Case Law Details
ICICI Bank Ltd Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that non-examination of the details clearly makes the order of AO erroneous and prejudicial to the interest of revenue. Accordingly, PCIT correctly assumed the revisional jurisdiction under section 263 of the Income Tax Act.
Facts- Assessee is a company engaged in banking operations and related activities showing income from banking activities, dividends, interest on debentures, leasing, deposits and advances and commission fee etc.
AO passed the assessment order on 12/02/2019 u/s 143 (3) rws 144C (3) of the Act after making various additions/ disallowances. Thereafter, PCIT examined the records and held that the order of the learned Assessing Officer is erroneous and prejudicial to the interest of Revenue. Being aggrieved, the present appeal is filed.
Conclusion- Held that order of the learned PCIT does not show that what is the error in allowing the claim of the assessee wherein the amount is debited to the profit and loss account as write off .therefore, on this issue we do not find that there is any error in the order of the learned assessing officer in allowing the claim of the assessee which is after calling for the explanation and correctly allowed. Therefore, on the same issue of the bad debts allowed of Rs. 3,126,937,766/– the order of the learned PCIT is not sustainable.
Held that it cannot be the case that the amount of deduction is allowable to the assessee higher than what is not claimed in the return of income without there being a revised return before the LD AO. Therefore, it is in clear violation of the decision of the honourable Supreme Court in 284 ITR 323 in case of Goetz India limited versus CIT. Therefore, we uphold the action of the learned PCIT in holding that claim allowed by the assessing officer higher than that claimed in the return of income without assessee filing any revised return is definitely erroneous and prejudicial to the interest of the revenue. Therefore, to that extent on this issue the action of the learned PCIT is upheld in holding that assessee has been allowed excess deduction of Rs. 1,592,224,604/– under section 36 (1) (viia) of the act.
Held that non-examination of the details clearly makes the order of the learned assessing officer erroneous and prejudicial to the interest of revenue. Further, it is the claim of the assessee that this is based on the audit objection raised by the Director-General of Audit, Mumbai. We do not find any infirmity in the order of the learned PCIT because even if there is an audit objection, he has applied his mind independently and held that order of the AO is erroneous to that extent. In the result on this issue, we hold that the learned PCIT has correctly assumed the jurisdiction and correctly held that the order of the learned AO is erroneous and prejudicial to the interest of revenue.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. ITA No.738/Mum/2021, for A.Y. 2015-16 is filed by ICICI bank Limited [assessee / appellant] challenging the order of Pr. Commissioner of Income Tax, Mumbai-2, [Ld. PCIT/CIT] passed under Section 263 of The Income-tax Act, 1961 (the Act) dated 31st March, 2021, holding that the assessment order passed by the Asst. Commissioner of Income Tax, Circle 2(3)(2), Mumbai [ Ld AO] dated 12th February, 2019, determining the total income of the assessee as per normal computation of total income of ₹16,208,83,93,045/- and computing the book profit u/s 115JB of ₹16,803,01,10,106/- passed under Section 143(3) read with section 144C(3) of the Act dated 12th February, 2019, is erroneous and prejudicial to the interest of the Revenue due to lack of enquiry as per explanation 2 to Section 263 of the Act. He set aside it and the learned Assessing Officer is directed to conduct the requisite enquiries to arrive at the correct conclusion and reframe the order of assessment denovo, after giving an opportunity to the assessee of being heard.
2. Assessee has raised following grounds of appeal.
“Being aggrieved by the order No. ITBA/REV/F/REV5/2020-21/1032095047(1) dated March 31, 2021 issued by the Pr. Commissioner of Income-tax 2, Mumbai (hereinafter called the Pr.CIT] under section 263 of the Income-tax Act, 1961 (hereinafter called The Act) and communicated to the Appellant on the same day, the Appellant appeals against and on the following amongst other grounds which are without prejudice to each other.
1. Setting aside of order under section 263 of the Act
1.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in passing an order under section 263 setting aside the assessment order dated February 12, 2019 passed under section 143(3) r.w.s. 144C(3) of the Act on the ground that the Assessing Officer in not examining the following issues has rendered the order as erroneous and prejudicial to the interest of the revenue:
(a) Irregular allowance of long term capital loss of Rs.996,75,31,387.
(b) Bad debts allowed of Rs.312,69,37,766.
(c) Provision for Depreciation of investments of Rs.46,19,11,355.
(d) Deduction allowed under section 36(1) (viia) of Rs. 159,22,24,604.
(e) Excess grant of deduction under section 36(1) (viia) Rs.12,23,01,710.
(f) Deduction under section 36(1) (viii) Rs. 138, 52, 06,494.
(g) Allowance of Long-term Capital loss to the extent of Rs.502,62,44,256.
(h) Excess allowance of deduction under section 36(1) (vii) of Rs.250, 03, 69,520.
1.2. The Pr. CIT erred in dismissing the Appellant’s detailed submissions made vide letter dated March 26, 2021 on all the aforesaid issues as not tenable without appreciating the facts of the Appellant’s case.
1.3. The Pr. CIT erred in holding that the assessment order dated February 12, 2019 passed under section 143(3) r.w.s. 144C (3) of the Act is as erroneous and prejudicial to the interest of the revenue due to lack of enquiry made on the above-mentioned issues by the Assessing Officer despite detailed submissions made by the Appellant during the course of assessment proceedings and considered by the Assessing Officer in the assessment order
2. Irregular allowance of long term capital loss – Rs.996,75,31,387
2.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that the Appellant whilst working the long-term capital loss of Rs.996,75,31,387 on reduction/redemption of investments in its subsidiaries, applied the cost inflation index to the cost in foreign currency, which is erroneous as the cost inflation index is with reference to Indian Currency and to be computed with reference to Indian Currency only.
2.2. The Pr. CIT failed to appreciate that investment in shares was made by the Appellant and its offshore subsidiaries in foreign currency and the sales proceeds were also received in foreign currency. Therefore, pursuant to section 48 read with Rule 115 the resultant capital gain/loss is computed by reducing indexed cost of acquisition of shares (in foreign currency) from sales proceeds (in foreign currency) received and the resultant gain/loss is converted to INR by applying provisions of Rule 115 of the Rules to compute capital gain/loss.
3. Bad debts allowed of Rs.312,69,37,766
3.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that Appellant had not made and written off any bad debts during the year for the following reasons:
(a) the provision for NPA shown in Books of Accounts is Rs.3023,25,00,000 [Note 1 to Schedule 18(38), page 167] contradicts the provision for NPAS shown in statement No.15 of the return of income amounting to Rs.3141,26,87,071, Hence, in view of differential amounts and the notes to the amount [as per Schedule 18.18, Page 167] and since the Appellant has debited only the provisions for NPAs and other provisions, the bad debts claim of Rs. 1855,76,37,766/-under section 36(1)(vii) of the Act was required to be disallowed and added back to total income of the assessee, which is not done by the Assessing Officer.
(b) As observed from the Schedule 18.18, Non- Performing Assets, Page No.149 the Appellant has shown provision utilized for write off of Rs.1543,07,00,000/- during the year from the Provision of NPA in the Balance Sheet and thus the said amount should have been considered as bad debts written off during the year instead of Rs. 1855,76,37,766.
3.2. The Pr. CIT erred in not appreciating the Appellant’s reply that Schedule 18(38) under the head “Provisions and Contingencies” comprises of bad debts written off, business loss, provisions created, provisions reversed and utilized for write off, cash write back of bad debt and other provisions and contingencies. Thus the entire amount of bad debt is a part of the amount of Rs.3602,06,30,493 [Sch. 18(38)] which has been debited to the Profit and Loss Account and the said amount of Rs.3602,06,30,493 has been added to the computation of income and Rs. 1855,76,37,766 has been claimed as bad debt under section 36(1)(vii) of the Act.
3.3. The Pr. CIT ought to have considered the Appellant’s reply that that bad debts of Rs.1543,07,00,000 are written off through opening provisions and balance bad debts are directly debited to P&L, hence it does not form part of schedule 18(18).
4. Provision for Depreciation of investments of Rs.46,19,11,355
4.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that the Assessing Officer had not disallowed the amount of Rs.46,19,11,355 being actual loss on sale of investments thereby rendering the assessment order passed by the Assessing Officer as erroneous in so far as prejudicial to the interest of revenue.
4.2. The Pr. CIT ought to have appreciated that the said loss had been disallowed by the Appellant in the computation of income as the same pertained to book loss on sale of investments which is taxed under the head capital gains as per the provision of the Act.
5. Deduction allowed under section 36(1) (viia) of Rs.159,22,24,604
5.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that the Assessing Officer in the assessment order had allowed deduction under section 36(1)(viia) Rs.1472,17,64,492 which is more than as claimed by the Appellant in its return of income of Rs.1312,95,39,888 thereby resulting in an alleged additional claim under the said section of Rs. 159,22,24,604. The Pr. CIT erred in relying upon the Supreme Court decision in the case of Goetze India Limited vs. CIT [284 ITR 323] to deny the additional claim.
