF ADVANCES OUTSTANDING FOR A PERIOD OF MORE THAN 5 YE ARS AS ON 31.03.2008 WAS RS. 456 CRORES. THIS THE AO MISUNDERSTOOD TO BE THE TOTAL ELIGIBLE ADVANCES. TH E AO DOES NOT APPEAR TO HAVE CONSIDERED THE FACT THAT CE RTAIN ADVANCES WERE GIVEN FOR A PERIOD OF MORE THAN 5 YEA RS, MAY BE OUTSTANDING FOR A PERIOD OF LESS THAN FIVE Y EARS AS ON 31.03.2008 DUE TO REPAYMENTS BEING MADE IN ACCORDANCE WITH THE TERMS OF LOANS AND ADVANCES. IT APPEARS TO BE A CLEAR CASE OF MISUNDERSTANDING OF F ACTS ON THE PART OF THE AO. WITH RESPECT TO THE QUANTUM OF TOTAL INCOME OF THE ASSESSEE, THE AO HAS CONSIDERED THE TOTAL INCOME AT RS. 41.88 CRORES. IN THIS CONTEXT IT WOULD BE RELEVANT TO ITA NOS.673, 674 & 684/B/14 12 REPRODUCE THE PROVISIONS OF SECTION 36(1)(VIII) OF THE ACT WHICH READS AS UNDER : 36(1)(VIII) IN RESPECT OF ANY SPECIAL RESERVE CREATED AND MAINTAINED BY A SPECIFIED ENTITY, AN AMOUNT NOT EXCEEDING TWENTY PER CENT OF THE PROFITS DERIVED FROM ELIGIBLE BUSINESS COMPUTED UNDER THE HEAD ' PROFITS AND GAINS OF BUSINESS OR PROFESSION' (BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE) CARRIED TO SUCH RESERVE ACCOUNT.' FROM THE PROVISION OF SECTION 36(1)(VIII) OF THE AC T, IT IS CLEAR THAT THE DEDUCTION OF 20% SHOULD BE ON THE PR OFITS PERTAINING TO THE ELIGIBLE BUSINESS. THE AO, IN THE CASE ON HAND, HAS CONSIDERED THE PROFITS FROM THE ELIGIBLE BUSINESS TO BE AT 17% OF THE BOOK PROFIT INSTEAD OF CONSIDERING THE TOTAL INCOME FROM THE ELIGIBLE PROF ITS. VARIOUS COURTS HAVE HELD THAT FOR THE PURPOSES OF CLAIMING DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT, IT HAS TO BE COMPUTED ON THE TOTAL INCOME BEFORE DEDUC TION UNDER THIS SECTION. AS REGARDS THE ISSUE OF WHETHER STATUTORY DEDUCTION UNDER SECTION 36(1)(VIII) OF TH E ACT SHOULD BE CALCULATED ON THE TOTAL INCOME, BEFORE DEDUCTION UNDER SECTION 36(1)(VIII) ITSELF OR AFTER DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT, IT IS A SETTLED ISSUE IN VIEW OF THE DECISIONS OF THE HON'B LE APEX COURT IN THE CASES OF KERALA STATE INDUSTRIAL DEVELOPMENT CORP. (SUPRA) AND ANDHRA PRADESH STATE FINANCIAL CORPORATION (SUPRA) RELIED ON BY THE ASSE SSEE THAT THE STATUTORY DEDUCTION UNDER SECTION 36(1)(VI II) SHOULD BE CALCULATED ON TOTAL INCOME BEFORE THE DED UCTION UNDER SECTION 36(1)(VIII) ITSELF. IN VIEW OF THE FINDINGS THAT THE ASSESSEE HAD CORRE CTLY WORKED OUT THE DEDUCTION UNDER SECTION 36(1)(VIII) OF THE ACT AT RS. 8,10,91,000 AND THEREFORE THE AMOUNT OF ELIGIBLE ADVANCES IS RS. 1055.01 CRORES, AND FOLLOW ING THE AFORESAID TWO DECISIONS OF THE HON'BLE APEX COURT I N THE CASES OF KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION(SUPRA) AND ANDHRA PRADESH STATE FINANCI AL CORPORATION (SUPRA) AS REGARDS THE TOTAL INCOME FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 36(1)( VIII) OF THE ACT, WE UPHOLD THE ORDER OF THE LEARNED CIT(APPEALS).' RESPECTFULLY FOLLOWING THE JURISDICTION OF ITAT, 'C ' BENCH, BANGALORE JUDGMENT MENTIONED SUPRA THE ADDITION MAD E BY THE AO WAS DISALLOWED AND ASSESSES GROUND OF APP EAL IS ALLOWED. 18. AGGRIEVED BY THE ORDER OF THE CIT(A) REVENUE HA S RAISED GROUND NOS. 5 AND 6 BEFORE THE TRIBUNAL. ITA NOS.673, 674 & 684/B/14 13 19. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NOT CLEAR AS TO HOW THE ASSESSEE MADE ITS CLAIM FOR A SUM OF RS.2.91 CRORES AS DEDUCTION U/S 36(1)(VIII) OF THE ACT. THE BASIS AS GIVEN BY THE ASSESSEE IN THE WRITTEN SUBMISSION BEFORE THE CIT(A) WAS AS FOLLOWS:- 20. THE PERUSAL OF THE CIT(A) ORDER SHOWS THAT THE RELIEF ALLOWED BY THE CIT(A) TO THE ASSESSEE IS BASED ON THE DECISION OF THE ITAT, BANGALORE BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 AND 2008-09 IN ITA NOS. 226 AND 227/BANG/2012. THE CIT(A) HAS NOT GIVEN A FACTUAL FINDING AS TO WHAT SHOULD BE CONSIDERED AS ELIGIBLE ADVANCES I.E. , LONG TERM FINANCE PROVIDED BY THE ASSESSEE. WE ARE OF THE VIEW THAT S INCE NO FINDING HAS BEEN GIVEN BY THE CIT(A) AS TO THE BASIS ON WHICH THE RE LIEF WAS GIVEN BY THE CIT(A), WE DEEM IT FIT AND PROPER TO SET ASIDE THE ORDER OF THE CIT(A) AND REMAND TO THE AO FOR FRESH CONSIDERATION THE QUEST ION OF PROPER DEDUCTION TO BE ALLOWED U/S 36(1)((VIII) OF THE ACT. THE AO WIL L CONSIDER THE CONTENTIONS PUT FORTH BY THE ASSESSEE AND DECIDE THE ISSUE AFRE SH AFFORDING OPPORTUNITY BEING HEARD TO THE ASSESSEE. ITA NOS.673, 674 & 684/B/14 14 21. GROUND NOS.5 AND 6 ARE TREATED AS ALLOWED FOR S TATISTICAL PURPOSES. 22. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS TR EATED AS PARTLY ALLOWED. ITA NO.674/BANG/2014 (REVENUES APPEAL FOR ASST. YE AR 2010-11) 23. GROUND NOS. 1, 8 AND 9 RAISED BY THE REVENUE AR E GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 24. GROUND NOS.2 AND 3 RAISED BY THE REVENUE ARE SI MILAR TO GROUND NOS. 2 TO 4 RAISED BY THE ASSESSEE IN ITS APPEAL FOR ASS ESSMENT YEAR 2009-10 IN ITA NO.673/BANG/2014. FOR THE REASONS STATED THEREIN T HE DISALLOWANCE MADE BY THE AO U/S 36(1)(VIIA) OF THE ACT IS RESTORED AND T HE RELIEF ALLOWED BY THE CIT(A) IS HELD TO BE NOT CORRECT. 25. THE GROUND NOS. 2 TO 3 ARE ACCORDINGLY ALLOWED. 26. GROUND NOS. 4 AND 5 RAISED BY THE REVENUE READS AS FOLLOWS:- 4. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, I S THE 01(A) CORRECT IN DELETING ADDITION OF RS.2.96 CRORE S MADE ON PROVISION FOR DEPRECIATION OF INVESTMENTS H ELD TO MATURITY (HTM) AS STOCK-IN-TRADE. 5. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, IS THE CIT(A) CORRECT IN ALLOWING DEDUCTION FOR DEPRECIATI ON OF INVESTMENT WHICH IS NOTIONAL LOSS WITHOUT APPRECIATING THE FACT THAT LOSS CLAIMED ON ACCOUNT OF DEPRECIATION IS ONLY NOTIONAL AND NOT ACTUAL LOSS INCURRED BY THE ASSESSEE. 27. AS FAR AS GROUND NOS. 4 AND 5 RAISED BY THE REV ENUE ARE CONCERNED, IT IS NOT IN DISPUTE BEFORE US THAT AN IDENTICAL ISSUE CAME FOR CONSIDERATION IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008-09 AND THIS TRIBUNAL ON IDENTICAL ISSUE HELD THAT THE ASSESSEE IS ENTITLED TO GET DED UCTION ON ACCOUNT OF DEPRECIATION OF INVESTMENTS WHICH WERE HELD IN THE CATEGORY OF HTM (HELD TO MATURITY). THE DISPUTE IN AY 2008-09 WAS THE ASSES SEE IN ITS PROFIT AND LOSS. ACCOUNT FOR THE YEAR ENDED 31.3.2007 HAD WRITTEN OF F A SUM OF RS,17,59,00,087 ITA NOS.673, 674 & 684/B/14 15 CLAIMING DEPRECIATION ON INVESTMENTS, BY WAY OF LOS S ON VALUATION OF SECURITIES WHICH REPRESENTS DEPRECIATION IN THE VALUE OF SECUR ITIES HELD BY THE ASSESSEE AS ON 31.3.2007. THE ASSSSEE HAD VALUED THE SECURITIES HELD BY IT AS ON 31.3.2007 AND FOUND THAT THE MARKET VALUE OF SUCH SECURITIES AS ON THE SAID DATA WAS LESS THAN THE COST OF THE SECURITIES BY THE ABOVE SUM OF RS.1759,00,087 AND WROTE OFF THE SAME IN ITS BOOKS OF ACCOUNT ON THE BASIS O F THE PRINCIPLE 'COST OR MARKET VALUE WHICHEVER IS LESS APPLICABLE TO THE VA LUATION OF CLOSING STOCK'. THE ASSESSING OFFICER HOWEVER DID NOT AGREE WITH TH E VIEW OF THE ASSESSEE AND RELYING ON CBDT'S LNSTRUCTION NO.17/2008 DT.26. 12.2008 CAME TO THE CONCLUSION THAT THE SECURITIES IN RESPECT OF WHICH THE DECREASE IN VALUE WAS WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT ARE HELD INVESTMENTS HELD TO MATURITY' AND THEREFORE THESE CANNOT BE TREATED AS STOCK-IN-TRADE AND CONSEQUENTLY CANNOT BE VALUED IN THE MANNER IN WHIC H STOCK-IN-TRADE IS VALUED. ON APPEAL, THE LEARNED CIT (APPEALS) IN HIS ORDER RELYING ON THE DECISIONS OF THE COORDINATE BENCHES OF THIS TRIBUNA L IN THE CASE OF :- I. ACIT (LTU) V VIJAYA BANK IN ITA NOS.253 & 205/BANG /2007 D.24.1.2008 FOR ASSESSMENT YEAR 2003-04. II. (II) THE KARNATAKA BANK LTD. VJCIT IN ITA NO.50/BAN G! 997. III. (IN) ING VYSYA BANK LTD V DCIT (2006) 6 SOT 606 (BA NG) HELD THAT ALL INVESTMENTS MADE BY THE ASSESSEE CONS TITUTE STOCK IN TRADE FOR THE PURPOSE OF INCOME TAX AND HAS TO BE THEREFORE VALUE D IN THE MANNER IN WHICH STOCK-IN-TRADE IS VALUED. ON FURTHER APPEAL BY THE REVENUE THE TRIBUNAL UPHELD THE ORDER OF THE CIT(A). FOLLOWING ARE THE RELEVAN T OBSERVATION OF THE ITAT IN ITA NO.226/BANG/2012 FOR ASSESSMENT YEAR 2008-09 HE LD AS FOLLOWS:- 11.5 WE HAVE HEARD THE RIVAL CONTENTIONS ON THE IS SUE BEFORE US AND HAVE PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUDICIAL, PRONOUNC EMENTS RELIED ON. IN THE CASE ON HAND, WE FIND THAT THERE IS NO DISPUTE AS REGARDS THE INVESTMENT MADE BY THE ASSES SEE IN SECURITIES AND THE SAID INVESTMENTS HAVE BEEN TREAT ED AND CLASSIFIED BY THE ASSESSEE AS STOCK-IN-TRADE, WHICH HAVE BEEN VALUED AT THE END OF THE YEAR AT COST OR MARKET VAL UE, WHICHEVER IS LESS. FROM THIS IT IS CLEAR THAT THE A SSES-SEE IS TREATING THE SECURITIES HELD UNDER THE CATEGORY HE LD TO MATURITY' AS STOCK-IN-TRADE. THIS ISSUE HAS BEEN CO NSIDERED IN DETAIL BY TH HON'BLE KARNATAKA HIGH COURT IN TH E CASE OF ITA NOS.673, 674 & 684/B/14 16 KARNATAKA BANK LTD. V CIT IN ITS ORDER (ITA NO.172/ 2009 DT.22.3.2013), WHEREIN THE HONBLE COURT AFTER CONS