Case Law Details
UCO Bank Vs ACIT (ITAT Kolkata)
Leave Encashment Allowed Only on Payment Basis as Tribunal Follows Supreme Court Ruling; MAT Additions Deleted Due to Inapplicability of Section 115JB to Statutory Banks; Disallowance for Short TDS Rejected as Covered by Jurisdictional High Court Decision; No Disallowance Under Section 14A Where Own Funds Exceed Investments.
The matter involved cross appeals against the order dated 12.12.2017 passed by the Commissioner of Income-tax (Appeals)-23, Kolkata for Assessment Year 2013–14.
On the issue of leave encashment, the Assessing Officer disallowed provision for leave encashment on the ground that deduction is allowable only on payment basis under Section 43B(f). The CIT(A) upheld the disallowance. The Tribunal noted that the Supreme Court had decided the issue in favour of the Revenue, holding that such deduction is allowable only on payment basis. Accordingly, while the disallowance on accrual basis was upheld, the Tribunal directed that deduction be allowed for actual payments made during the year.
With respect to applicability of Section 115JB (Minimum Alternate Tax), the assessee contended that it is not a company under the Companies Act, as it is established under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The Assessing Officer and CIT(A) held that Section 115JB applied and computed book profits accordingly. The Tribunal relied on a Special Bench decision which held that such banks are not companies formed and registered under the Companies Act. It was further held that deeming provisions treating such banks as “Indian companies” under the Income-tax Act cannot extend to treating them as companies under the Companies Act. Therefore, the conditions required for applying Section 115JB were not satisfied. The Tribunal concluded that provisions of Section 115JB are not applicable to such banks and set aside the orders of lower authorities on this issue.
In the Revenue’s appeal, the first issue related to disallowance under Section 40(a)(ia) for short deduction of tax at source. The CIT(A) deleted the addition following jurisdictional High Court precedent. The Tribunal upheld this deletion, finding no infirmity.
On disallowance under Section 14A read with Rule 8D, the Assessing Officer made additions in respect of expenditure relating to exempt income. The CIT(A) deleted the additions based on earlier decisions and judicial precedents. The Tribunal affirmed this deletion, noting that where own funds exceed investments, no disallowance of interest is warranted.
Regarding additions to book profit under Section 115JB for provisions such as fraud and doubtful debts, the Tribunal held that since Section 115JB itself was not applicable to the assessee, such additions could not survive. Accordingly, the Revenue’s grounds on this issue were dismissed.
Another issue concerned disallowance under Section 40(a)(i) for non-deduction of tax on payments made to a foreign entity. The Assessing Officer held that the payments were taxable in India due to business connection and disallowed the expenditure. The CIT(A) deleted the addition, observing that no material was brought on record to show that the foreign entity carried out operations or had a permanent establishment in India. It was also noted that under the applicable tax treaty, such income would not be taxable in India in absence of a permanent establishment. The Tribunal upheld this finding, noting consistency with earlier years and judicial precedents.
In conclusion, the assessee’s appeal was partly allowed, particularly on the issue of applicability of Section 115JB and payment-based deduction of leave encashment, while the Revenue’s appeal was dismissed in entirety.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
These are cross appeals preferred against the order of the Commissioner of Income-tax (Appeals)-23, Kolkata (hereinafter referred to as the “Ld. CIT(A)”] dated 12.12.2017 for the AY 2013-14.
2. The ground nos. 1 and 2 are against the order of ld. CIT (A) upholding the disallowances of leave encashment of ₹35,68,07,485/-. The assessee has also raised a without prejudice issue that the leave of encashment expenditure should have been allowed by the ld. CIT on payment basis.
2.1. The facts in brief are that the ld. AO during the course of assessment proceedings observed that the assessee has claimed provisions for leave encashment which were not allowable expenses while determining the income of the assessee. The ld. AO noted that the decision relied on by the assessee in the case of Exide Industries Ltd. Vs. CIT 292 ITR 470(Cal) which has been stayed by the Hon’ble Supreme Court. The ld. AO further noted that as per provisions of Section 43B(f) of the Income-tax Act, 1961 (the Act) the deduction of provision of leave encashment is admissible on payment basis and not on accrual basis and accordingly made the addition.
2.2. The ld. CIT (A) affirmed the order of the ld. AO by holding that the Hon’ble Supreme Court has admitted the SLP against the decision of Hon’ble Kolkata High Court as stated above and also stayed the operation of the said decision.