5.2. The Pr. CIT erred in not appreciating the provisions of section 36(1)(viia) as per which in respect of provisions for bad and doubtful debts created in the books. a deduction is to be given at an amount not exceeding 7.5% of the total income computed before making any deduction under this clause and Chapter VIA and an amount not exceeding 10% of the aggregate average advances made by the rural branches. Thus the deduction under section 36(1)(viia) being a deduction linked to the total income computed it is subject to revision each time the total income changes viz. increases /decreases subject to the provision created in the books of accounts and that the higher deduction granted under section 36(1)(viia) is on account of the increase in business income due to additions/disallowances made in the assessment order.
6. Grant of deduction under section 36(1)(viia) Rs.12,23,01,710
6.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that the Assessing Officer in the assessment order had allowed excess deduction under section 36(1) (viia) of Rs.12,23,01,710 by taking into account certain branches identified by the Appellant as rural branches in its return of income but which were not rural as per RBI census 2011.
6.2. The Pr. CIT failed to appreciate the Appellant’s submission that it had during the course of assessment proceedings re-worked the deduction under section 36(1)(viia) of the IT Act by following the 2011 Census published by RBI on September 1, 2016 and accordingly reduced the rural advances to Rs.1460,96,93,335 as against Rs. 1608,37,88,170 taken by the Bank in the revised return of income and the Assessing Officer has adopted the reduced figure of rural advances in the assessment order.
7. Excess deduction under section 36(1) (viii) Rs. 138,52,06,494
7.1. The Pr. CIT erred on facts and circumstances of the case and in law, in holding that the deduction under section 36(1)(viii) of the Act should be restricted to Rs.961,47,93,509 as against Rs.1057,29,83,056 as claimed by Appellant in its revised return resulting in alleged excess deduction of Rs.138,52,06,494 and the Assessing Officer by not considering the correct figure has resulted in the assessment order being erroneous in so far as prejudicial to the interest of revenue within the meaning of provisions of section 263 of the Act. The Pr. CIT erred in holding that the business other than the income from finance of Rs.4395,96,30,823 should be reduced from the figure of business income ofRs.16092,79,21,690 as given in the revised return of income and not as determined in the assessment order amounting to Rs. 18453,17,42,829.
7.2. The Pr. CIT ought to have appreciated that as per provisions of section 36(1)(viii) of the Act, the claim of deduction under section 36(1) (viii) is linked to business income computed under the head profits and gains of business or profession subject to the amount appropriated to the special reserve account created and maintained by the assessee. Thus if the business income is increased on account of disallowances, the deduction would consequentially increase restricted to the amount carried to the special reserve account in the said year. In the aforesaid assessment year, since the business income on account of additions/disallowances has increased to Rs. 18453,17,42,829, the deduction. Under special reserve also increases to Rs. 1155,50,27,607 (sr. no.6 page 44 of the assessment order). However, since the Appellant has appropriated Rs.1100,00,00,000 to the special reserve account during the said year, the deduction has been restricted to the said amount in the order.
8. Allowance of Long term Capital loss to Rs.502,62,44,256 the extent of
8.1. On the facts and circumstances of the case and in law, the Pr. CIT erred in holding that the Appellant whilst working the long term capital loss of Rs.759,14,40,116 on reduction/redemption of investments of its subsidiaries ICICI Bank Canada and ICICI Bank UK Plc, applied the cost inflation index to the cost in foreign currency which has which has resulted in an alleged excess allowance of Rs.502,62,44,256.
8.2. The Pr. CIT failed to appreciate that investment in shares was made by the Appellant in foreign currency and the sales proceeds were also received in foreign currency. Therefore, pursuant to section 48 read with Rule 115 the resultant capital gain/loss is computed by reducing indexed cost of acquisition of shares (in foreign currency) from sales proceeds (in foreign currency) received and the resultant gain/loss would be converted to INR by applying provisions of Rule 115 of the Rules to compute capital gain/loss.
9. Excess allowance of deduction under section 36(1) (vii) of Rs.250,03,69,520
9.1. On the facts and circumstances of the case and in law, the Pr. CIT ought to have appreciated that the deduction under section 36(1)(viia) being a deduction linked to the total income computed is subject to revision each time the total income changes. In the present case, the balance under section 36(1)(vila) to be reduced from the bad debts of the above-mentioned assessment year ought to be Rs. 1087,57,88,246 as per order giving effect dated September 9, 2020 for AY 2014-15 which could be rectified vide an order under section 154 of the Act and is not a subject matter of review under section 263 of the Act.
GENERAL
10. The order of the Pr. CIT should be suitably modified by granting the aforesaid proper and consequential reliefs to the Appellant.
11. The Appellant craves leave and reserves its right to vary, amend, alter and/or add to the grounds of appeal and to produce such oral and documentary evidence and file such compilation of documents as may be necessary at the time of hearing of the appeal.”
3. Brief facts of the case is that assessee is a company engaged in banking operations and related activities showing income from banking activities, dividends, interest on debentures, leasing, deposits and advances and commission fee etc. It filed return of income on 28th November, 2015, declaring a total income of ₹13,703,58,06,540/-, which was revised on 30th March, 2017, declaring total income of ₹13,721,26,57,490/-. This return of income was picked up for scrutiny by issue of notice under Section 143(2) of the Act dated 17th March, 2016 and further, notice under Section 142(1) of the Act dated 6th February, 2017 and 2nd November, 2017 was issued.
4. The ld AO passed the assessment order on 12/02/2019 u/s 143 (3) rws 144C (3) of the Act determining total income of the assessee at Rs. 162088394045/- as per normal computation of income and book profit u/s 115 JB of the Act was determined at Rs. 16803,01,10,106/-wherein the following additions/ disallowances were made:-
i. Transfer pricing adjustment of ₹5,82,51,214/- in view of determination of Arm’s Length Price of international transaction under Section 92CA(3) of the Act by order dated 31st October, 2018, wherein on the international transaction of buy back of shares of ₹65,62,50,000/- was upwardly revised by ₹5,82,51,214/-.
ii. Disallowance under Section 14A of the Act as per Rule 8D by computing the total disallowance of ₹1,182,24,87,180/- and further rejecting suo moto disallowance offered by the assessee of ₹21,89,85,725/- resulting into net disallowance of ₹1,160,35,01,455/- in the normal computation of total income and further same was also added to the computation of book profit under Section 115JB of the Act.
iii. Disallowance of depreciation on leased assets of ₹27,31,73,482/- was allowed instead of depreciation claimed by the assessee of ₹7,74,20,633/-.
iv Disallowance of club membership expenditure of ₹64,19,440/- holding that such expenditure is capital expenditure, as it is paid for entrance fee.
v. Disallowance of Non performing advances provision u/s 43D of Rs 47,05,01481/-
vi. Disallowance of provision of expenditure of ₹89,92,67,946/-, holding that it is contingent and unascertained liability.
vii. Disallowance of mark to market (MTM) losses of ₹134,21,00,000/- holding that it is contingent liability.
viii. Disallowance of claim of depreciation on goodwill arising in the books of assessee because of merger of Bank of Rajasthan and Anagram Finance Limited of ₹254,51,40,318/- on consideration of 5th proviso to Section 32(1) of the Act.
ix. Addition of ₹39,97,71,317/- of broken period interest paid on purchase of securities held under maturity category holding that such interest is to be included in the purchase cost of such securities.
x. Disallowance of ESOP expenditure of ₹370,39,79,795/- holding that it is notional expenditure.
xi. Disallowance of deduction under Section 36(1) (viii)
of the Act restricting the allowance only to the extent of ₹11 crores against the claim of deduction of ₹1,57,29,83,056/-.
xii. Rejection of the revised claim of relief under Section 90 of the Act amounting to ₹120,42,42,761/- on increase in liability of Qatar Branch of the assessee.
xiii. Disallowance of deduction under Section 36(1) (viia) of the Act, on rural advances amounting to ₹14,74,09,538/-.
xiv. Disallowance of write off credit card sum of ₹182,94,37,799/- holding that no evidences were brought on record.
xv. Disallowance on interest on perpetual bonds amounting to ₹281,71,64,749/- holding that there is no obligation to refund the capital provided.