IDERING THE DECISION IN THE CASE OF CIT V IG VYSYA BANK LTD . IN ITA NO.2886/2005 DT.6.6.2012 HZI HELD AT PAGES 23 TO 25 AT PARAS 9 & 10 ITS ORDER AS UNDER: 9. IN INSTANT CASES, THE ASSESSEE HAS MAINTAINED TH E ACCOUNTS IN TERMS OF THE RBI REGULATIONS AND H HAS SHOWN IT AS INVESTMENT. BUT CONSISTENTLY FOR MORE T HAN 1TQDADES IT HAS BEEN SHOWN AS STOCK-IN-TRADE AND DEPRECIATION IS CLAIMED AND ALLOWED THEREFORE NOTWITHSTANDING THAT IN THE BALANCE FEET IT IS SHOW N AS INVESTMENT, FOR THE PURPOSE OF INCOME TAX ACT, IT I S SHOWN AS STOCK-IN-TRAD. THEREFORE, THE VALUE OF THE STOCKS BEING CLOSELY CONNECTED WITH THE STOCK MARKE T, AT THE END OF THE FINANCIAL YEAR, WHILE VALUING THE AS SETS, NECESSARILY THE BANK HAS TO TAKE INTO CONSIDERATION THE MARKET VALUE, OF THE SHARES. IF THE MARKET VALUE IS LESS THAN THE COST PRICE, IN LAW THEY ARE ENTITLED TO DEDUCTIONS AND IT CANNOT BE DENIED BY THE AUTHORITI ES UNDER THE PRETEXT THAT IT IS SHOWN AS INVESTMENT IN THE BALANCE SHEET. 10. IN THAT VIEW OF THE MATTER, THE ORDER PASSED BY THE AUTHORITIES BALDING THAT IN VIEW OF THE RBI GUIDELI NES, THE ASSESSEE IS STOPPED FROM TREATING THE INVESTMEN T AS STOCK-IN-TRADE IS NOT CORRECT THAT FINDING RECORDED BY THE AUTHORITIES IS HEREBY SET ASIDE. TIE APPEAL IS ALLOWED..... 11. 6 THE FACTS OF THE CASE ON HAND ARE SIMILAR TO THOSE IN THE CASE OF KARNATAKA BANK LTD IN ITA NO.172/2009 DECID ED BY THE HON'BLE KARNATAKA HIGH COURT BY ORDER DT.23.3.2 013. THIS DECISION OF THE HON'BLE KARNATAKA HIGH COURT H AS ALSO BEEN FOLLOWED BY A CO-ORDINATE BENCH OF THIS TRIBUN AL IN THE CASE OF DCIT V SYNDICATE BANK IN ITA NOS.668 & 669/BANG/2010 AND 708 & 709/BANG/2010 DT 19 6 2013 WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE HONBLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA BANK LTD. (SUPRA) HOLD THAT THE ORDER-OF THE LEARNED.CIT(APPE ALS)DOES NOT CALL FOR ANY INTERFERENCE AND CONSEQUENTLY, DIS MISS GROUNDS NO.2 TO 4 RAISED BY REVENUE. 28. RESPECTFULLY FOLLOWING THE DECISION REFERRED A BOVE, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS GROUND NO.4 AND 5 5 AISED BY THE REVENUE. 29. GROUND NOS. 6 AND 7 RAISED BY THE REVENUE AS FO LLOWS:- ITA NOS.673, 674 & 684/B/14 17 6. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, I S THE CIT(A) CORRECT IN DELETING THE ADDITION MADE ON ACC OUNT OF STALE DRAFTS AND PAY ORDERS U/S. 41(1). 7. WHETHER ON FACTS & CIRCUMSTANCES OF THE CASE, IS THE CIT(A) CORRECT IN NOT APPRECIATING THAT STALE DRAFT S & PAY ORDERS HAVE NOT BEEN CLAIMED BY THE PERSONS AND THE AMOUNTS INVOLVED REMAINED WITH THE ASSESSEE BANK AN D HENCE TAXABLE AS PER SECTION 28(IV) OF THE L.T. ACT . 30. AS FAR AS GROUND NOS. 6 AND 7 ARE CONCERNED, TH E ISSUE IS WITH REGARD TO WHETHER THE AO WAS JUSTIFIED IN MAKING AN ADDITION BY TREATING LIABILITY OF THE ASSESSEE ON ACCOUNT OF STALE DRAFTS AS INCOME OF TH E ASSESSEE U/S 41(1) OF THE ACT. IT WAS NOT DISPUTED BY THE PARTIES BEFORE US THAT IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE I N ASSESSMENT YEAR 2008- 09. THE FACTS IN AY 2008-09 WHICH ARE SIMILAR TO THE FACTS IN THE PRESENT AY ARE THAT THE ASSESSING OFFICER NOTICED THAT IN THE ASSESSES BALANCE SHEET AS ON 31.3.2007 AN AMOUNT OF RS.58,31,851 WAS SHOWN AS LIABILITY OUTSTANDING TOWARDS DRAFTS AND PAY ORDERS. THE ASSESSING OFFICE RS TREATED THESE AMOUNTS AS INCOME OF THE ASSESSEE U/S.41(1) OF THE ACT BY R ELYING ON THE NS OF THE HON'BLE APEX COURT IN THE CASE OF T.V. SUNDARAM LYE NGAR & SONS REPORTED IN 22 ITR 334 AND OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BATLIBOL & CO. PVT. LTD. (149 ITR 604). ON APPEAL, THE LEARNED CIT (APPEALS) UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. THE CASE OF THE ASSESSEE WAS THAT THE ABOVE SUMS AMOUNTING TO RS.58,31,851 DO NOT REPRESE NT INCOME U/S.41(1) OF THE ACT. IT WAS SUBMITTED THAT FOR ANY AMOUNT TO CO NSTITUTE INCOME U/S.41(1) OF THE ACT, IT OUGHT TO HAVE BEEN TREATED AS AN ALLOWA NCE OR DEDUCTION IN AN ASSESSMENT YEAR EARLIER TO THE PREVIOUS YEAR IN WHI CH IT IS SOUGHT TO BE TREATED AS INCOME. IT WAS SUBMITTED THAT THE AMOUNTS COLLEC TED TO ISSUE DRAFTS AND PAY ORDERS ARE HELD IN TRUST BY THE BANK AND THESE AMOU NTS HAVE NEVER EVEN BEEN TREATED AS AN ALLOWANCE OR DEDUCTION. THE ONLY INCO ME THAT THE BANK EARNS FOR ISSUE OF DRAFTS AND PAY ORDERS IS COMMISSION WHICH WAS ALREADY BE OFFERED AS INCOME IN THE RELEVANT PERIODS. THE ASSESSEE PLACE D RELIANCE ON