2.3. After hearing the rival contentions and perusing the materials available on record, we find that the issue of admissibility of leave encashment on payment basis is squarely covered by the decision of Union of India Vs. Excide Industries Ltd. reported in (2010) 116 taxmann.com 378 (SC) vide order dated 24.04.2020, wherein the Hon’ble Apex Court has set aside the order of Hon’ble Calcutta High Court and decided the issue in favour of the Revenue. However, the position of the Act that the leave encashment is an admissible expense on payment basis still holds the ground. Accordingly, we direct the ld. AO to allow the deduction to the assessee in respect of leave encashment paid during the year. Hence, ground no.1 is dismissed, while ground no. 2 is allowed.
3. The issue raised in ground no.3 is not pressed at the time of hearing and is dismissed as not pressed.
4. The issue raised in grounds no.4 to 9 is against the order of ld. CIT (A) upholding the order of the ld. AO assessing the book profit u/s 115JB of the Act and holding that the Provisions of Section 115JB of the Act, were applicable to the assessee’s bank which is even not incorporated under Companies Act, 1956.
4.1. The facts in brief are that the assessee is established under the baking of companies (acquisition and transfer) of undertakings Act 1970 and is not a company within the meaning of Companies Act 1956. Therefore, the Provisions of Section 115JB of the Act were not applicable to the assessee. The ld. AO held that the Provisions of Section 115JB of the Act were applicable to the assessee and accordingly, computed the book profit u/s 115JB of the Act. The ld. CIT (A) dismissed the appeal of the assessee by upholding the order of ld. AO on this issue.
4.2. After hearing the rival contentions and perusing the materials available on record, we find that the ld. AO calculated the book profit by making an addition in respect of provisions created by the assessee aggregating to ₹268,74,51,368/-. The order of the ld. AO was affirmed by the ld. CIT (A). The ld. counsel of the assessee submitted that the issue is squarely covered by the decision of Mumbai (SB) whereas the ld. DR submitted that the issue is sub-judice before the Hon’ble Apex Court. In our opinion, the issue is squarely covered by the decision of the Special Bench of Mumbai in case of Union Bank of India Vs. DCIT, LTU reported in (2024) 115 ITR (Trib) 481 (ITAT Mum-SB) order dated 06.09.2024. We have considered the argument of the ld. DR qua the issue being pending before Hon’ble Apex Court but that for that reasons the case could not be kept pending. For the sale of ready reference we extract the operative part of the above decision as under:-
“39. We have heard both the parties and also perused the relevant material referred to before us and the various provisions of the relevant Acts cited which are relevant for adjudication of the issue before us.
40. The question which has been referred to the Special Bench is whether the requirement of sub-section (2) of 115JB is fulfilled in the present case of the assessees. Sub-section (1) of Section 115JB mandates charge of income tax based on book profits subject to fulfillment of certain conditions and also provides the rate on which such tax shall be charged. The Section starts with non-obstante clause and therefore, it is a departure from normal charge of tax on the total income of the company. Sub-section (2) is the computation provision dealing with the manner in which such book profits are to be computed. Upto A.Y.2012-13, subsection (2) of Section 115JB applied only to such companies which were required to prepare its profit and loss account in accordance with part II & III of Schedule VI to the Companies Act 1956. The assessee bank is required to prepare its profit and loss account in accordance with Section 52 r.w.s. 29 of the Banking Regulation Act and not as per the Companies Act. Earlier in the case of the assessee it has been settled by the Hon’ble Jurisdictional High Court that provision of Section 115JB has no application to its case. Now after the amendment w.e.f. A.Y.2013-14, Sub-section (2) has been amended to bring into the ambit of Section 115JB, those companies to which second proviso to subsection (1) of Section 129 of the Companies Act is applicable, who are required to prepare its statement of profit and loss account in accordance with provisions of the Act governing such company. For the sake of ready reference the amended subsection (2) of Section 115JB is again reproduced hereunder:-
(2) Every assessee,—
(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or
(b) being a company, to which the second proviso to subsection (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company:
Provided that while preparing the annual accounts including statement of profit and loss,—
i. the accounting policies;
ii. the accounting standards adopted for preparing such accounts including statement of profit and loss;
iii. the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (18 of 2013):
Provided further that where the company has adopted or adopts the financial year under the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,—
i. the accounting policies;
ii. the accounting standards adopted for preparing such accounts including statement of profit and loss;
iii. the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financial year falling within the relevant previous year.
41. In so far as Clause (a), the same applies to a case of a company other than referred to in Clause (b). According to clause (a), for the purpose of Section 115JB the company has to prepare its profit and loss account for the relevant previous year in accordance with the Companies Act, 2013 and the First proviso to sub-section (2) requires that while preparing the accounts including the profit and loss account, the accounting policies, the accounting standards and the method and rates adopted for the purpose of preparing such accounts including the profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of Section 129 of the Companies Act, 2013. Since assessee bank has to prepare its accounts in accordance with the provisions contained in Section 51 r.w.s. 29 of the BR Act, therefore, Schedule III of the Companies Act is not applicable. Thus, Clause (a) of Section 115JB (2), the computation provision, will not apply and this matter has attained finality in the case of the assessee by the Hon’ble Jurisdictional High Court in the case of the assessee (cited supra).
42. Now for Clause (b), following conditions need to be satisfied for applying section 115JB in the case of a company:-
i. it applies to a company to which the second proviso to subsection (1) of section 129 of the Companies Act, 2013 is applicable;
ii. once this condition is fulfilled, it requires such assessee for the purpose of this section to prepare its profit and loss account in accordance with the provisions of the Act governing such company.
43. Since 115JB is applicable to the company to which second proviso to Section 129(1) applies, therefore, it would be relevant to quote Section 129 of the Companies Act which reads as under:-
“129. Financial statement-(1) The financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting standards.
Provided further that nothing contained in this subsection shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company Provided also that the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose (a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938 (4 of 1938), or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999),
b. in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949 (10 of 1949),
c. in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003 (36 of 2003),
d. in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.”
44. The second proviso applies to any insurance company, banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company. In so far as the present case is concerned, one has to consider whether the assessee could be regarded as a ‘banking company’ for the purposes of section 129 of the Companies Act, 2013).
45. Now whether the assessee bank can be termed as a company within the meaning of the Companies Act, 2013, first of all, Section 115JB(2) is applicable to every assessee „being a company’. The company has been defined in Section 2(17) of the Income Tax Act which we have already reproduced in para 22 above. Thus, the company means any Indian company. Indian company has been defined in Section 2(26) (incorporated in para 23 of the order) which defines „Indian company’ means company formed and registered under the Companies Act. Thus, the company for the purpose of the Income Tax Act is a company which is formed and registered under the Companies Act. Section 2(9) of the Companies Act, 2013, a banking company has been defined to mean a banking company as defined in section 5(c) of the BR Act). Section 5(c) of the BR Act defines a „banking company’ as under:
“(c) “banking company” means any company which transacts the business of banking in India”
Therefore, for an entity to qualify as a banking company it should first of all, be a company’ and secondly the said company should transact the business of banking in India.
46. The expression “company” has been defined in section 5(d) of the BR Act as under:
“(d) “company” means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that Act;”
47. Therefore, in so far as is relevant, the entity has to be a company as defined in section 3 of the Companies Act, 1956 (Now 2013) to be regarded as a banking company. Section 3(1)(i) of the Companies Act, defines a ‘company’ as under:
“(i) “company” means a company formed and registered under this Act or an existing company as defined in clause (ii)”
48. Therefore, it is sine-qua-non that for an entity to qualify as a company it must either be a company formed and registered under the Companies Act or it should be an existing company as defined in sub-clause (ii) thereof. Since the Assessee is not formed and registered under the Companies Act, 1956, albeit came into existence by a separate Act of Parliament, that is, „Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970′, therefore, it does not fall in the first part of the said section.
49. Further, the expression “existing company has been defined in Section 3(1)(ii) to mean as under:
“(ii) “existing company” means a company formed and registered under any of the previous companies laws specified below :-
a. any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1866), and repealed by that Act;
b. the Indian Companies Act, 1866 (10 of 1866);
c. the Indian Companies Act, 1882 (6 of 1882);
d. the Indian Companies Act, 1913 (7 of 1913);
e. the Registration of Transferred Companies Ordinance, 1942 (54 of 1942); and
f. any law corresponding to any of the Acts or the Ordinance aforesaid and in force – (1) in the merged territories or in a Part B States (other than the State of Jammu and Kashmir), or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7 of 1913);
or
(2) in the State of Jammu and Kashmir, or any part thereof, before the commencement of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956), insofar as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu & Kashmir) Act, 1968 (25 of 1968), insofar as other corporations are concemed; and (3) the Portuguese Commercial Code, insofar as it relates to sociedadesanonimas”;”
50. The assessee bank was neither formed or registered under the Companies Act, 1956; nor it is in existing company as per the above definition. Once it is not a company under the Companies Act, then the first condition referred to in clause (b) of Section 115JB(2) is not fulfilled, and consequently second proviso below Section 129(1) of the Companies Act is also not applicable.
