State Bank of India Vs ACIT (ITAT Chandigarh)
ITAT Chandigarh held that disallowance of expenses u/s 14A read with Rule 8D is unwarranted on the premise that the investment in shares were stock-in-trade.
Facts- The assessee has challenged the action of the Ld.CIT(A) in upholding disallowance of deduction claimed by the assessee u/s 36(1)(viii) of the Income Tax Act, 1961 amounting to Rs. 120 crores. The assessee bank had claimed deduction of Rs. 120 crores on account of a special reserve created for the impugned assessment year, under the provisions of section 36(1)(viii) of the Act. The same was denied by the AO since he found that the special reserve was not created before finalization of the books of the assessee for the impugned year. AO found that the assessee had created the special reserve only in financial year 20 12-13 relevant to assessment year 2013-14. He, therefore, held that the assessee was not entitled to claim deduction u/s 36(1)(viii) of the Act.
AO, during the assessment proceedings found that assessee had shown dividend income exempt u/s 10(34) & 10(35) and net interest income exempt u/s 10(15)(iv)(h). AO, therefore, disallowed expenses as per the provisions of section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 computing the same at Rs. 17 crores, and after reducing the expenses suo moto disallowed by the assessee amounting to Rs.4,57,918/-, made disallowance of the balance amounting to Rs. 16.95 crores.
Conclusion- Held that that for claiming deduction u/s 36(1)(viii) of the Act on account of creation of special reserve, what is essential is that the same should be created out of the profits of the year only though not necessarily in the books for the impugned year and that the same can be created in the books of the subsequent year also. Accordingly, we hold that the assessee is entitled to claim deduction on account of creation of special reserve of Rs. 120 crores u/s 36(1)(viii) of the Act since the said reserve has been created out of the profits of the impugned year before the claim was considered for the purpose of deduction.
We find no merit in the ground raised by the Revenue since the Hon’ble High Court has already decided the issue of disallowance of expenses u/s 14A read with Rule 8D in the case of the assessee in assessment year 2008-09 in favour of the assessee on the premise that investments in shares were stock-in-trade of the assessee, in which case no disallowance u/s 14A was warranted.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
The captioned appeals relate to the same assessee and are cross appeals filed by the assessee and revenue against orders passed by the Commissioner of Income Tax (Appeals),Patiala,(hereinafter referred to as ‘CIT(A)’) pertaining to assessment year 2011-12, 2013-14 & 2014-15, while the assessee has filed appeal against orders passed by the CIT(A), Patiala, for A.Y.2012-13 & 2015-16.
It was common ground between both the parties that the issue involved in all the appeals was common ,therefore they were all heard together and are being disposed off by way of a common, consolidated order for the sake of convenience. We shall first be dealing with the cross appeals relating to A.Y 2011-12.
ITA No.861/Chd/2017: Assessee’s appeal for A.Y.2011-12
2. Ground No.1 raised by the assessee reads as under:
“1. The Ld. CIT(A) failed to appreciate that for creation of reserve u/s 36(1)(viii) no time limit was prescribed in the Act, when the same was created before the completion of assessment, the deduction u/s 36(1)(viii) should have been granted by the AO.”
3. In the above ground the assessee has challenged the action of the Ld.CIT(Appeals) in upholding disallowance of deduction claimed by the assessee u/s 36(1)(viii) of the Income Tax Act, 1961 (in short ‘the Act’) amounting to Rs. 120 crores. The assessee bank had claimed deduction of Rs. 120 crores on account of a special reserve created for the impugned assessment year, under the provisions of section 36(1)(viii) of the Act. The same was denied by the Assessing Officer since he found that the special reserve was not created before finalization of the books of the assessee for the impugned year. The Assessing Officer found that the assessee had created the special reserve only in financial year 20 12-13 relevant to assessment year 2013-14. He, therefore, held that the assessee was not entitled to claim deduction u/s 36(1)(viii) of the Act.
4. The Ld.CIT(Appeals) upheld the disallowance, holding that the assessee was duty bound to create and maintain the special reserve out of the profits of the eligible business during the relevant financial year itself and having not done so he held that the Assessing Officer had rightly denied the said claim of the assessee. The Ld.CIT(Appeals) distinguished all the case laws relied upon by the assessee in support of its contention that it was not imperative to create reserve for the impugned year itself before claiming the said deduction.