A DECISION OF THE CO-ORDINATE BENCH OF ITAT BANGALORE IN THE CASE OF CANARA BANK LTD. IN ITA NO.390/BANG/2011 DT.8.6.2012, WHEREIN THE BANK TRANSFERRED A SUM OF RS.52,77,81,540 REPRESENTING AMOUNTS COLLECTED TOWA RDS ISSUE OF DRAFTS AND PAY ORDERS TO THE PROFIT AND LOSS ACCOUNT AFTER SEE KING NECESSARY PERMISSION FROM THE RESERVE BANK OF INDIA ('RBI') TO DO SO. TH E ASSESSING OFFICER IN THAT ITA NOS.673, 674 & 684/B/14 18 CASE TREATED THE ABOVE AMOUNT AS INCOME OF THE BANK . THE CO-ORDINATE BENCH OF THE TRIBUNAL HELD THAT THE SAME DOES NOT CONSTIT UTE INCOME AFTER DULY CONSIDERING THE DECISION OF THE T.V. SUNDARAM LYENG AR & SONS (SUPRA) AND DISTINGUISHED THE SAME ON FACTS. RELIANCE WAS ALSO PLACED ON A DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF VIJAYA BANK LTD . (ITA NO.455/BANG/2011 DT.22.6.2012 WHEREIN THE BANK TRA NSFERRED A SUM OF RS 10,50,47,796 REPRESENTING AMOUNTS COLLECTED TOWARDS ISSUE OF DRAFTS AND PAY ORDERS TO THE PROFIT AND LOSS ACCOUNT AFTER FOLLOWI NG NECESSARY PERMISSION FROM THE RBI TO DO SO. THE ASSESSING OFFICER IN THAT CAS E TREATED THE ABOVE AMOUNT AS INCOME OF THE BANK. THE TRIBUNAL, IN THAT CASE A LSO, AFTER DULY CONSIDERING THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF TV SUNDARAM LYENGAR & SONS (SUPRA) HELD, AT PARAGRAPH 12 OF ITS ORDER AS UNDER: 12. IN THE PRESENT CASE THE ASSESSEE NEVER WANTED THE AMOUNT TO BE TREATED AS ITS INCOME BY CREDIT TO THE PROFIT AN D LOSS ACCOUNT. IT WAS, ONLY BECAUSE OF RBI'S DIRECTION THE AMOUNT WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT. THE RBI'S DIRECTION S ARE ALSO CLEAR THAT THE ASSESSEE SHOULD NOT USE THE AMOUNT TRANSFE RRED TO GENERAL RESERVE FOR ANY PURPOSE OTHER THAN MEETING ANY, FUTURE CLAIMS BY THE PERSONS ENTITLED TO CLAIM THE AFORESA ID AMOUNT. THE AMOUNT WAS ALSO NOT AVAILABLE FOR DISTRIBUTION OF D IVIDEND. IN THE FIGHT OF THE AFORESAID FACTS AND CIRCUMSTANCES PREV AILING IN THE CASE OF THE ASSESSEE, WE ARE OF THE VIEW THAT THE D ECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TV SUNDARAM LY ENGAR AND SONS (SUPRA) WILL NOT BE APPLICABLE TO THE FACTS OF THE PRESENT CASE.' 31. THE TRIBUNAL ON THE ABOVE CONTENTIONS HELD IN ITA NO.226/BANG/2014 ORDER DATED 28/11/2013 AS FOLLOWS:- 7.3.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND C AREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUD ICIAL DECISIONS CITED ON EITHER SIDE. THE ASSESSING OFFIC ER HAS INVOKED THE PROVISIONS OF SECTION 41(1) OF THE ACT TO BRING THE AMOUNT OF RS.58, 31,851 RECEIVED FOR MAKING DRAFTS AND PAY OR DERS TO TAX IN THE HANDS OF THE ASSES E IN THE PERIOD UNDER CON SIDERATION. SECTION 41(1) OF THE ACT, SPECIFICALLY DEALS WITH A MOUR1T THAT WERE ALLOWED AS A DEDUCTION IN THE PAST ASSESSMENTS AS TRADING LIABILITIES WHICH IN LATER YEAR CEASES OR ARE REMIT TED BY THE CREDITORS IF AND WHEN IN A LATER YEAR THERE IS EVID ENCE TO SHOW THAT THE LIABILITY IS-REMITTED, IT CAN BE BROUGHT TO TAX. IN ORDER TO INVOKE SECTION 41(1) OF THE ACT, IT MUST BE FIRS T ESTABLISHED THAT THE ASSESSEE HAD OBTAINED SOME BENEFIT -IN RES PECT OF A TRADING LIABILITY WHICH WAS EARLIER ALLOWED AS A DE DUCTION. IT IS NOT ENOUGH IF THE ASSESSEE DERIVES SOME BENEFIT IN RESPECT OF ITA NOS.673, 674 & 684/B/14 19 SUCH LIABILITY, BUT IT IS ESSENTIAL THAT SUCH BENEF IT ARISES BY WAY OF 'REMISSION' OR 'CESSATION' OF LIABILITY. IN SUGA ULI SUGAR WORKS (P) LTD REPORTED IN (1999) 234 ITR 518 (SC) IT WAS HELD THAT A UNILATERAL ACTION CANNOT BRING ABOUT A CESSATION OR , REMISSION AS A 'REMISSION' CAN ONLY BE GRANTED BY A CREDITOR AND 'CESSATION' CAN ONLY OCCUR EITHER BY OPERATION OF L AW OR THE DEBTOR BY UNEQUIVOCALIY DECLARING INTENTION NOT TO HONOUR HIS LIABILITY WHEN PAYMENT IS DEMANDED BY CREDITOR. IN THE CASE ON HAND TAKING INTO ACCOUNT THE FACTS AND CIRCUMSTANCE S INVOLVED, WE FIND MERIT IN THE ARGUMENTS PUT FORTH BY THE LEA RNED AUTHORISED REPRESENTATIVE SINCE THE OUTSTANDINGLY L IABILITY OF RS.58,31,851 ON ACCOUNT OF DEMAND DRAFTS AND PAY OR DERS IS STILL REFLECTED IN THE BOOKS OF ACCOUNTS OF THE ASS ESSEE AS ON 313.2007 AND THEREFORE THE SAME STANDS ACKNOWLEDGED BY THE ASSESSEE AND THE LIABILITY SUBSISTS. IN THIS VIEW O F THE MATTER, WE FIND THAT THE AUTHORITIES BELOW HAVE FAILED TO ESTA BLISH THE PRIMARY REQUISITE FOR INVOKING THE PROVISIONS OF SE CTION 41(1) OF THE ACT AND HOLD THAT THE PROVISIONS OF SECTION 41( 1) OF THE ACT WOULD NOT LE ATTRACTED IN THE CASE ON HAND IN RESPE CT OF THE OUTSTANDING LIABILITY OF RS.58,31,851. 