51. The main crux of the department is that since assessee bank has come into existence by the Acquisition Act’ and Section 11 thereof states that for the purpose of Income Tax Act, every corresponding new bank shall be deemed to be an „Indian company’ and the company in which the public are Substantially interested’ and since in Section 2(17) of the Income Tax Act, the „company’ has been defined as any Indian company therefore, the provisions of the Income Tax Act would apply because Section 2(26) of the Act defines „Indian company’ means the company formed and registered under the Companies Act and therefore, it is deemed to be a company under the Companies Act.
52. Section 11 of the Acquisition Act states that “For the purposes of Income-tax Act, 1961 (43 of 1961), every corresponding new bank shall be deemed to be an Indian company and a company in which the public are substantially interested”. Therefore, the said deeming fiction is created only for the purposes of the Income-tax Act. Further, for the purposes of the said Act, it treats every corresponding new bank to be an Indian company and also a company in which the public are substantially interested.
53. First of all, deeming an entity to be an Indian Company or a company in which public are substantially interested for the purposes of the Income-tax Act would not ipso facto make such entity as a ‘company’ for the purposes of the Companies Act, 2013, unless the conditions specified in Section 3 thereof are fulfilled. There is no provision to deem a nationalised bank to be a company for the purposes of Section 3 of the Companies Act, 1956.
54. As explained in the foregoing paragraphs, Section 2(17) of the income Tax Act r.w.s. 2(26) which defines „company’ to mean a company formed and registered under the Companies Act, 1956, does not meet the requirement of being a company in the case of assessee bank, because the Indian company has to be formed and registered under the Companies Act. Notwithstanding that Section 11 of the Acquisition Act deems assessee bank to be a company for the purpose of Income Tax Act, but that does not lead to an inference that merely regarded as a company for the purpose of the Income Tax Act it is also Company registered under the Companies Act. The fiction created by Section 11 of the Acquisition Act, does not imply that the assessee bank would also become a company for the purpose of the Companies Act for which Clause (b) of Sub-Section 2 of Section 115JB is applicable.
55. In the earlier part of the order, we have already noted that by the Acquisition Act, the banking business of the existing bank was transferred from Union Bank of India Ltd to The Union Bank of India. The earlier entity, i.e., Union Bank of India Ltd. was a company under the earlier Companies Act, however, that company as a whole was not taken over or acquired but only banking business was acquired by the Acquisition Act. That is the reason why Union Bank of India Ltd. still existed at the point of acquisition and continues till now and the shareholders of Union Bank of India Ltd. were paid compensation as a consideration for acquiring the banking business. It was by the Acquisition Act that these banks were nationalized and the banking business was acquired from the erstwhile banking companies. These new acquiring banks including Union Bank of India is neither registered under the Companies Act, 2013 nor under any other previous company law. Already the Hon’ble Supreme Court in the case of Rustom Cavasjee Cooper (supra) as noted above, the Hon’ble Supreme Court had held that only undertaking was acquired for the banking companies acquisition and transfer of invoking ordinance which was promulgated on 19/06/1969, which culminated into the Act of Banking Companies (Acquisition and Transfer of Undertaking) Act,1970. Thus, assessee cannot be treated as a company under the Companies Act, because it was never registered under the Companies Act. Ergo, the deeming fiction by way of Section 11 of the Acquisition Act has to be read purely in the context for the purpose of Income Tax Act where the corresponding new bank have been deemed to be an Indian Company and a company in which public are substantially interested. This deeming section cannot be extended to a company registered under the Companies Act to which alone Section 115JB is applicable.
56. Thus, we hold that Section 11 of the Acquisition Act which deals a corresponding new bank treated as Indian company for the purpose of Income Tax, however, Clause (b) in Sub-Section 2 to Section 115JB does not permit treatment of such bank as a company for the purpose of the said clause, because it should be company to which second proviso to sub-section (1) to Section 129 of the Companies Act is applicable. The said proviso has no application to the corresponding new bank as it is not a banking company for the purpose of the said provision. The expression “company” used in section 115JB(2)(b) is to be inferred to be company under the Companies Act and not to an entity which is deemed by a fiction to be a company for the purpose of the Income Tax Act.
57. Before us, ld. Counsel
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