5. During the course of hearing before us, the Ld. counsel for assessee pointed out that identical issue had been dealt with by the Delhi Bench of the I.T.A.T. in the case of Power Finance Corporation Limited Vs. JCIT (2008) 16 DTR 519(Del) which was followed by the Mumbai Bench of the I.T.A.T. in the case of Bank of Baroda Vs. Addl.CIT in ITA No.4619/M/2012 dated 4. 1 1.2015. Copies of the order were placed before us. The Ld. counsel for assessee pointed out therefrom that it was held by the Tribunal in the said cases that the reserve created in subsequent years, however, before finalization of grant of deduction is required to be considered while allowing the assessee’s claim of deduction made u/s 36(1)(viii) of the Act
6. The Ld. DR, on the other hand, relied upon the order of the Ld.CIT(Appeals) and pointed out therefrom that the Ld.CIT(Appeals) had distinguished the aforesaid case law relied upon by the assessee before it by pointing out that the said decision pertained to assessment year prior to assessment year 1998-99 and further that as per the amended provisions the pre-condition for claiming deduction u/s 36(1)(viii) is the creation and maintenance of the reserve, which the assessee had failed to do in the present case. The Ld. DR further drew our attention to the case laws relied upon by the Ld.CIT(Appeals) while upholding the order of the Assessing Officer in support of its finding that the creation of reserve is a pre-condition for claiming deduction u/s 36(1)(viii) of the Act as under:
1) CIT Vs. Tamil Nadu Industrial Investment Corporation Ltd., 240 ITR 573 (Mad)
2) Kerala Financial Corporation Vs. CIT 129 Taxmann 365(Ker)
7. We have heard the contentions of both the parties. We have also gone through the orders of the authorities below and case laws cited before us and also the documents which were brought to our notice during the course of hearing.
8. The issue before us pertains to allowance of deduction on account of creation of a special reserve as per the provisions of section 36(1)(viii) of the Act which though not created in the books of account in the relevant previous year and created later in the A.Y. 2013-14, but before the assessment for the impugned year was completed.
9. We find merit in the contention of the Ld. counsel for assessee that the issue is squarely covered by the decision of the Coordinate Benches in the case of Power Finance Corporation Limited (supra) and Bank of Baroda (supra). On perusing the order of the Delhi Bench of the I.T.A.T. in the case of Power Finance Corporation Limited (supra) we find that the issue before it was identical to the impugned case whether the creation of special reserve at the time of finalization of accounts is imperative for the purpose of claiming deduction on account of the same as per the provision of section 36(1)(viii) of the Act. As per the facts of the said case the assessee had created special reserve of Rs.76.72 crores during the year under consideration but had claimed deduction 36(1)(viii) of the Act on account of higher amount of Rs. 130.47 crores on the basis that the reserve of the balance amount of Rs.53.27 crores had been created in the succeeding year. The tax authorities restricted the claim to the extent of reserve created during the year only denying the balance for the reason that the same was not created by the assessee in the books of account for the impugned year but was created in the subsequent year. The I.T.A.T. held that as per the plain reading of section 36(1)(viii) no time limit is indicated for the creation of special reserve for claiming deduction u/s 36(1)(viii) of the Act. The I.T.A.T. held that, therefore, there was no force in the contention of the Revenue that section does not permit deduction in cases where the reserve is created in subsequent years. The I.T.A.T. held that the words used in section “before making any deduction under this clause carried to such reserve account” meant that the creation of the reserve should be considered at the time of considering the claim of deduction made by the assessee and not before making any deduction. The I.T.A.T. drew support for its findings from the decision of he Delhi High Court in the case of CIT Vs. Orient Express Co. Pvt. Ltd. Vs. IAC (1985) 14 ITD 506 (Delhi), the decision of the Special Bench of the ITAT Chandigarh Bench in the case of M/s Punjab State Industrial Corporation Ltd. Vs. DCIT, 102 ITD 1 (Chd)(SB) and the decision of the Hon’ble Apex Court in the case of Karimjee Pvt. Ltd vs DCIT (2005) 193 CTR (SC) 55. The I.T.A.T., therefore, held that the assessee is entitled to deduction u/s 36(1)(viii) of the Act though the reserve is created in the subsequent year provided the same is created before the claim of the assessee is considered and also provided that the same is made out of the profits for the concerned year and not out of the profits of the subsequent year. The relevant findings of the I.T.A.T. in this regard at paras 20 to 25 are as under:
“20. A plain reading of s. 36(1)(viii) does not indicate any time-limit for creation of special reserve for claiming deduction under s. 36(1)(viii) of the Act, hence, the contention of learned Departmental Representative for the Revenue that this provision does not permit the deduction in case the special reserve is created in subsequent year, has no force as it does not find support from the plain language of s. 36(1)(viii) of the Act. Perhaps, the words “…….. (before making any deduction under this clause) carried to such reserve account” prompt such inference by the learned Departmental Representative for the Revenue but to our mind answer to such inference drawn by the learned Departmental Representative for the Revenue is that before making any deduction does not mean before making any claim but means at the time of considering such deduction claimed by the assessee.