7.3.2 IN THE CASE ON HAND, THE FACT THAT THE ASSESS EE HAS NOT CREDITED THE AMOUNT OF RS.58,31,851 RECEIVED FOR MA KING OF DRAFTS AND PAY ORDERS TO ITS PROFIT AND LOSS ACCOUN T IN THE PERIOD UNDER CONSIDERATION, IS NOT IN DISPUTE. IN F ACT, THE SAID AMOUNT ADMITTEDLY APPEARED AS AN OUTSTANDING LIABIL ITY TOWARDS DRAFTS AND PAY ORDERS IN THE BALANCE SHEET OF THE A SSESSEE AS 31 .3 .2007. WE THEREFORE FIND MERIT IN THE ARGUMENTS PUT FORTH BY THE LEARNED AUTHORISED REPRESENTATIVE WHICH IS FURT HER FORTIFIED BY THE DECISIONS RENDERED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASES OF CANARA BANK (ITA NO390/BAN G/20111 DT.8.6.2012) AND VIJAYA BANK (ITA O.455/BANG/2011 DT.22.4.2012). FOLLOWING, THE AFORESAID DECISIONS O F THE CO- ORDINATE BENCH OF THE TRIBUNAL (SUPRA) WE DELETE T HIS ADDITION OF RS.58,31,851 MADE BY THE ASSESSING OFFICER UNDER SECTION 41(1) OF THE ACT AS BEING UNSUSTAINABLE. 8.0. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSES SMENT YEAR 2007-08 IS PARTLY ALLOWED. 32. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS GROUND NOS.6 AND 7 RAISE D BY THE REVENUE. 33. IN THE RESULT, APPEAL BY THE REVENUE IS PARTLY ALLOWED. ITA NOS.673, 674 & 684/B/14 20 ITA NO.684/BANG/2014 (ASSESSMENT YEAR 2010-11) ASSE SSEES APPEAL: 34. THE ONLY ISSUE THAT ARISES CONSIDERATION IN T HIS APPEAL BY THE ASSESSEE IS WITH REGARD TO THE DISALLOWANCE OF INTEREST EXPENSE S MADE BY THE AO U/S 40A(IA) OF THE ACT. IN TERMS OF SEC.40(A)(I) OF THE ACT, I F TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B OF THE ACT AND WHERE IT IS NOT SO DEDUCTED AT SOURCE ON THE AMOUNT OF ANY INTEREST OR ROYALTY, FE ES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THE ACT, WHICH IS PAYABL E OUTSIDE INDIA OR IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY OR TO A FORE IGN COMPANY, THE SAME SHALL NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS. IN TERMS OF SEC.40(A)(IA) OF THE ACT, IF TAX IS DED UCTIBLE AT SOURCE UNDER CHAPTER XVII-B OF THE ACT AND WHERE IT IS NOT SO DEDUCTED A T SOURCE ON THE AMOUNT OF ANY INTEREST, COMMISSION OR BROKERAGE, RENT, ROYAL TY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR, BEING RE SIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT A NY WORK), THE SAME SHALL NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS. THE RELEVANT STATUTORY PROVISIONS READ AS FOLLOWS: AMO UNTS NOT DEDUCTIBLE. 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38 , THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PRO FITS AND GAINS OF BUSINESS OR PROFESSION', ( A) IN THE CASE OF ANY ASSESSEE (IA) ANY INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SER VICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR O R SUB- CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WO RK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WORK), ON WHI CH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 : PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEE N DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCT ED IN THE PREVIOUS YEAR BUT PAID IN ANY SUBSEQUENT YEAR AFTER THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 , ITA NOS.673, 674 & 684/B/14 21 SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTI NG THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS B EEN PAID. EXPLANATION.FOR THE PURPOSES OF THIS SUB-CLAUSE, (I) 'COMMISSION OR BROKERAGE' SHALL HAVE THE SAME MEANI NG AS IN CLAUSE (I) OF THE EXPLANATION TO SECTION 194H ; (II)'FEES FOR TECHNICAL SERVICES' SHALL HAVE THE SA ME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9 ; (III) 'PROFESSIONAL SERVICES' SHALL HAVE THE SAME MEANING AS IN CLAUSE (A) OF THE EXPLANATION TO SECTION 194J ; (IV) 'WORK' SHALL HAVE THE SAME MEANING AS IN EXPLANATION III TO SECTION 194C ; (V) 'RENT' SHALL HAVE THE SAME MEANING AS IN CLAUS E (I) TO THE EXPLANATION TO SECTION 194-I; (VI ) 'ROYALTY' SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9; 35. UNDER SECTION 194A OF THE ACT WHICH IS A SECTI ON APPEARING IN PART XVIIB OF THE ACT, THE ASSESSEE WAS OBLIGED TO DEDUC T TAX AT SOURCE WHERE INTEREST PAID IS IN EXCESS OF RS.10,000/- PER ANNUM . DURING THE ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO THAT THE ASSES SEE HAS PAID TOTAL INTEREST OF RS 234,62,57,000/- DURING THE F.YR 2009-10. OF T HIS AMOUNT RS 15,03,55,000/- WAS PAID TO NABARD AND RS 68,44,000/ - WAS PAID TO RESERVE BANK OF INDIA . THUS THE INTEREST PAID ON OTHER DEP OSITS CAME TO RS.218,90,58,000/- . THE ASSESSEE WAS ASKED TO GIVE FURTHER BREAK UP OF THE SUM OF RS 218,90,58,000/- TO VERIFY WHETHER TDS WAS MADE ON THE INTEREST PAID ON TERM DEPOSITS EXCEEDING RS 10,000/-. IN RES PONSE THE ASSESSEE SUBMITTED THE FOLLOWING BREAK UP OF INTEREST PAID : ITA NOS.673, 674 & 684/B/14 22 36. IN REGARDS TO DEDUCTION OF TAX AT SOURCE (T DS) ON TERM DEPOSITS WHERE PAYMENT ON INTEREST WAS IN EXCESS OF RS. 10,000/- , THE ASSESSEE SUBMITTED THAT DEPOSITORS HAVE SOUGHT EXEMPTION FROM TDS ON PAYMEN T OF INTEREST BY SUBMITTING DECLARATION IN FORM NO. 15G/H AND IN THO SE CASES, THE VARIOUS BRANCHES HAVE NOT DEDUCTED TDS BASED ON 15G /H SUBM ITTED BY THE DEPOSITORS. THE ASSESSEE FURTHER SUBMITTED THAT BRANCHES HAVE A CCEPTED THE DEPOSIT FROM GOVERNMENT AND QUASI GOVERNMENT BODIES BANKS /CO-OP ERATIVE SOCIETIES ETC., AND NOT DEDUCTED THE TAX ON THE INTEREST PAID TO TH EM ON THE BASIS THAT DEPOSITORS I.E. GOVERNMENT / QUASI GOVERNMENT, WOUL D HAVE OBTAINED EXEMPTION CERTIFICATE FROM THE INCOME TAX DEPARTMEN T FOR NON DEDUCTION OF TAX AT SOURCE. 37. THE AO WAS OF THE VIEW THAT THE ASSESSEE HAS A DMITTED THAT OUT OF THE TOTAL INTEREST PAID OF RS 218,90,58,326/-, THAT INTEREST PAID ABOVE RS 10,000/- ON TERM DEPOSITS WHERE NO TDS WAS MADE COMES RS 12,98, 57,409/-. AS NO TDS WAS MADE ON THIS AMOUNT THE SAME NEEDS TO BE DISALL OWED U/S 40A(IA) OF IT ACT. AS FAR AS THE INTEREST PAID OF RS 28,98,43,076 /- ON WHICH NO TDS WAS MADE AS THE RECIPIENTS OF THE INTEREST SUBMITTED FO RM 15G/15H TO THE ASSESSEE ITA NOS.673, 674 & 684/B/14 23 BANK, AO HELD THAT THE ASSESSEE OUGHT TO HAVE SUBMI TTED FORM NO.15G/H OBTAINED FROM THE DEPOSITORS BEFORE THE PRESCRIBED AUTHORITY WHICH IS COMMISSIONER OF INCOME TAX, WITHIN THE PRESCRIBED P ERIOD. SINCE THE ASSESSEE FAILED TO DO SO, THE AO HELD THAT DISALLOW ANCE U/S.40(A)(IA) OF THE ACT HAS TO BE MADE. WITH REGARD TO INTEREST PAID TO GO VERNMENT/QUASI-GOVERNMENT AUTHORITY PAYMENT OF INTEREST TO WHOM THE ASSESSEE CLAIMED WAS NOT LIABLE TO TDS, THE AO HELD THAT THE ASSESSEE FAILED TO FURNIS H EVIDENCE TO SHOW PAYMENTS TO GOVERNMENT/QUASI GOVERNMENT. THE AO TH EREFORE DISALLOWED INTEREST EXPENSE OF RS.28,98,43,076 U/S.40(A)(IA) O F THE ACT. WITH REGARD TO DISALLOWANCE OF INTEREST OF RS.12,98,57,409 WHICH W AS PAYMENT OF INTEREST WITHOUT TDS, THE AO DISALLOWED THE CLAIM FOR DEDUCT ION OF THE SAID SUM FOR VIOLATION OF PROVISIONS OF SEC.40(A)(IA) OF THE ACT . 38. ON APPEAL BY THE ASSESSEE, THE CIT(A) UPHELD B OTH THE ADDITIONS MADE BY THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 39. BEFORE THE TRIBUNAL, ON THE ISSUE OF DISALLOWA NCE OF A SUM OF RS.28,98,43,706, THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT ONCE THE DEPOSITORS GIVE FORM NO.15G/H, THE LAW EMPOWERS THE ASSESSEE TO MAKE PAYMENT OF INTEREST WITHOUT DEDUCTION OF TAX AT SOU RCE. THE REQUIREMENT OF FILING THE FORM SO OBTAINED BEFORE THE PRESCRIBED A UTHORITY WITHIN THE PRESCRIBED PERIOD WAS ONLY A PROCEDURAL REQUIREMENT AND IT WAS MANDATORY AND FOR FAILURE TO FILE THE FORM BEFORE THE PRESCRI BED AUTHORITY NO DISALLOWANCE CAN BE MADE U/S.40(A)(IA) OF THE ACT. FOR THE ABOV E PROPOSITION THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF SRI MARIKAMBA TRANSPORT CO. 23 1 TAXMAN 484 (KARN.) WHEREIN THE HONBLE KARNATAKA HIGH COURT AS FOLLOWS : 4. THE COMBINED READING OF THESE TWO PROVISIONS MA KE IT CLEAR THAT IF THERE IS ANY BREACH OF REQUIREMENTS OF SECT ION 194C(3), THE QUESTION OF APPLICABILITY OF SECTION 40(A)(IA) ARISES. THE EXCLUSION PROVIDED IN SUB-SECTION OF SECTION 194C F ROM THE ITA NOS.673, 674 & 684/B/14 24 LIABILITY TO DEDUCT TAX AT SOURCE UNDER SUB-SECTION (2) WOULD BE COMPLETE, THE MOMENT THE REQUIREMENTS CONTAINED THE REIN ARE SATISFIED. ONCE, THE DECLARATION FORMS ARE FILED BY THE SUBCONTRACTOR, THE LIABILITY OF THE ASSESSEE TO DED UCT TAX ON THE PAYMENTS MADE TO THE SUB-CONTRACTOR WOULD NOT ARISE . AS WE HAVE EXAMINED, THE SUB-CONTRACTORS HAVE FILED FORM NO. 15-1 BEFORE THE ASSESSEE. SUCH BEING THE CASE, THE ASSES SEE IS NOT REQUIRED TO DEDUCT TAX UNDER SECTION 194C(3) OF THE ACT AND TO FILE FORM NO. 15J. IT IS ONLY A TECHNICAL DEFECT AS POINTED OUT BY THE TRIBUNAL IN NOT FILING FORM NO.15J BY THE AS SESSEE. THIS MATTER WAS EXTENSIVELY CONSIDERED BY THE ITAT, AHMEDABAD BENCH IN VALIBHAI