5. The learned PCIT examined the records and issued a show cause notice dated 11th March, 2021, holding that the order of the learned Assessing Officer is erroneous and prejudicial to the interest of Revenue on following grounds:-
i. Irregular allowances of long-term capital loss of ₹99,665 lacs on buy back of investment in subsidiaries computed by assessee claiming cost inflation index on foreign currency instead of Indian currency as the learned Assessing Officer has failed to examine the facts.
ii. Excess of debit allowed of ₹312,69,37,766/- as the learned Assessing Officer failed to correctly compute the allowability of bad debt written off. According to the learned PCIT, the learned Assessing Officer has allowed the bad debt without considering the provisions of Section 36(1) (vii).
iii. Failed to disallow the provision for depreciation on investment amounting to ₹46,19,11,355/-.
iv. Excess deduction allowed under Section 36(1)(viia) of the Act of ₹159,22,24,604/- by allowing the claim despite assessee not revising its return of income for new claim which is against the decision of Hon’ble Supreme Court in Goetz India Limited [284 ITR 323].
v. Excess grant of deduction under Section 36(1) (vii) of ₹12.23 crores as he failed to disallow the deduction to 10% of rural advances of ₹122.30 crores which were not rural branches
vi. Excess deduction allowed under Section 36(1)(viii) of the Act of ₹138,52,06,494/- which should have been restricted to ₹961,47,93,509/- being 20% of allowable deduction.
vii. Excess allowances of long-term capital loss on sale of shares of foreign entity of Rs 502,62,44,256/-without examining the fact of application of cost inflation index on foreign currency in computation of capital gain.
viii. Excess allowances of deduction of ₹250,03,69,520/- under Section 36 (1) (vii) of the Act, where the assessee is eligible for deduction to the extent of only ₹542,07,79,550/- but in the assessment order same was allowed to the extent of ₹792,11,49,070/-.
06. This show cause notice was replied by the assessee by letter dated 26th March, 2021, wherein the assessee submitted as under:-
“Reply to Show Cause Notice issued under section 263 of the Income-tax Act, 1961 Assessment Year: 2015-16 P.A. No.: AAACI1195H March 26, 2021
Please refer to the show cause notice dated March 11, 2021 issued under section 263 of the Income-tax Act (the Act) received by us on March 20, 2021 for the above mentioned assessment year. As per the said notice, your goodself proposes to revise the assessment order passed by the Assistant Commissioner of Income-tax 2(3)(2), Mumbai (Assessing Officer) under section 143(3) read with section 144C(3) dated February 12, 2019 on the ground that it is erroneous and prejudicial to the interest of the revenue for the reasons stated therein.
We give below our submission with respect to each of the issues in respect of which your goodself has issued the captioned notice.
1. Irregular allowance of long-term capital loss of Rs. 99,675.31 lakhs.
1. During the year bank has claimed long term capital loss on investment in subsidiaries, break-up of which is as flows:
| Sr. No. | Subsidiary | Sale consideration (foreign currency) | Indexed cost of acquisition (foreign currency) | Long term capital loss (foreign currency) |
Long term capital loss (Indian ₹) |
| 1. | ICICI Bank Canada | 7,80,32,000 | 14,26,03,195 | 6,45,71,195 | 316,52,79,976 |
| 2. | ICICI bank UK PLC | 7,50,00,000 | 14,58,18,562 | 442,61,60,143 | |
| 3. | ICICI Bank Eurasia LLC | 122,49,51,818 | 359,13,68,448 | 236,64,16,630 | 237,60,91,268 |
| total | 996,75,31,387 | ||||
Detailed explanation for the said transaction is as below:
1.2 ICICI Bank Canada
1.2.a During the aforesaid assessment year, the equity share capital of ICICI Bank Canada was reduced by an amount of Rs. 392,26,00,000 (equivalent to CAD 8,00,00,000) after obtaining requisite approvals from the Superintendent of Financial Institutions Canada vide letter dated March 26, 2015. As per section 2(22)(d) of the Act, any distribution to its shareholders by a company on the reduction of its capital to the extent of distributable profit is to be treated as deemed dividend. Accordingly, of the total amount repatriated, CAD 19,68,000 is apportioned towards deemed dividend and CAD 7,80,32,000 being in excess of accumulated earning is considered for capital gain computation.
1.2.b. The value of the shares was determined to be CAD 0.85 per share on the basis of valuation report of Anil Ashok and Associates, Chartered Accountants. Of the total amount repatriated by ICICI Bank Canada amounting to CAD 8,00,00,000, CAD 19,68,000 is apportioned towards deemed dividend as per provisions of section 2(22)(d) of the Act and CAD 7,80,32,000 being in excess of its accumulated profits is offered to tax under the head “Capital Gains”. Accordingly, the Bank has offered to tax deemed dividend under section 1158BD of Rs.9,64,71,360 and has incurred long term capital loss of Rs.316,52,79,976 on the balance which the Bank has carried forward to the subsequent assessment year 2016- 17. The relevant statements are a part of the return of income and also submitted during the course of assessment proceedings vide letter dated December 26, 2018 on pages 8 and 11 respectively. Copy of the resolution passed dated February 27, 2015 and copy of the valuation report of Anil Ashok and Associates, Chartered Accountants was submitted as documentary evidence in support of the said transaction vide letter dated December 26, 2018 on pages 42 and 43 to 56 respectively.
ICICI Bank UK Pic
1.3.a. The Bank had invested in equity shares of ICICI Bank UK PIc (wholly owned subsidiary of the Bank). During the year, the share capital was redeemed by USD 7,50,00,000 in a scheme of buy back. The sale consideration of the buyback was determined at USD 1 per equity share. This scheme of buyback is an extinguishment, which has resulted in capital loss to the Bank of Rs.442,61,60,143.
1.3.b. As per the valuation report of Anil Ashok and Associates, Chartered Accountants an independent third party valuer, the valuer had valued the shares at USD 0.85 by taking into account the average value of 4 methods viz. Net Asset Method, Future Maintainable profit method, Market Multiple Method and Dividend Discount Method.
1.3.c. The indexed cost of the said shares was USD 14,58,18,562 resulting in a loss of USD 7,08,18,562 which has been converted to Indian rupees by applying the applicable conversion rate and a loss of Rs. 4,42,61,60,143 has been worked out in aforesaid assessment year which the Bank has carried forward to the subsequent assessment year 2016-17.
1.3.d. The aforesaid transaction had been examined in detail by the Transfer Pricing Officer [TPO] during the course of transfer pricing assessment proceedings. The TPO in her order dated October 31, 2018, had rejected one of the methods of valuation viz, the dividend discount method and had made an adjustment by enhancing the value of the share to UDS 1.14 as against USD 1 taken by the Bank. On account of this alteration to the arm’s length price the capital loss stood reduced to Rs.3,76,99,10,143 as against Rs. 4,42,61,60,143 claimed by the Bank in its return of income resulting in a reduction in the capital loss to the tune of Rs.65,62,50,000 and consequential reduction in the carried forward losses set off in the subsequent assessment year 2016-17. These facts were also brought to the notice of the Assessing Officer during the course of assessment proceedings and copy of the resolution passed in general meeting held on February 23, 2015 including copy of the valuation report of Anil Ashok and Associates, Chartered Accountants were submitted as documentary evidence in support of the said transaction vide letter dated December 26, 2018 on pages 23 to 24 and 25 to 41 respectively ICICI Bank Eurasia LLC
1.4.a ICICI Bank Eurasia Limited Liability Company (IBEL) was a wholly owned subsidiary of the Bank. In the aforesaid assessment year, the Bank has sold its entire holdings in IBEL to Sovcombank for a consideration of Roubles 122,49,51,818. This sale has resulted in capital loss to the Bank of Rs.237,60,91,268.
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1.4.b The total cost for acquiring the shares in IBEL was Roubles 183,12,16,035 (indexed cost Roubles359,13,68,448) as can be seen from the statement enclosed on page 9 also attached in statement No.27 filed with the revised return of income. The total capital loss as per the said statement works out to Roubles236,64,16,630 which has been converted to Indian rupees by applying the applicable conversion rate and a loss of Rs.237,60,91,268 has been worked out in aforesaid assessment year which the Bank has carried forward to the subsequent assessment year 2016-17. Copies of the term sheet dated May 5, 2014 and the agreement for sale entered between the Bank and Sovcombank on March 17, 2015 were submitted as documentary evidence in support of the said transaction vide letter dated December 26, 2018 on pages 12 and 13 to 22 respectively. Thus the allegation in the show cause notice that the status of ICICI Bank Eurasia is not readily available on records is incorrect.
1.5. With respect to the above-mentioned capital loss, we submit that the Assessing Officer has examined the Bank’s claim as can be seen in para 6 on pages 2 and 3 and para 21, page 61 of the assessment order wherein adjustment to arm’s length price to buy back of shares of ICICI Bank UK Plc. has been made and carried forward loss to the subsequent year reduced by Rs.65,62,50,000. Since the Assessing Officer after examining has taken a particular view on the said issue, there is no justification to revise the assessment on a presumption that the same is erroneous and prejudicial to the interests of the revenue.
1.6. With respect to your good self’s contention, that in case of ICICI Bank Canada and ICICI Bank UK PIc since there is a transfer from the subsidiary to the holding Company, the said transaction cannot be considered as a transfer under section 2(47) of the act and hence is not entitled to indexation benefit. Firstly, there is no transfer of a capital asset from subsidiary to holding company. In the present case amount repatriated is towards the investment held by the Bank in is its subsidiary. Secondly, we respectfully submit that it is not necessary that for a capital gain to arise there must be a sale of a capital asset. As per section 2(47) relinquishment of an asset or any right in it which may not amount to sale is also considered as a transfer. When the share capital is reduced by paying off a part of the capital by reducing the face value of the share, the share remains but the right of the shareholder to dividends on his share capital and the right to share in the distribution of net assets upon liquidation is extinguished proportionately to the extent of reduction in the share capital. In case of both the subsidiaries ICICI Bank Canada and ICICI Bank UK Plc. there was a reduction/redemption respectively in share capital which is an extinguishment of the right of the holding company viz. the Bank to dividends and to share in distribution in the event of winding up of the subsidiaries and thus such an extinguishment would amount to ‘transfer’ within the meaning of section 2(47) of the Act. This has been held by the Gujarat High Court in the case of Kartikey v. Sarabhai & Anr. v. CIT [138 ITR 425] which has been confirmed by Supreme Court (142 ITR 150).