21. Hon’ble jurisdictional High Court of Delhi while interpreting similar wordings in the context of s. 32A of the Act in the case of CIT vs. Orient Express Co. (P) Ltd. (supra) while dealing with creation of reserve required under s. 32A of the Act at p. 896 held that section prescribes no point of time by which the reserve should be created and in this regard accepted that a reserve created after the closure of the accounts of the year qualifies by observing as under :
“The second question which is raised only in ITC Nos. 44 and 45 of 1986 is whether the assessee is disentitled to the investment allowance scheme because no requisite reserve has been created by the assessee company before the close of books of the relevant previous year. On this, the finding is that the requisite ‘reserve’ has been created by holding a second annual general meeting of the members of the company and that the accounts had been duly amended so as to provide for the reserve before the assessment was completed. In view of the fact that the section prescribes no point of time by which the reserve should be created and in view of the various decisions also referred to by the Tribunal, we think, no question of law arises in regard to this aspect. We, therefore, decline to refer this question.”
The observation made by the Hon’ble Delhi High Court in this regard is thus clearly applicable to the instant case under consideration also.
22. We further find that the Special Bench of Tribunal (Chandigarh) in the case of Punjab State Industrial Development Corporation Ltd. (supra) also clearly held that in case of claim under s. 36(1)(viii) of the Act further reserve could be created after closure of the account and AO should offer an opportunity to the assessee to do the same for claiming the deduction under s. 36(1)(viii) of the Act.
23. Similar view as taken by the apex Court in the case of Karimjee (P) Ltd. (supra) wherein while dealing with deduction under s. 80HHC of the Act, their Lordships observed that creation of reserve after closure of the accounts was construed as complying with the requirement of granting deduction under s. 80HHC of the Act and in this case the timing of creation of reserve was while the matter was being dealt with by the apex Court.
24. Respectfully following the case law (supra) as discussed hereinabove, we hold that a reserve created in subsequent years, however, before finalization of grant of deduction, is required to be considered while allowing assessee’s claim of deduction made under s. 36(1)(viii) of the Act.
25. We further observe that for and from asst. yr. 1996-97, a financial corporation engaged in providing long-term finance for development of infrastructure facility in India has also become eligible assessee and for computing deduction under s. 36(1)(viii) of the Act in the hands of all eligible assessees, only the income derived from the business of providing longterm finance specified in s. 36(1)(viii) of the Act has to be taken into account and an amount not exceeding 40 per cent of the profits from such business is to be carried to such reserve account. This makes out a condition that the amount so transferred to such reserve account should be from such eligible business of providing long-term financing.
In view thereof, we hold that the increase in reserve created on 31st March, 1998 i.e., in subsequent year/years is allowable subject to the same being from the profits of eligible business of the assessee of the asst. yr. 1997-98 and not of asst. yr. 1998-99.”
10. The aforesaid decision of the Delhi Bench of the I.T.A.T. was followed by the Mumbai Bench of the I.T.A.T. in the case of Bank of Baroda (supra) wherein the issue was identical, the assessee having claimed deduction u/s 36(1)(viii) of the Act, though the special reserve for the purpose of the said claim had not been made during the impugned year but had been made in the subsequent year.
11. It is clear therefore that for claiming deduction u/s 36(1)(viii) of the Act on account of creation of special reserve, what is essential is that the same should be created out of the profits of the year only though not necessarily in the books for the impugned year and that the same can be created in the books of the subsequent year also. What is essential is the creation out of the profits of the impugned year, the point of time of creation being before the consideration of the claim of deduction and not before claiming the deduction as such.
12. Applying the aforesaid provision to the facts of the present case we find that the claim of the assessee amounts to Rs. 120 crores for deduction u/s 36(1)(viii) of the Act. The said reserve had been created in financial year 2012-13,i.e before the completion of the assessment for the impugned year vide order passed u/s 143(3) dt.31-03-2014 was . As per the audited annual report of the assessee of the said year placed before us, it is seen from the Profit & Loss Account for the year ending 3 1.3.2013, that an amount of Rs. 120 crores was transferred from the general reserve out of the profit for the financial year 2010-1 1 relating to assessment year 201 1-12, which is the impugned assessment year, for creating the special reserve u/s 36(1)(viii) of the Act for the assessment year 201 1-12. Thus the assessee has duly demonstrated the creation of reserve out of the profits for the impugned assessment year only and also it is not denied that the same had been created before the finalization of the assessment for the impugned assessment year, meaning thereby while considering the claim of the assessee for deduction u/s 36(1)(viii) of the Act. In view of the above, since the assessee has fulfilled the requirement of section 36(1)(viii) of the Act as interpreted by two decisions of the Tribunal as cited above, we hold that the assessee is entitled to deduction u/s 36(1)(viii) of the Act to the extent of reserve created amounting to Rs. 120 crores.