KHANCLBAI MANKAD CASE (SUPRA) AND THE SAID JUDGMENT HAS BEEN UPHELD BY IN HIGH COURT OF GUJARAT IN CIT V. VALIBHAI KHANBHAI MANKAD 120131 216 TAXMAN 18/28 TAXMANN.COM 119 WHEREIN IT IS HELD THAT ONCE THE CONDITIONS OF SECTION 194C(3) WE RE SATISFIED, THE LIABILITY OF THE PAYEE TO DEDUCT TAX AT SOURCE WOULD CEASE AND ACCORDINGLY, APPLICATION OF SECTION 40(A)(IA) WOULD ALSO NOT ARISE. THE TRIBUNAL, PLACING RELIANCE ON THE JUDGMENT OF THE ITAT, AHMEDABAD BENCH, HAS DISMISSE D THE APPEAL FILED BY THE REVENUE. WE AGREE YITH THE SAID PROPOSITIONS AND HOLD THAT FILING OF FORM NO. 151/J IS ONLY DIRE CTORY AND NOT MANDATORY. (EMPHASIS SUPPLIED) 40. THE LEARNED DR RELIED ON THE ORDER OF THE CIT( A). HE FURTHER POINTED OUT THAT AS FAR AS THE PAYMENTS TO OTHER EXEMPTED PERSO N IS CONCERNED, THE AO IN HIS ORDER HAS MADE THE FOLLOWING OBSERVATIONS:- 9.3. DURING THE COURSE OF HEARING THE ASSESSEE WA S ASKED TO FURNISH THE RESPECTIVE EVIDENCES. APART FROM THE QUESTIONNAIRE ISSUED U/S.142(1) DATED 24.1.2013, THE ASSESSEE WAS ASKED TO FURNISH THE NECESSARY EVIDENCES IN SUPPORT OF ITS C LAIM FOR NOT INVOKING PROVISIONS OF SEC. 40A(IA), DURING THE HEA RINGS ON 26.02.2013, 06.02.2013, 07.03.2013 AND 11.03.2013. HOWEVER, THE ASSESSEE COULD NOT PRODUCE ANY SUCH EVIDENCES H ENCE THE AMOUNT WHICH IS LIABLE FOR DEDUCTION OF TDS AMOUNTI NG TO RS 28,98,43,076/- BUT NO TDS WAS DONE BECAUSE OF STATE D SUBMISSIONS OF FORM 15G/15H BY THE RECIPIENT OR INT EREST CLAIMED TO BE PAID TO THE GOVERNMENT , NOW CANNOT B E ALLOWED AS DEDUCTION. THE NON SUBMISSIONS OF 15G/15H BEFORE THE PRESCRIBED AUTHORITY, AMOUNTS TO, ALL TOGETHER, NON - DEDUCTION OF TDS, WHERE IT OUGHT TO HAVE BEEN DONE, THUS INVI TING THE DISALLOWANCE OF THE SAME U/S 40A (IA) OF IT ACT. LI KE SO THE CLAIM OF INTEREST PAYMENT STATED TO BE MADE TO GOVE RNMENT WAS NOT PROPERLY SUPPORTED WITH THE EVIDENCES THUS INVI TING THE DISALLOWANCE OF THE SAME U/S 40A (IA) OF IT ACT. ITA NOS.673, 674 & 684/B/14 25 9.4. THUS AN AMOUNT THE RS 12,98,57,409 FOR NON-DED UCTION OF TDS ON THEINTEREST PAID EXCEEDING RS 10,000/- AND A N AMOUNT OF RS 28,98,43,076/- WHERE NO 15G/15H FORMS WERE ST ATED TO BE SUBMITTED OR INTEREST STATED TO BE PAID TO GOVER NMENT DEPARTMENT, IS DISALLOWED U/S 40A (IA) OF IT ACT. T HUS THE TOTAL AMOUNT OF RS. 41,97,00,485/- DISALLOWED AND ADDED B ACK TO THE INCOME RETURNED BY THE ASSESSEE. 41. WITHOUT PREJUDICE TO HIS RELIANCE ON THE ORDER OF THE AO, THE LD DR SUBMITTED THAT THE DISALLOWANCE TO THE EXTENT OF PA YMENT TO GOVERNMENT SHOULD BE SET ASIDE TO THE AO AND THE ASSESSEE SHOULD BE A SKED TO FURNISH THE REQUIRED DETAILS. 42. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AS FAR AS DISALLOWANCE OF INTEREST OF A SUM OF RS.28,9 8,43,076/- IS CONCERNED TO THE EXTENT OF THE DISALLOWANCE RELATES TO INTEREST PAID TO PERSONS FURNISHED FORM 15 G AND FORM 15 H TO THE ASSESSEE, NO DISALLO WANCE CAN BE MADE U/S 40A(IA) OF THE ACT AS HELD BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF SRI MARIKAMBA TRANSPORT CO., (SUPRA). THE REQUIREM ENT OF FILING OF FORM 15G AND 15H WITH THE PRESCRIBED AUTHORITY VIZ., CIT IS ONLY PROCEDURAL AND THAT CANNOT RESULT IN A DISALLOWANCE U/S 40A(IA) OF THE ACT. TO THE EXTENT THAT PAYMENT OF INTEREST RELATES TO THE GOVERNMENT AND T HE EXEMPTED CATEGORY OF PERSONS, THE ASSESSEE IS DIRECTED TO FURNISH REQUIR ED DETAILS TO THE AO AND THE AO WILL CONSIDER THE CLAIM OF THE ASSESSEE AFTER A FFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 43. AS FAR AS THE DISALLOWANCE OF RS.12,98,57,409/ - WHICH IS THE INTEREST PAID WITHOUT DEDUCTION OF TDS AND IN WHICH CASE THERE I S NO DECLARATION IN FORM 15G OR FORM 15H GIVEN BY THE RECIPIENT, THE LD. COU NSEL FOR THE ASSESSEE SUBMITTED THAT SEC. 40(A)(IA) OF THE ACT IS APPLICA BLE ONLY WITH A DEDUCTION IS CLAIMED U/S 30 TO 38 OF THE ACT. HE POINTED OUT TH AT THE INTEREST WHICH THE ASSESSEE PAID WAS INTEREST ON TERM DEPOSITS AND SAV INGS BANK ACCOUNT HELD BY THE VARIOUS CUSTOMERS OF THE BANK. HE SUBMITTED TH AT THE PROVISION OF SEC. 36(1)(III) OF THE ACT ARE NOT APPLICABLE BECAUSE IN TEREST IN QUESTION IS NOT INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSE OF BUSINESS. IT WAS ARGUED BY HIM THAT THE DEPOSITS OF MONEY BY THE CUS TOMERS IN FIXED DEPOSITS OR SB ACCOUNT CANNOT BE TERMED AS CAPITAL BORROWED BY AN ASSESSEE. ACCORDING ITA NOS.673, 674 & 684/B/14 26 TO HIM NONE OF THE OTHER PROVISION OF SEC. 