1.7. As regards the second observation that the indexation is to be done on the
a. The mode of computation of capital gains viz. difference between sale proceeds and cost of acquisition is laid down in section 48 of the Income-tax Act, 1961 (“the Act”). Further, Rule 115 of the Income-tax Rules (“the Rules”) prescribes, in case of investment made in foreign assets, capital gains are to be converted to INR using exchange rate of the last day of the previous month in which capital asset is transferred. Thus, combined reading specifies that, capital gain in respect of capital asset acquired in foreign currency is required to be first computed in foreign currency and thereafter converted into INR for tax purposes.
b. Investment in shares was made by the Bank and its offshore subsidiaries in foreign currency. Sales proceeds were also received in foreign currency. Therefore, pursuant to section 48 read with Rule 115 the resultant capital gain/loss is computed by reducing indexed cost of acquisition of shares (in foreign currency) from sales proceeds (in foreign currency) received. Resultant gain/loss would be converted to INR applying provisions of Rule 115 of the Rules to compute capital gain/loss.
1.8. Hence the long-term capital loss has of Rs. 99,675.31 lakhs have been correctly computed by the Bank and accordingly allowed in assessment.
2. Excess bad debts allowed of Rs. 312,69,37,766
2.1 As per your good self’s observation, provision utilised for write off as per Schedule 18(18) on page 149 is only Rs.1543,07,00,000 as against Rs. 1855,76,37,766 claimed by the Bank thus resulting in an excess claim of Rs.312,69,37,766.
2.2 Schedule 18(18) shows the movement of Provision of NPA on year to year basis. It starts with opening provision, provision created during the year, provision utilized out of opening balance for write off and closing balance.
2.3 We submit that Bad debts of Rs. 1543,07,00,000 are written off through opening provisions and balance bad debts are directly debited to P&L, hence it does not form part of schedule 18(18).
2.4 In regards to your good self’s observation, bad debts have not been debited in schedule 16A, we submit the bad debts claimed by the Bank have been written off during the year in its Annual Accounts which is reflected in Schedule 18 cl.38 under the head Provisions and Contingencies (page 167). The breakup of the same relating to bad debts is given as under:
|
Particulars |
Sch. Reference | Amount ₹ |
| Provision towards non-performing assets (net) | 18(38) | 3141,26,87,071 |
| Other provisions and contingencies | 18(38) | 460,79,43,422 |
| Total | 3602,06,30,493 |
2.5 Balance Sheet and Profit and Loss Account is prepared in accordance with the guidelines of RBI read with the Banking Regulation Act, 1949. Schedule 18(38) under the head “Provisions and Contingencies” comprises of bad debts written off, business loss, provisions created, provisions reversed and utilized for write off, cash write back of bad debt and other provisions and contingencies.
2.6 the above-mentioned amount of b₹3602,06,30,493 has been added back in the computation of income and Bad debts written off has been claimed by the Bank during the assessment year 2015-16.
2.7 The entire amount of bad debt is a part of the amount of ₹3602,06,30,493 which has been debited to the Profit and Loss Account. The detailed breakup of which is given as under:
| Particulars | Amount in Rs. |
| Bad Debts written off | 1855,76,37,766 |
| Business Loss | 222,01,25,347 |
| Net Provision for bad debts | 1692,77,28,493 |
| Less: Cash write back of Bad Debts | (168,48,61,113) |
| Total as per Sch. 18(38) | 3602,06,30,493 |
2.8 With respect to your good self’s contention that the provision for NPA shown in Books of Accounts is Rs. 3023,25,00,000 [Note 1 to Schedule 18(38), page 167] contradicts the provision for NPAs shown in statement No.15 of the return of income amounting to Rs. 3141,26,87,071, we respectfully submit that the figure in statement No. 15 provides the breakup as given in para 2.7 above. The Note 1 to Schedule 18(38) on page 167 clearly specifies that Amount of Rs. 3023,25,00,000 is part Rs. 3141,26,87,071.
2.9 We reiterate that presentation of figures of provision for bad debts, write off of bad debts etc, in the books of accounts are done in accordance with the RBI guidelines and the Banking Regulation Act, 1949 but the claim made by the Bank in its return of income is as per provisions of section 36(1)(vii) the Income-tax Act. Thus, since bad debts is debited to profit and loss account under schedule 16A, the same is an allowable expenditure under section 36(1)(viia) of the Act.
3. Provision for Depreciation of investments of Rs.46,19,11,355
3.1 In the aforesaid assessment year, the Bank had debited an amount of Rs.297,92,33,446 as provision for depreciation on investments. This figure comprises of provision made in respect of securities held as stock in trade as well as those held as investments, break-up which is given below:
|
Particulars |
Amount Rs. |
| Provision for investments (A) | 297,92,33,446 |
| Less: Reversal of Provision for securities held as stock in trade (B) | (44,26,64,750) |
| Less: Book Loss in respect of securities held as stock in trade (C) | 46,19,11,355 |
| Provision for securities held as investments (A-B-C) | 207,46,57,341 |
3.2 Investments are accounted for in accordance with the RBI guidelines on investment classification and valuation. As per RBI guidelines, Investment held by the Bank are classified into ‘Held to Maturity’ (HTM), ‘Available for Sale’ (AFS) and ‘Held for Trading (AFT). In the Bank’s case government securities whether classified as HTM, AFS or HFT are treated as stock in trade by the Bank.
3.3 The Bank as per RBI norms has to keep certain securities in order to maintain its statutory liquidity ratio (SLR) and cash reserve ratio (CRR) in order to protect the Bank from an unexpected huge amount of withdrawal from the depositors. The Bank acquires Government of India securities (GOI secs) which are classified as stock in trade by the Bank. These securities which are acquired for the purposes of trading/treasury operations in the normal course of banking business are thus classified as stock in trade by the Bank.
3.4 The Bank also acquires other securities and shares /debentures which are held as capital assets. These are acquired for the purposes of investment and are classified as investment by the Bank. Loss on valuation of securities/provision for diminution in the value of securities held as investments is not claimed as a deduction from the business income but added back for tax purposes. Similarly, the gain on securities held as investments is not offered to tax under the head ‘profits and gains from business or profession’. Both the gains/losses in respect of securities held as investments are offered to tax under the head “Capital gains” at the time of sale of securities.
3.5 The reversal of provision made for securities held as stock in trade has been offered by the Bank and the book loss in respect of securities held as stock in trade has been claimed. The provision on securities held as investments of Rs. 207,46,57,341 has been disallowed by the Bank in its computation of income. This accounting practice has been followed by the Bank consistently and has been accepted by the Department. The losses/gains on revaluation on securities held as stock in trade by the Bank have been consistently claimed as a deduction/offered to tax and allowed in all the preceding assessment years.
3.6 It has been held by the Bombay High Court in American Express International Banking v. CIT (258 ITR 61) that the choice of the method of accounting lies with the assessee and the valid method followed by the assessee can be disregarded only if the same does not disclose the true and proper income over the period,
3.7 The Supreme Court in the case of United Commercial Bank v. CIT (240 ITR 355) has held that it is open to the assessee to value the investments at cost or market whichever is lower and the method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities. The Apex Court has also held that for purpose of income tax whichever method is adopted by the assessee a true picture of the profits and gains, the real income is to be disclosed and for determining the real income entries in a balance sheet required to be maintained in the statutory form may not be decisive or conclusive. The view of the Supreme Court has been followed by the Bombay High Court in CIT V. Bank of Baroda (262 ITR 334) and the Kerala High Court in CIT V. Nedungadi Bank (264 ITR 545).
3.8 In Bank’s merged entity-Erstwhile Bank of Madura, Mumbai Tribunal in ITA 677 & 678/M/2014 dated December 12, 2019 for AY 2000-01 and 200102 has following the order of earlier years held that depreciation claimed by assessee on securities held as stock in trade is allowable.
3.9 Thus, the Bank has correctly disallowed the amount of Rs.207,46,57,341 being the amount of provision made in respect of securities held as investments and claimed the book loss of Rs.46,19,11,355 in respect of securities held as stock in trade as per the settled legal position mentioned hereinabove.
4. Excess Deduction allowed under section 36(1)(viia) of Rs. 159,22,24,604
4.1 Your goodself has contended that deduction allowed by assessing officer of Rs.1472,17,64,492 is more than as claimed by the Bank of Rs.1312,95,39,888 by Rs. 159,22,24,604.