13. The reliance placed by the Ld. DR on the decision of the Hon’ble Madras High Court in the case of Tamil Nadu Industrial Investment Corporation Ltd. (supra), we find is of no help to the Revenue. In fact, we find that the ratio laid down in the said decision helps the assessee since the Hon’ble High Court held that for the purpose of claiming deduction u/s 36(1)(viii) of the Act, the creation of reserve out of the profits of the impugned year was imperative. In the case before the Hon’ble High Court the assessee had created reserve out of profits of earlier years which the Hon’ble High Court held would not entitle the assessee to claim deduction u/s 36(1)(viii) of, since the essential condition for claiming the said deduction was creation of reserve out of the profits of the impugned year itself. Since the same has been demonstrated in the present case, the decision of the Hon’ble Madras High Court in the case of Tamil Nadu Industrial Investment Corporation Ltd. (supra), in fact, we find helps the assessee’s case. As for the decision relied upon by the assessee of the Hon’ble Kerala High Court in the case of Kerala Financial Corporation (supra), we fail to understand how the said decision is of any assistance to the Revenue since no decision was rendered by the Hon’ble High Court vis-à-vis the issue of point of time of creation of reserve and the only issue before it was whether after creation of reserve, writing off bad debts from the same would tantamount to not “maintaining” the reserve which was required u/s 36(1)(viii) of the Act. The decision of the Hon’ble Kerala High Court is, therefore, clearly distinguishable and we hold, therefore, does not apply to the facts and circumstances of the present case at all. As for the contention of the Ld. DR that the case laws relied upon by the assessee are for the period prior to assessment year 1998-99 and as per amended provisions of section 36(1)(viii) thereafter, the creation of reserve is essential pre-requisite, we find is mis-placed.
The creation of reserve was always a condition both in pre-amended and post-amended section. What was added only to the words of the section after the amendment carried out in 1998 was the words “maintained”. Therefore, even the decision rendered prior to the amendment brought about to section in 1998, applies to the issue at hand since the amendment had no impact on the condition of creation of reserve.
14. In view of the above, we hold that the assessee is entitled to claim deduction on account of creation of special reserve of Rs. 120 crores u/s 36(1)(viii) of the Act since the said reserve has been created out of the profits of the impugned year before the claim was considered for the purpose of deduction. The ground of appeal No. 1 raised by the assessee, therefore, stands allowed.
15. Ground No.2 raised by the assessee read as under:
“2. The Ld. CIT(A) failed to appreciate that when income is increased consequent on additions in the assessment order, deduction u/s 36(1)(viia) shall be increased to that extent in conformity with the provisions of the said section.”
16. Briefly stated, the only plea of the assessee vis-à-vis this ground is that the assessee ought to have been allowed deduction u/s 36(1)(viia) of the Act on account of provision for any bad and doubtful debt on the income enhanced during assessment proceedings. The Ld.CIT(Appeals) rejected this plea of the assessee by stating that the additions made by the Assessing Officer represented concealed income of the assessee and, therefore, the same was not eligible for any deduction.
17. We are in agreement with the Ld.CIT(Appeals) in this regard, that the assessee is not entitled to claim any deduction on account of the enhancement made to the income of the assessee during assessment proceedings by virtue of various additions/disallowances made during assessment proceedings and the reason for the same is that as per the provisions of section 36(1)(viia) of the Act, deduction is allowed in respect of any provision for bad and doubtful debt made by the assessee. For better understanding Section 36(1)(viia) is reproduced as under:
“Section 36(1)(viia) in The Income- Tax Act, 1995
(viia) in respect of any provision for bad and doubtful debts made by-
(a) a scheduled bank[ not being 1 ] a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 2 ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner;”
Clearly, no such provision has been made in the books of account of the assessee with respect to the additions/disallowances made. Therefore as per the plain reading of the section itself, the assessee is not entitled to claim any deduction on the enhanced income.
In view of the above, ground No.2 raised by the assessee stands dismissed.
18. The appeal of the assessee, therefore, stands partly allowed.
ITA No.787/Chd/2017: Revenue’s appeal for A.Y 2011-12
19. Ground No. 1 raised by the Revenue reads as under:
“1. Whether in the facts and circumstances of the case, the Ld.CIT(A), Patiala is legally correct in deleting the addition of Rs. 16,95,42,082/- made on account of apportionment of expenses against exempted income u/s 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962.”
20. Briefly stated, the Assessing Officer during assessment proceedings found that the assessee had shown the following incomes as exempt in its return of income:
