Income Tax Appellate Tribunal - Hyderabad
State Bank Of Hyderabad, Hyderabad vs Assessee on 9 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER
ITA No. 578/HYD/2010
Assessment Year: 2007-08
M/s State Bank of Hyderabad, ... Appellant
Hyderabad
(PAN - AADCS4009H)
Vs.
The Dy. Commissioner of Income-tax, ... Respondent
Circle - 3(2), Range-3, Hyderabad
and
ITA No. 779/HYD/2010
Assessment Year: 2007-08
The Dy. Commissioner of Income-tax, ... Appellant
Circle - 3(2), Range-3, Hyderabad
Vs.
M/s State Bank of Hyderabad, ...Respondent
Hyderabad
(PAN - AADCS4009H)
Assessee by : Mr. G. Kalyandas/Pawan Kumar
Revenue by : Mr. K. Gnana Prakash
Date of Hearing : 09/07/2012
Date of Pronouncement : 07/09/2012
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
These are the cross appeals directed against the orders of the CIT(A), Guntur for the assessment year 2007-08.
2 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad ITA NO. 578/Hyd/10 - appeal by the assessee
2. The assessee has raised the following grounds of appeal:-
"1. The order of the learned CIT(A) is contrary to law and the facts.
2.1 The learned CIT(A) erred in sustaining disallowance of Rs. 5.83 crores being proportionate expenditure on exempted income while actual expenditure incurred by the Bank on Investment Department is Rs. 7.04 lakhs and the Hon'ble Tribunal in the earlier years had determined the disallowance equal to 2 months salary of investment department.
2.2 Without prejudice to the above appellant contends, having regard to the interest free funds available to the appellant and the amount of investment made whose income is exempt, no disallowance could be made u/s 14A read with rule 8D of the IT Rules.
3.1The learned Assessing Officer erred in not allowing Rs. 276.39 crores u/s 36(1)(viia) of the Act.
3.2 The learned Assessing Officer is not correct in holding that the provision u/s 36(i)(viia) of the Act is allowed to the appellant bank subject to making provisions in the books of account which we contend contradict the spirit of law.
3.3 The learned Assessing Officer failed to note that the appellant bank being government undertaking participating in the public policies, rural development programs is allowed additional allowance u/s 36(1)(viia) of the Act without creating provisions in the books of account.
3.4 The appellant contends that claim u/s 36(i)(viia) of the Act is made in accordance with law and decisions rendered by courts.
3.5 Without prejudice to the above, the appellant contends that the provision u/s 36(i)(viia) of the Act in respect of rural branch advances Rs. 276.39 crores is allowable as the appellant not claimed bad debts Rs. 6.07 crore in respect of rural advances. Bad debts in 3 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad rural advances are required to be set off against provision allowable in respect of rural advances only. And our contention based on the law and the decisions of the courts.
3.6 The appellant therefore contends that the Assessing Officer be directed not to set off other debts against deduction u/s 36(i)(viia) of the Act allowed to the Bank in respect of rural advances.
4. The learned CIT(A) is not correct in holding that the provisions of section 115JB of the Act are applicable to the Bank as the appellant bank being 100% subsidiary of State Bank of India, is not required to hold annual general meeting which is mandatory as per the provisions of section 115JB of the Act."
3. The first issue on appeal is regarding the disallowance of Rs.5.83 crores being proportionate expenditure on exempted income u/s.14A. The AO disallowed Rs.5,83,68,430 on the ground that the relatable earnings of exempted income by the assessee. On appeal, the CIT(A) has directed the AO to work out the disallowance u/s.14A in terms of IT Rule 8D. Aggrieved the assessee is on appeal.
4. The Assessment Year on appeal is 2007-08 and hence the provision of Rule 8D will not be applicable as held by Mumbai High Court in the case of Godrej & Boyce Mfg Co Ltd. 328 ITR 81 (Mum). We therefore, set aside the issue of disallowance of income u/s14A to the files of AO to make reasonable estimate of expenditure which are attributable to earning of exempt income and disallow the same u/s14A.
5. The second ground of appeal is regarding disallowance of Rs.276.39 crores claimed by the assessee u/s.36(1)(viia) in respect of advances from their Rural Branches The assessee had written off Rs.102.15 Crores out of loan and 4 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad advances from the non rural branches and claimed the same deduction u/s.36(1)(vii). The assessee had claimed 10% of the aggregate average rural branches advance amounting to Rs.226.20 Crores and they have also claimed sum of Rs.50.18 Crores being provision and doubtful debts @ 7.5% of the total income under sec 36(1)(viia). The AO restricted the claim of Rs.276.39 Crores (Rs.226.20 + Rs.50.18 Crores) claimed u/s.36(1)(viia) to Rs.46 Crores since he found that the provision actually made by the appellant was to the extent of Rs.46 Crores only.
6. On appeal, before the CIT(A), the AR of the assessee submitted that the assessee had claimed the entire amount of Rs. 276.39 crores worked out as per the limits prescribed in section 36(1)(viia) and apart from this has also claimed an amount of Rs. 102.15 crores u/s 36(i)(vii) being loans from non rural branches actually written off. The AR of the assessee further submitted that the bad debts of Rs. 6.07 crores actually written off out of the rural advance were not being claimed, since the provision of Rs. 279.39 crores was much higher than the amount written off. After considering the submissions of the assessee, the CIT(A) held that the Assessing Officer was correct in holding that the claim u/s 36(1)(viia) is to be restricted to the amount of provision made in the books. Since the provision made in the books Rs. 46.00 crores only, the CIT(A) held that the provisions of Rs. 46.00 crores can be considered under the provisions of section 36(1)(viia) and not the amount of Rs. 276.39 crores.
7. On further appeal before us, the learned counsel Shri Kalyan Das reiterated the contentions made before the 5 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad CIT(A). The learned counsel relied upon the decision of the Catholic Syrian Bank Ltd. Vs. CIT, 343 ITR 270 (SC).
8. We have heard the arguments of both the parties and perused the record. We find that the issue of bad debts is now settled by the decisions of the Hon'ble Supreme Court in the case of (a) TRF Ltd (323 ITR 397) (b) Vijaya bank Ltd (323 ITR 166 and (c) Catholic Syrian Bank Ltd (343 ITR
270).
9. The Apex Court in the case of TRF Ltd(supra) has held that any debt written off as irrecoverable should be allowed as deduction. In the case of Vijaya Bank Ltd(supra), the Apex court has held that if the provision fro bad debts debited to the P&L is netted against the current assets the provisions is an allowable deduction even if individual accounts of the debtors are not wtitten off. In the case of Catholic Syrian bank Ltd(supra), which was not available with the lower authorities at the time of deciding the issue, the Apex Court has held as under under:
(i) The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s.
36(1)(viia) as it would frustrate the object of granting such deductions. The Revenue's argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, 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 6 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred)
10. In that case the Apex court has held that the bank would be entitled to both the deductions, one under Clause
(vii) on the basis of actual write off and another on the basis of clause (viia) in respect of mere provision. Further to prevent to double deduction, proviso to clause (vii) was inserted which says that in respect of bad debts 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). It follows that deduction u/s 36(1)(viia) is to be allowed only on the amount of provision made for bad and doubtful debts subject to the maximum on the basis of rural advances/ income prescribed under that section. The allowance u/s 36(1)(viia) cannot be in excess of provision for bad debts actually made in the accounts.
11. In view of the very clear principles laid down by the Apex Court in the above judgements, we deem it fit to set aside the issue to the file of the Assessing Officer to decide the issue in the light of the decisions of the Apex Court in the cases of (a) TRF Ltd (323 ITR 397) (b) Vijaya bank Ltd (323 ITR 166) and (c) Catholic Syrian Bank Ltd (343 ITR
270).
12. The next issue is regarding the applicability of provision of Sec.115JB to the assessee bank. The contention of the assessee is that the assessee being a bank, the provisions of companies act will not apply to the 7 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad assessee and hence the assessee will not be liable to tax u/s.115JB.
13. The provisions of Sec.115JB will be applicable to all companies. However, it is contended that Sec.115JB will be applicable only where the assessee is required to show profit & loss account in accordance with schedule VI of companies act. As the banks are required to prepare balance sheet and profit & loss account in accordance with the Banking Regulation Act, provision of 115JB cannot be applied to the banks. In the case of Maharashtra State Electricity Board vs. JCIT (82 ITD 422) it was held that provisions of book profit cannot be applied to Electricity Companies. Banking Companies and companies engaged in generation and supply of electricity do not have to prepare their accounts in accordance with parts II and III of Sch. VI of the Companies Act by the virtue of proviso to sec 211(2) of the Companies Act. We find that by the Finance Act 2012, with effect from 1.4.2013, even companies to which Proviso to sec 211(2) applies (the banking Companies and companies engaged in generating and distribution of electricity), should prepare their P&L and balance Sheet in ccordance with the provisions of the Act Governing such companies. This would mean that prior to AY 2013-14, provisions of sec 115JB will not apply to companies to which proviso to sec 211(2) of the companies Act, 1956 applies. The Assessee being a company to which proviso to sec 211(2) of the Companies Act 1956 applies, will not be liable to be taxed under sec 115JB.
14. The Mumbai Tribunal in the case of Krung Thai Bank Vs. JCIT (133 TTJ 435), to which one of us is a party has 8 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad held that provision of Sec.115JB cannot be applied to the banking company.
15. In view of the above, as the amendment to sec 115JB by the Finance Act 2012 will be applicable only from the AY 2013-2014, we uphold the claim of the assessee that provision of Sec.115JB will not be applicable to the Assessee Bank and set aside the assessment made u/s 115JB on the Assessee company.
16. In the result, appeal of the assessee is partly allowed for statistical purposes.
ITA 779 - DEPARTMENTAL APPEAL
17. This appeal is preferred by the Revenue directed against the order of CIT(A), Guntur, dated 12/03/2010 for the assessment year 2007-08.
18. The first issue in the appeal is regarding disallowance of broken period interest of Rs.58.51 Crores. The bank which have purchased government securities have paid Rs.58.51 Crores towards interest in respect of securities purchased for the broken period from the preceding due date for payment of interest upto the date of purchase. The bank had also received interest of Rs.36.84 Crores in respect of securities sold by them for the broken period from the preceding due date for payment of interest upto the date of the sale. The assessee claimed the amount of interest paid for the broken period upto the date of purchase as deduction on the ground that the securities were held stock in trade. The AO however rejected the appellant's claim 9 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad holding that the appellant's contention that the securities constituted stock in trade. It has not been accepted since it was found that the securities held in the category of HTM (held to maturity) did not form part of the stock. However, the CIT(A) allowed the claim on the ground that the same was in stock in trade and hence the interest for the broken period is an allowable deduction, following the decision of ITAT Hyderabad dated 18/03/05. Aggrieved Revenue is on appeal. We find that the issue is covered by the decision of the Mumbai Bench in the case of JCIT Vs. Dena Bank 139 TTJ 81 (Mum). They had followed the decision of Special Bench in the Mumbai in JCIT Bank of Beharain, 132 TTJ 505 and the decision of Mumbai High Court in the case of American Express International Banking Corporation Vs. CIT 258 ITR 601, we find that Kerala High Court., CIT Vs. Nedungadi Bank 264 ITR 545 has held that the broken period interest is an allowable deduction.
19. Respectfully following the above decisions, we uphold the order of CIT(A) and reject the Revenue's appeal on this ground.
20. The next issue in the Revenue's appeal read as under:
"The CIT(A) in deleting the disallowances made on account of omission for bad and doubtful debts and bad debts written off as the assessee fail to establish as to whether the bad debts written off correspond the advance against which no provision is made in the books towards bad and doubtful debts"
21. This issue has been covered in our decision in ITA 578/H/10 supra in the assessee's appeal wherein we have held that the bank would be entitled to both the deductions, 10 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad one under Clause (vii) on the basis of actual write off and another on the basis of clause (viia) in respect of mere provision. Further to prevent to double deduction, proviso to clause (vii) was inserted which says that in respect of bad debts 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).
22. We have set aside the Assessee's appeal(supra) on this issue to the file of the Assessing Officer to decide the issue in the light of the decisions of the Apex Court in the cases of
(a) TRF Ltd (323 ITR 397) (b) Vijaya bank Ltd (323 ITR 166 and (c) Catholic Syrian Bank Ltd (343 ITR 270). We set aside the appeal of the revenue also to the files of the AO with similar directions.
23. With the result the appeal of the Revenue is partly allowed for statistical purposes.
24. To sum up, appeal of the assessee and the revenue's appeal are partly allowed for statistical purposes.
Pronounced in the open court on 07/09/2012.
Sd/- Sd/-
(D. KARUNAKARA RAO) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 7 th September, 2012. kv 11 ITA NOS. 779 & 578/Hyd/2010 State Bank of Hyderabad Copy to:-
1) DCIT, Circle 3(2), Range-3, Hyderabad.
2) M/s State Bank of Hyderabad, Head Office, Finance and Accounts dept., Gunfoundry, Hyderabad
3) The CIT (A), Guntur
4) The CIT-III, Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.