4.2 Here, we want to clarify that the Bank in its revised return of income claimed deduction u/s 36(1)(viia) at Rs. 1312,95,39,888 which was revised to Rs.1298,21,34,851 during assessment proceedings vide letter dated December 26, 2018,
4.3 The deduction under section 36(1)(viia) of the Act is to be given at an amount not exceeding 7.5% of the total income computed before making any deduction under this clause and Chapter VIA and an amount not exceeding 10% of the aggregate average advances made by the rural branches. The deduction u/s 36(1)(viia) being a deduction linked to the total income computed it is subject to revision each time the total income changes viz, increases /decreases subject to the provision created in the books of accounts.
4.4 With respect to your good self’s observation that the additional claim u/s 36(1)(viiia) ought not to be allowed as the same was not made in the return of income (reliance placed Supreme Court decision in the case of Goetze India Limited vs. CIT) we respectfully submit that the Bank has not made any additional claim in respect of deduction claimed under section 36(1)(viiia) and therefore the question of Supreme Court decision in the case of Goetze India Limited vs. CIT is not applicable. The higher deduction granted under section 36(1)(viiia) is on account of the increase in business income due to additions/disallowances made in the assessment order. Hence the deduction u/s 36(viiia) has been correctly allowed to the Bank.
4.5 With respect to your goodself’s observation that the deduction should be restricted to provision actually created in the books, we have to submit that the since the deduction under section 36(1) (viia) allowed at Rs.1472,17,64,492 is less than the provision created in the books of accounts the same is admissible as per provisions of the Act.
4.6 Your goodself in the show cause notice has made an observation that in case of Kotak Mahindra Bank, the Assessing Officer had restricted the deduction under section 36(1)(viia) to the extent of claimed made by the assessee in their return of income. We respectfully submit that we are unaware of the facts of the case of Kotak Mahindra Bank and state that a view taken by the Assessing Officer in that case does not make the assessment order passed in the case of ICICI Bank erroneous and prejudicial to the interest of the Revenue.
5. Excess grant of deduction under section 36(1)(viia) Rs.12.23 crores
5.1 Your goodself in the show cause notice has made an observation that in the deduction claimed under section 36(1)(viia), Bank has classified some branches as rural branches which are not rural branches as per census 2011. You have identified 36 such branches whose average advances amount to Rs. 1223.01 resulting in access claim of Rs.12.23 crore (10% of Rs. 1223.01)
5.2 The Bank in its revised return of income had claimed deduction under section 36(1)(viia) of the IT Act of Rs. 1312,95,39,888. In order to compute the deduction under section 36(1)(viia) of the Act, the Bank had worked out 10% of the rural advances as per the 2001 Census published by RBI which was the latest Census available at the time of filing the return of Income.
5.3 The Bank vide letter dated November 20, 2018 submitted during the course of assessment proceedings re-worked the deduction under section 36(1)(vila) of the IT Act by following the 2011 Census published by RBI on September 1, 2016. The rural advances have been reduced to Rs.1460,96,93,335 as against Rs.1608,37,88,170 taken by the Bank in the revised return of income. Thus as per the revised working, the deduction under section 36(1)(viia) of the Act has reduced to Rs.1298,21,30,351 as against Rs.1312,95,39,888 claimed by the Bank in the revised return of income.
5.4 The amount of deduction claimed on rural advances in revised return and as revised during assessment is as below:
|
Particulars
|
Rural Advances (Rs) | Deduction at 10% (Rs) |
| As per revised return (based on 2001 census) | 1879,54,78,170 | 187,95,47,817 |
| As per revised working submitted during assessment proceedings (based on 2011 census) | 1460,96,93,335 | 146,09,69,333 |
| Claim suo moto reduced by assessee | 41,85,78,484 |
Thus, Bank has suo moto reduced its claim under section 36(1)(viia) by 41.85 crores on rural advances in the revised working submitted vide letter dated November 20, 2018.
5.5 Of the 36 branches mentioned in the show cause notice, 34 branches have been removed from the list of rural branches in the revised working submitted during assessment proceedings as per census of 2011. The other 2 branches mentioned in the show cause notice actually belongs to another state and the said branch is classified as Rural as per 2011 census. The correct details of the said 2 branch are as follows:
| Sr. No. | State | District | Branch | Population group as per 2011 census |
| 1. | Himachal Pradesh | Shimla | Rampur | Rural |
| 30. | Madhya Pradesh | Indore | Rajpura | Rural |
5.6 In the assessment order dated February 12, 2019 passed under section 143(3) r.w.s 1440(3), the figure of rural branches has been taken at Rs.1460,96,93,335 (page 63 of assessment order).
5.7 Thus, the deduction u/s. 36(1)(viia) on rural advances has been correctly allowed to the assessee as per 2011 census.
6. Excess deduction under section 36(1)(viii) Rs. 138,52,06,494
6.1 According to your goodself the deduction under section 36(1)(viii) of the IT Act should be restricted to Rs.961,47,93,509 as against Rs. 1057,29,83,056 as claimed by Bank in its revised return resulting is access deduction of Rs. 138,52,06,494.
6.2 As per provision of Section 36(1)(viii) of the Income Tax Act in respect of Special Reserve created and maintained by the Bank an amount not exceeding 20% of the profits derived from eligible business computed under the head “Profits & Gains from Business or Profession is to be allowed as a deduction from the total income. The said deduction is restricted to the amount transferred during the year by the assessee to the Special reserve account.
6.3 In the assessment order passed under section 143(3) read with section 144(C)(3) dated February 12, 2019, deduction under section 36(1) (viii) has been allowed at Rs.1100,00,00,000 being the amount appropriated by the assessee Bank to the Special Reserve A/c. This increase in deduction as compared to the claim made by the assessee in revised return of income was due to increase in the business income to Rs. 18453,17,42,829 on account of disallowances/additions made to the tune of Rs.2360,38,21,139 to the returned income.
6.4 With respect to your goodself’s observation that the additional clairn u/s 36(1)(viii) ought not to be allowed as the same was not made in the return of income (reliance placed Supreme Court decision in the case of Goetze India Limited vs. CIT we respectfully submit that the Bank has not made any additional claim in respect of deduction claimed under section 36(1)(viii) and therefore the question of Supreme Court decision in the case of Goetze India Limited vs. CIT is not applicable. The higher deduction granted under section 36(1)(viii) is on account of the increase in business income due to additions/disallowances made in the assessment order. Hence the deduction u/s 36(viii) has been correctly allowed to the Bank.
6.5 Further according to your goodself the business other than the income from finance of Rs.4395,96,30,823 should be reduced from the figure of business income of Rs.16092,79,21,690 as given in the revised return of income and not as determined in the assessment order amounting to Rs. 18453,17,42,829.
6.6 We submit that the claim of deduction under section 36(1)(viii) is linked to business income computed under the head profits and gains of business or profession subject to the amount appropriated to the special reserve account created and maintained by the assessee. Thus if the business income is increased on account of disallowances, the deduction would consequentially increase restricted to the amount carried to the special reserve account in the said year. In the aforesaid assessment year, since the business income on account of additions/disallowances has increased to
Rs.18453,17,42,829, the deduction under special reserve also increases to Rs. 1155,50,27,607 (sr. no.6 page 44 of the assessment order). However, since the assesse Bank has appropriated Rs.1100,00,00,000 to the special reserve account during the said year, the deduction has been restricted to the said amount in the order. Hence the deduction u/s 36(viii) has been correctly allowed to the Bank.
7. Excess allowance of Long term Capital loss to the extent of Rs.502,62,44,256
7.1 During the year Bank has claimed long term capital loss on investment in subsidiaries of ICICI Bank Canada and ICICI Bank UK Plc of Rs. 759,14,40,116. As per your observation the said loss should be computed at Rs.256,51,95,860 which has resulted in excess allowance of Rs. 502,62,44,256.
7.2 In respect of long term capital loss of Rs.759,14,40,116 claimed by the Bank in respect of reduction in capital of the said companies, your good self’s observation that since the Bank had made investment in its subsidiaries in Indian currency hence indexation shall be allowed in Indian rupees as per explanation 1 to section 48 of the Act.
7.3 Proviso 1 to Section 48 reads as follows: “Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company
7.4 At the outset, we submit that proviso 1 to section 48 of the Act applies to capital gains in case of an assessee who is a non-resident. In the case of the Bank this proviso has no application at all as Bank is a resident of India.
7.5 Further we reiterate that investment in shares was made by the Bank and its offshore subsidiaries in foreign currency. Sales proceeds were also received in foreign currency. Therefore, pursuant to section 48 read with Rule 115 the resultant capital gain/loss is computed by reducing indexed cost of acquisition of shares (in foreign currency) from sales proceeds (in foreign currency) received. Resultant gain/loss would be converted to INR applying provisions of Rule 115 of the Rules to compute capital gain/loss. The same is also explained in detail in para 1.7.
7.6 Hence the long term capital loss has of Rs.759,14,40,116 has been correctly computed by the Bank and accordingly allowed in assessment.