30 TO 38 OF THE ACT ARE APPLICABLE TO THE INTEREST IN QUESTION. IT WAS SUBMITTED BY HIM THAT THE DEDUCTION ON ACCOUNT OF INTEREST PAID IN THE CASE OF THE ASSESSEE WHO IS THE BANKER SHOULD BE ALLOWED U/S 28 OF THE ACT ON COMMERCIAL PRINCIPLES AS EXPEN SES LINKED WITH THE DETERMINATION OF PROFITS. IN THIS REGARD, IT WAS S UBMITTED BY HIM THAT IN SEVERAL DECISIONS, COURTS HAVE TAKEN THE VIEW THAT MONEY BORROWED CANNOT BE REGARDED AS CAPITAL EMPLOYED. REFERENCE WAS MADE TO PRINCIPLES OF ACCOUNTANCY IN THIS REGARD. THE LD. COUNSEL FOR TH E ASSESSEE FURTHER SUBMITTED THAT SEC. 40(A)(IA) OF THE ACT REFERS TO TAX DEDUCT IBLE AT SOURCE UNDER CHAPTER XVII B OF THE ACT AND SINCE NO ORDER U/S 201(1) OF THE ACT TREATING THE ASSESSEE AS AN ASSESSEE IN DEFAULT UNDER CHAPTER XVIIB OF THE ACT HAS BEEN PASSED, NO DISALLOWANCE U/S 40(A)(IA) OF THE ACT C AN BE MADE. IN OTHER WORDS, ACCORDING TO HIM ANY DISALLOWANCE U/S 40(A)( IA) OF THE ACT WITHOUT CORRESPONDING ORDER TREATING THE ASSESSEE AS AN AS SESSEE IN DEFAULT U/S 201(1) OF THE ACT IS PASSED AS SEC.40(A)(IA) IN CHAPTER X VIIB ARE INTERLINKED PROVISIONS. 44. THE LD DR HOWEVER, SUBMITTED THAT THE INTERES T IN QUESTION IS ALLOWABLE AS REVENUE EXPENDITURE U/S 37(1) OF THE ACT AND, TH EREFORE, THE DISALLOWANCE U/S 40A(IA) OF THE ACT IS APPLICABLE. IT WAS SUBMI TTED BY HIM THAT COMMERCIAL PRINCIPLES CANNOT BE MADE APPLICABLE IN THE CONTEXT OF DISALLOWANCE U/S 40A(IA) OF THE ACT. IT WAS SUBMITTED BY HIM THAT THE ACCEP TANCE OF DEPOSITS BY BANKING COMPANY IS ONLY FOR THE PURPOSE OF LENDING WHICH IS A REGULAR BUSINESS OF THE ASSESSEE AND INTEREST PAID ON SUCH DEPOSITS WILL F ALL WITHIN THE AMBIT OF SEC. 37(1) OF THE ACT AND NOT U/S 28 OF THE ACT. IT WAS ALSO SUBMITTED BY HIM THAT EVEN SEC. 40(A)(IA) OF THE ACT MAKES A SPECIFIC REF ERENCE TO ANY INTEREST AND, THEREFORE ALL TYPES OF INTEREST ARE COVERED WITHIN THE AMBIT OF SEC. 40(A)(IA) OF THE ACT. IT WAS SUBMITTED BY HIM THAT LANGUAGE OF THE SEC. 40(A)(IA) OF THE ACT DOES NOT REQUIRE FOR ITS APPLICATION THAT THERE MUS T BE AN ORDER U/S 201(1) OF THE ACT UNDER CHAPTER XVII B OF THE ACT. 45. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. WE DO NOT FIND FORCE IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE. INTEREST PAID BY A BANKER ON THE DEPOSITS HELD BY ITS CUSTOM ER, THOUGH MAY NOT STRICTLY FALL WITHIN THE AMBIT OF SEC.36(1)(III) OF THE ACT, WILL FALL WITHIN THE AMBIT OF ITA NOS.673, 674 & 684/B/14 27 SEC.37(1) OF THE ACT, AS AN EXPENDITURE INCURRED WH ICH IS OF A REVENUE NATURE, WHOLLY AND EXCLUSIVE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE TO TREAT THE INTEREST EXPENSES AS ALLOWABLE U/S.28(I) OF THE ACT ON COMMERCIAL PRI NCIPLES CANNOT BE ACCEPTED, ESPECIALLY IN THE CONTEXT OF SEC.40(A)(IA) OF THE A CT, WHICH ARE PROVISIONS WHICH ARE MEANT FOR COLLECTION OF TAXES. SEC40(A)( IA) IS A DISABLING PROVISION WHICH AND NOT AN ENABLING PROVISION. AS RIGHTLY SU BMITTED BY THE LEARNED DR, THERE IS NOTHING IN THE LANGUAGE OF SEC.40(A)(IA) O F THE ACT TO THE EFFECT THAT IT IS ONLY WHEN AN ASSESSEE IS TREATED AS AN ASSESSEE IN DEFAULT UNDER CHAPTER XVII B OF THE ACT BY AN ORDER PASSED U/S.201(1) OF THE ACT, CAN A DISALLOWANCE BE MADE U/S.40(A)(IA) OF THE ACT OF TH E EXPENSES CLAIMED IN RESPECT OF WHICH THERE IS A DEFAULT IN DEDUCTING TA X AT SOURCE. THE ARGUMENTS RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE ARE WITHOUT ANY MERIT AND REJECTED. THUS THE DISALLOWANCE TO THE EXTENT OF RS .12,98,57,409 IS CONFIRMED. 46. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS T REATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 47. IN THE COMBINED RESULT, ITA NO.673/BANG/2014 I S PARTLY ALLOWED, ITA NO.674/B/2015 IS PARTLY ALLOWED AND ITA NO.684/BANG /2014 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH APRIL, 2017. SD/- SD/- (JASON P BOAZ) (N.V VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER VMS. BANGALORE DATED : 25/04/2017 ITA NOS.673, 674 & 684/B/14 28 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER SR. PRIVATE SECRETA RY, ITAT, BANGALORE. ITA NOS.673, 674 & 684/B/14 29 1. DATE OF D ICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR. P. S ... 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT.. 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER 12. THE DATE ON WHICH THE FILE GOES TO DESPATCH SEC TION FOR DESPATCH OF THE TRIBUNAL ORDER . 13. DATE OF D ESPATCH OF ORDER.