7.7 Further your goodself’s observation on page 10 of the show cause notice that the Assessing Officer has failed to examine facts of these transactions is erroneous. As mentioned in para 1, all transactions pertaining to long term capital loss on redemption of shares of subsidiary companies has been examined by him and taken into account in the order accordingly. Hence we state that the order passed is neither erroneous nor prejudicial to the interests of the revenue.
8. Excess allowance of deduction of Rs.250,03,69,520
8.1 The Bank has claimed deduction of bad debts u/s 36(1) (vii) of Rs.792,11,49,070 after reducing the balance as on April 1, 2014 u/s 36(1)(viia) amounting to Rs. 1063,64,88,695. This balance was taken by the Bank as the amount claimed by it in the revised return filed for the AY 2014-15.
8.2 As per your goodself the balance under section 36(1)(viia) to be reduced ought to be Rs. 1313,68,58,216 as per assessment order dated February 21, 2018 passed under section 143(3) r.w.s 144C(3) of the Act for AY 2014-15, thus resulting in excess allowance of Rs. 250,03,69,520.
8.3 The deduction u/s 36(1)(viia) being a deduction linked to the total income computed and is subject to revision each time the total income changes. The order giving effect to the to the order of the Commissioner of Income tax(Appeals) 56, Mumbai [CIT(A)] for AY 2014-15 is pending. We submit that the figure worked out as per the order giving effect of AY 2014-15 may be taken as the opening balance under section 36(1)(viia) to be reduced from the gross bad debts of Rs.1855,76,37,766 of the aforesaid assessment year. We submit that the change in the opening balance of section 36(1) (vila) may be done vide an order under section 154 of the Act and is not a subject matter of review under section 263 of the Act.
9. We further submit that in order to invoke provisions of section 263 the order sought to be revised should be both erroneous and prejudicial to the interest of the revenue. It has been held by Supreme Court in Malabar Industrial Co. Ltd. vs. Commissioner of Income Tax (243 ITR 83 (SC), CIT v Max India 295 ITR 282, CIT v Amitabh Bachhan 384 ITR 200 at 216, Para 21] that if one of the conditions is absent, recourse cannot be had to section 263(1) of the Act. According to the Court the provisions of 263 cannot be invoked to correct each and every type of mistake or error.
10. We further submit that all the above mentioned issues given in above mentioned paras 1 to 8 have been examined by the Assessing Officer during assessment proceedings and a possible view has been taken. The assessment order therefore cannot be treated as erroneous and prejudicial the interests of the Revenue.
11. Without prejudice to the aforesaid, we respectfully submit that as per Explanation 1 to section 263(1) of the Act, the powers of the Principal Commissioner/Commissioner to revise an order under section 263 of the Act can be only restricted to matters which had not been considered or decided in appeal. We submit that the issues regarding long term capital loss in respect of investment made by the Bank in its subsidiaries ICICI Bank Canada and ICICI Bank UK Plc. and deduction under section 36(1)(viii) mentioned in paras 1 and 7 and 6 of your show cause notice respectively are subject matter of appeal before the CIT(A) 56, Mumbai filed by the Bank and hence do not come within the purview of revision under section 263.
We reiterate that the order passed under section 143(3) r.w.s. 144C(3) is neither erroneous nor prejudicial and the proceedings under section 263 ought to be dropped.”
7. The learned PCIT after considering the explanation of the assessee noted that on this issues that the learned Assessing Officer has neither examined the issues nor called for any details in the assessment proceedings and allowed either excessive deduction then claimed by the assessee contrary to the decision of Honourable Supreme court, contrary to the law and therefore, the order passed in the case is erroneous so far as prejudicial to the interest of the Revenue.
8. The learned PCIT held so on following issues:-
i. With respect to irregular long-term capital loss allowed of ₹99,675 lacs., He noted that while applying the cost inflation index on foreign currency was irregular as indexation of cost is allowed only when capital assets is purchased in Indian currency. He was further of the view that cost of inflation index is with reference to Indian economy and only applies when the assets are purchased in Indian currency and not in foreign currency. The correct method to compute the capital gain in case of such transfer was to convert the cost price in Indian currency and then used the cost of inflation indexed on such costs and compares the same with sale price in Indian currency. The learned Assessing Officer should have computed the capital gain accordingly. This aspect was not at all examined by the dl AO.
ii. With respect to excess bad debts allowed of ₹312,69,37,766/-, He held that provision for non performing advance in books of accounts of the assessee was ₹3,023 crores, whereas in computation of total income assessee has shown ₹3,741 crores. He further noted that assessee has not made any real bad debts write off in this book of accounts. According to him, assessee has not debited any bad debts towards the claim of ₹1,855 crores but only utilized ₹1543 crores and therefore, the bad debts of ₹312 crores were allowed by the assessee without examination.
iii. With respect to the provision for depreciation of investment of ₹46,19,11,355/-, he noted that assessee has debited provision for depreciation of investment of ₹297 crores and claimed the same as deduction, whereas assessee has added back provision of ₹207 crores. Sum of ₹46.19 crores has been claimed by the assessee as realized loss on investment and reduced from the book loss of investment. Thus, assessee has treated the same as realized loss against the sale of stock and claimed the same as expenses in the profit and loss account. Therefore, according to him, the above loss is actual loss, which is required to be added back to the total income, as it is not a provision for depreciation of investment. This amount was allowed by the learned Assessing Officer without examining the issue.
iv. With respect to excess deduction under Section 36(1) (viia) of ₹159,22,24,604/- stating that in the revised return assessee has claimed the deduction only of ₹1,312,95,39,888/-, however in the assessment order the learned Assessing Officer has allowed the claim of ₹1,472,17,64,492/- in violation of the decision of Hon’ble Supreme Court in Goetz India Limited [284 ITR 323]. According to him, the learned Assessing Officer should have allowed the claim to the extent of deduction claimed by the assessee in the return of income as the learned Assessing Officer has failed to examine the same, he held it to be erroneous.
v. With respect to excess grant of deduction under Section 36(1) (vii) of the Act of ₹12.23 crores, he found that huge advances were shown against the few branches and claimed it as rural branch on which deduction is allowable. He examined the category of braches and held that on ₹1223 crores against such branches which are Semi Urban braches, hence, those advances were not required to be considered for granting to the deduction and accordingly 10% of the sum of ₹12.23 crores was allowed in excess. Thus, LD AO failed to examine the advances or Rural Branches and allowed it without examination.
vi. With respect to deduction under Section 36(1)(viii) of the Act of ₹138,52,06,494/-, he found that in the return of income, the assessee has claimed deduction of only ₹1057,29,83,056/-, whereas the learned Assessing Officer has allowed excess deduction of ₹42,17,16,944/-. The learned Assessing Officer has allowed the deduction of ₹1155,50,27,607/- though deduction is ultimately restricted to the extent of ₹11,000 crores as per reserve credited the books of account. He further computed on an addition wherein there is wide difference between the amount claimed in the return of income and amount allowed by the assessee. He computed that in all excess deduction allowed is ₹138,52,06,491/-.
vii. The learned CIT also noted that the claim of long term capital loss was allowed excess to the extent of ₹502,62,44,256/-. He noted that assessee has claimed long term capital loss of ₹1,358 crores in the computation on sale of unquoted shares which was allowed by the learned Assessing Officer on sale of securities of ICICI bank Eurasia, UK and Canada. Those shares were sold at cost and assessee has claimed indexation of the foreign currency and claimed the same as capital loss. The assessee has made investment in those subsidiary companies in Indian currency and therefore, indexation should have been allowed on Indian rupee only. This has resulted in actual long-term capital loss allowable only to the extent of ₹256,51,95,860/- resulting into above excess allowance. The learned Assessing Officer did not examine the same.
viii. Excess allowance of deduction of ₹250,03,69,520/-, He held that out of provision for bad debts written off of ₹1,855/- crores earlier provision for bad debts allowed for A.Y. 2014-15 of ₹1,313 crores allowable bad debt written off to the assessee is only ₹542,07,79,550/-. Against this, the learned Assessing Officer after considering the opening bad debts provision of ₹1,855 crores reduced the earlier years provision for bad debts by ₹1,063 crores and ultimately allowed bad debts of ₹792,11,49,070/-, which has resulted in excess allowances of deduction of ₹250,03,69,520/- under Section 36(1)(vii) of the Act.
09. The learned CIT therefore held that the order passed by the learned Assessing Officer is erroneous by granting incorrect claim of the assessee and therefore set aside. He referred to several judicial precedents and invoked the explanation (2) of Section 263 of the Act.
10. The assessee is aggrieved with the same and preferred the appeal before us. The learned Authorized Representative submitted a paper book containing 163 pages. At page no.138 to 140 of the Act, she has given the detail reasons to show that the order passed by the learned CIT (A) is not sustainable. On the issue of each of the ground, it was submitted as under:-
i. On irregular allowance of long term capital loss it was submitted that by letter dated 26th February, 2018, the learned Assessing Officer was clearly explained the above issue. She referred to paragraph no.5 of that order and reiterated the submissions. She specifically submitted that provision to Section 48 of the Act, specifically debars indexation in case of non-residence. She submitted that assessee has purchased shares in foreign currency and sold them in foreign currency and therefore indexation was claimed on foreign currency thereafter-such gain was converted in to Indian currency and claimed loss. She said that it is in accordance with law.
ii. With respect to excess of bad debt allowed of ₹312 crores she submitted that letter dated 24th December, 2018, submitted to the learned Assessing Officer placed at page no.83 of the Paper Book clearly shows that a reconciliation of bad debts claimed was provided to the learned Assessing Officer and therefore, after considering the explanation of the assessee the learned Assessing Officer has allowed the claim. It was further stated that the learned Assessing Officer disallowed bad debts relating to credit card, which is in appeal before the learned Commissioner of Income tax (Appeals).
iii. With respect to actual loss of ₹46.19 crores, on sale of investments, it was submitted that this was reduced from the provisions for investment and the balance sum of ₹207 crores has been added back to the computation of total income. She further submitted that above loss has been adjusted against the profit on sale of investments and net amount of ₹39.44 crores is offered for capital gain. She further referred to page no.96 of the Paper Book to show that profit on sale of securities if taken according to the computation of the learned CIT (A) also the business income remain the same and therefore, it is not prejudicial to the interest of the Revenue.
iv. With respect to excess deduction of ₹159.28 crores under Section 36(1) (viiia) of the Act, it was submitted that quantum of deduction is linked to total income and enhancement in total income has resulted on account of various additions and disallowances which has resulted into enhanced quantum of deduction. It is allowed accordingly and therefore there is no error in the order of the LD AO.
v. With respect to excess deduction of ₹12.23 crores on advances on rural branches, she referred to letter dated 17th October 2018, submitted to the learned Assessing Officer. She referred to paragraph no.2 and submitted that rural advances computed based on census.
vi. With respect to higher deduction of ₹138.52 crores, under Section 36(1) (vii) of the Act, it was submitted that such deduction is allowable at the rate of 20% of profits derived from eligible business subject to the amount appropriated to the reserve. As the income is assessed at higher sum, the higher deduction is allowable subject to the amount credited to such reserve account. Therefore, there is no error in the assessment order.
vii. With respect to excess of long term capital loss allowed of ₹502.62 crores, she reiterated letter dated 26th December, 2018, submitted to the learned Assessing Officer and second proviso to section 48 of the Act. This issue is identical to issue no (i) above and same arguments were reiterated.
viii. With respect to deduction under Section 36(1) (vii) of the Act of ₹250 crores, it was submitted that her reply to show cause notice explains the provisions and fact that there is no error.
ix. In the end, she submitted that Assessing Officer has examined each issue during the assessment proceedings and therefore there is no error in the assessment order leave aside it being prejudicial to the interest of revenue.
x. She further submitted that some of the issues are arising out of the Audit objection and same are not valid. She enclosed copies of audit objections at page no 154 to 163 of the paper book. Those are related to computation of capital gain, deduction u/s 36(1) (viia) and incorrect deduction of Rs 1385206491 u/s 36(1) (viii) of the Act.
xi. She also relied up on the decision of Honourable Supreme court in case of Malabar industrial co Ltd 243 ITR 83 to submit that where the ld AO on examination of information has not raised further query and in fact accepted it does not make order erroneous. It was further submitted that explanation 2 to 263 of the act does not confer unfettered power on CIT and scope of inquiry of the ld AO relying on decision of coordinate bench in JRD Tata Trust V DCIT 85 ITR (T) 431.
11. We have carefully considered the rival contention and perused the orders of the learned assessing officer as well as the learned principal Commissioner of income tax. By the revisionary order dated 31/3/2021 passed under section 263 of the income tax act, 1961 the learned principal Commissioner of income tax, has held that the assessment order passed by the learned assessing officer on 12/2/2019 under section 143 (3) read with section 144C (3) of the act as erroneous and prejudicial to the interest of the revenue and therefore same is set-aside to the file of the learned assessing officer with a direction to pass the assessment order de Novo keeping in mind the observations made in his order after giving assessee the adequate opportunity of hearing.
12. Ground number 1 of the appeal is general in nature wherein the assessee has challenged the setting aside of the order under section 263 of the income tax act by the learned principal Commissioner of income tax and dismissing the detailed submission made by the assessee holding that the assessment order is erroneous so far as it is prejudicial to the interest of revenue. As each of the issues are separately dealt with in different grounds, this ground of appeal is general in nature and therefore same is dismissed.
13. The learned principal Commissioner of income tax has held assessment order to be erroneous and prejudicial to the interest of revenue under section 263 of the income tax act on following counts.
i. Irregular allowance of long-term capital loss of Rs. 99,675.31 lakhs wherein it has been held that the assessee has applied the cost of inflation index on foreign currency while computing the capital gain on the assets acquired out of foreign currency. Connected issue is with respect to capital gain computed on sale of shares of subsidiaries where PCIT is of the view that excess capital loss of Rs 502.62 Cr is claimed. This claim of the assessee is allowed by the learned assessing officer without making any enquiry on this issue. The PCIT held that the cost of inflation index is with reference to Indian economy and computed with reference to the assets purchased in Indian currency and cannot be applied on foreign currency. Therefore, according to him the capital gain computation by the learned assessing officer is not proper. According to him assessee purchased shares in Indian Currency and cost of such Indian currency cost needs to be indexed. The claim of the assessee is that this aspect has been verified by the learned assessing officer wherein the assessee made a submission by letter dated 26/12/2018, where assessee stated that ICICI Euroasia limited liability was a wholly owned subsidiary of the assessee. The assessee has sold the shares of the subsidiary company to another entity for a consideration of Russian rubles ₽ 122,49,51,818. This was purchased by the assessee for Russian ruble ₽ 183,12,16,035. Assessee while computing the capital gain indexed it and claimed the deduction for as a cost of Russian ruble ₽ 359,13,68,448/–. Assessee worked out capital loss of Russian ruble ₽ 236,64,16,630/– which has been converted to Indian rupees by applying the applicable conversion rate and determined the loss of Rs. 2,376,091,268/–. Further, the assessee has also invested in equity shares of ICICI bank UK plc, which is a wholly owned subsidiary of the bank. The shares of the subsidiary were bought back at US dollar one per equity share. The sale proceeds were determined at US$ 75,000,000. The cost of acquisition of the shares were indexed to US dollar 14,58,18,562 which resulted into the loss of US dollars 7,08,18,562 which has been converted to Indian rupees by applying the applicable conversion rate and a loss of Rs. 4,426,160,143/– was worked out. On the transfer pricing adjustment, such loss was reduced to Rs. 3,769,910,143 /– which resulted in the adjustment of reduction in capital loss to the tune of Rs. 656,250000. The assessee has also invested in ICICI bank Canada which is also wholly owned subsidiary, share capital of which has been reduced during the year by Rs. 3,922,600,063/–. Undisputedly, all these acquisitions have been made by the assessee in Indian currency and sold and ultimately consideration was received in India in Rupees. The acquisition cost in INR was converted in to FC and sale in foreign currency was received in INR. The learned PCIT has given a reason that the order of the learned assessing officer is not in accordance with the concept of cost inflation index. In fact, assessee has not invested in foreign currency but in INR. Even other second proviso to section 48 is only with respect to Nonresident Assessee. By computing long term capital gain by incorrect method assessee has got the benefit of Foreign Exchange Fluctuation as well as cost inflation index both which is not in accordance with Income tax Act. In view of this, to this extent, on this issue we find that the jurisdiction assumed by the learned PCIT holding that there is an irregular allowance of longterm capital loss of Rs. 99,675.31 lakhs and higher capital loss of Rs 502.62 Cr is justified. Therefore, on this issue the order under section 263 of the income tax act passed by the learned PCIT is sustained. Accordingly ground number 2 and 8 of the appeal are dismissed.
ii. Coming to the second issue of the excess bad debts allowed OF Rs. 3,126,937,766/–by holding that the assessee has written off only Rs. 15,430,700,000 as against the claim of the bad debts of Rs. 1,855,76,37,766/– claimed by the assessee thus resulting in an excess claim of the above sum. The claim of the assessee is that the bad debts of Rs. 15,430,700,000 written of out of opening provision of bad and doubtful debts in the balance sum of Rs. 3,126,937,766/– is directly debited to the profit and loss account. The assessee has submitted that as it has debited a sum of Rs. 36,020,630,493/– as amount of bad debts which has been debited to the profit and loss account. The above amount is shown to be the bad debts written off of Rs. 18,557,637,766/–, business loss of Rs. 222,01,24,347 and net provision for the bad debts of Rs. 16,927,728,493/–. There is cash write back of the bad debts amounting to Rs. 1,684,861,113 that resulted into the total debit to the profit and loss account of Rs. 36,020,630,493/–. Therefore, it is not the case that assessee has not debited the difference between the claim of Rs. 18,557,637,766/– and a sum of Rs. 1,543,07,00,000 to the profit and loss account. The learned PCIT has merely stated that the learned assessing officer has not examined this issue. However, assessee submitted that this issue was explained by letter dated 24/12/2018 and assessee has given the complete breakup of the reconciliation of the bad debts claim with the accounts. The Para number 1.5 of that letter clearly shows that the total bad debts claim by the assessee in the return of income is Rs. 18,557,637,766. In paragraph number 1.3 it is specifically stated that the bad debts claim by the bank has been written off during the year in its annual accounts, which is reflected in schedule 18.38 under the head provisions and contingencies. The breakup of the same was also given which show that the amount of Rs. 36,020,630,493 are the total bad debts written off. In view of this, the assessing officer has verified the same. The order of the learned PCIT does not show that what is the error in allowing the claim of the assessee wherein the amount is debited to the profit and loss account as write off .therefore, on this issue we do not find that there is any error in the order of the learned assessing officer in allowing the claim of the assessee which is after calling for the explanation and correctly allowed. Therefore, on the same issue of the bad debts allowed of Rs. 3,126,937,766/– the order of the learned PCIT is not sustainable. Accordingly, ground number 3 of the appeal is allowed to the extent indicated above.
iii. The next ground of revision is with respect to the provision for depreciation of investment of Rs. 461,911,355/–. The fact shows that the bank has debited an amount of Rs. 2,979,233,446/– as provision for depreciation on investment comprising of the securities held as stock in trade as well as those held as investment. From above provision, assessee has reduced sum of Rs. 461,911,355 pertaining to the book loss in respect of securities held as stock in trade. The provision for securities held as investment of Rs. 2,074,657,341/– was added to the total income of the assessee. The learned PCIT found that the book loss claimed by the assessee of Rs. 461,911,355 have been claimed by the assessee as realized loss on investment and reduced from the book loss of investment. Therefore, he was of the view that the amount is being actual loss and not a provision for depreciation of investments so it was required to be disallowed and added to the total income of the assessee. The AO has not verified this amount. During hearing before us, nothing was shown to us that this issue was examined by the learned assessing officer. Therefore, this issue is squarely covered by the explanation 2 to section 263 of the act where the assessing officer has not made any enquiry on the issue and has allowed the claim of the assessee, to such extent the order of the learned assessing officer is erroneous and prejudicial to the interest of the revenue. Therefore, on this issue we uphold the order of the learned PCIT. Accordingly, ground number 4 of the appeal is dismissed.
iv. The fourth issue is with respect to the excess deduction allowed under section 36 (1) (via) of the act of Rs 159.22 Crores. The learned PCIT has categorically held that assessee has claimed deduction of Rs. 313,122,539,888/– whereas the learned assessing officer allowed the claim of Rs. 14,721,764,492/– under that section. Therefore, allowing the claim of the assessee higher than the amount claimed in the return of income is against the decision of the honourable Supreme Court in 284 ITR 323. The only argument of the learned authorized representative is that the quantum deduction is linked to the total income and therefore any enhancement made in the income returned to additions/disallowances impact the quantum of deduction. However, we find that it cannot be the case that the amount of deduction is allowable to the assessee higher than what is not claimed in the return of income without there being a revised return before the LD AO. Therefore, it is in clear violation of the decision of the honourable Supreme Court in 284 ITR 323 in case of Goetz India limited versus CIT. Therefore, we uphold the action of the learned PCIT in holding that claim allowed by the assessing officer higher than that claimed in the return of income without assessee filing any revised return is definitely erroneous and prejudicial to the interest of the revenue. Therefore, to that extent on this issue the action of the learned PCIT is upheld in holding that assessee has been allowed excess deduction of Rs. 1,592,224,604/– under section 36 (1) (viia) of the act. Accordingly, ground number 5 of the appeal is dismissed.
v. The fifth issues with respect to the excess grant of deduction under section 36 (1) (vii) of the act with respect to the aggregate rural advances. The fact shows that assessee has claimed deduction of Rs. 13,129,539,888/–. The computation of the income shows that assessee has claimed deduction of Rs. 1,608,378,871/– as 10% on the aggregate rural advances amounting to Rs. 16,083,788,710/– from the rural branches and Rs. 11,521,161,017 being 8% of the gross total income. During the assessment proceedings, the list of rural branches was produced before the assessing officer. However, it was noticed by PCIT that huge advance are shown against few branches and claimed it as rural branch eligible for deduction. The categories of the branch was test checked from the press release of reserve bank of India dated 1 November 2011 and wherein it was found that some of the branches are semi urban branches whereas those branches have been considered by the assessee as rural branches. On examination, the PCIT held that an amount of advances aggregating to Rs. 122.3 crores are advances of semi urban branches, which are not qualified for deduction under this section. Therefore, it was found that the excess deduction of Rs. 12.23 crores being 10% of the total advances of Rs. 122.3 crores of semi urban branches are allowed by the assessing officer without examination. It is the claim of the assessee that letter dated 17/10/2018 submitted during the original assessment proceedings the above explanation was given before the assessing officer and therefore he examined the same and allowed the claim. We have carefully perused the letter and find that in Para number 2.3 of that letter, assessee itself stated that exact area where the branches located is not available, but the classification has been made by the bank by identifying the list of rural branches having a population of less than 10,000 from 2001 census data from the RBI site which only gives the name of the towns together with the population figures. Therefore, the learned assessing officer has not examined this aspect that whether the branch is rural branch or not, advances of which are to be considered for allowing the deduction under this section. The learned principal CIT has categorically found that certain branches are not rural branches on which deduction should have been granted.
Therefore, there is an error in the order of the learned assessing officer in granting deduction merely on the submission of the assessee and without making any enquiry about the various branches, which are claimed to be eligible for deduction under this section on the advances. Thus, non-examination of the details clearly makes the order of the learned assessing officer erroneous and prejudicial to the interest of revenue. Further, it is the claim of the assessee that this is based on the audit objection raised by the Director-General of Audit, Mumbai. We do not find any infirmity in the order of the learned PCIT because even if there is an audit objection, he has applied his mind independently and held that order of the AO is erroneous to that extent. In the result on this issue, we hold that the learned PCIT has correctly assumed the jurisdiction and correctly held that the order of the learned AO is erroneous and prejudicial to the interest of revenue. To that extent, the order of the learned PCIT is sustainable on this issue. Accordingly, ground number 6 of the appeal is dismissed.
vi. Ground number 7 of the appeal is with respect to the excess deduction under section 36 (1) (viii) of the act of ₹ 1,385,206,494/– which is against the order of the learned PCIT holding that the assessee has claimed the deduction of ₹ 13,129,539,888/– against which the deduction is allowed by the learned assessing officer of ₹ 14,721,764,492/– and therefore there is an excess deduction allowed by the learned assessing officer then claimed in the original return of income by the assessee by ₹ 1,592,224,604/–. Fact also shows that assessee has claimed in its original return of income claiming deduction under this section of ₹ 13,129,539,888 which was subsequently revised to ₹ 12,982,134,851/– by filing a revised return during assessment proceedings as per letter dated December 26, 2018. Admittedly, no revised return was filed by the assessee on this account. The only claim of the assessee is that the quantum of deduction is linked to the total income and therefore the enhancement in the income returned due to additions/disallowances which has impacted the quantum of deduction. The learned PCIT has held that in view of the decision of the honourable Supreme Court in 284 ITR 323 the allowance of claim higher than the amount claimed in the return of income without revising the return of income makes the order of the learned assessing officer is erroneous and prejudicial to the interest of revenue. We do not find any infirmity in the order of the learned principal Commissioner of income tax on this account is not following the decision of the honourable Supreme Court makes the order of the learned assessing officer is erroneous and prejudicial to the interest of the revenue. Accordingly, ground number 5 of the appeal of the assessee is dismissed.
vii. Ground number 7 of the appeal is with respect to the excess deduction under section 36 (1) (viii) of the act of ₹ 1,385,206,494/– the fact shows that the assessee has claimed deduction of ₹ 1,572,983,056/– as assessee has claimed deduction only of ₹ 1,572,983,056/– in the return of income. Therefore, the allowance of the excess deduction is contrary to the decision of the honourable Supreme Court in case of Goetze India limited versus CIT 284 ITR 323. Therefore as reason given while deciding ground number 5 of the appeal of the assessee in dismissing it, we also dismiss ground number 7 of the appeal.
viii. Ground number nine of the appeal is against the excess allowance of deduction under section 36 (1) (vii) of the act of ₹ 2,500,369,520. The learned principal Commissioner of income tax after examining the detail found that as per the chart placed at page number 44 of the revisionary order show that the allowable bad debts written off allowed by the learned assessing officer of ₹ 7,921,149,070/– whereas according to the learned principal Commissioner of income tax the allowable bad debts written off should be restricted to ₹ 542,07,79,550/– and therefore there is an excess disallowance of deduction of ₹ 250,03,69,520. This fact has not at all been examined by the assessee and the impact of the assessment order for assessment year 2014 – 15 with respect to the provision for bad debt allowable allowed to the assessee of ₹ 13,136,858,216/– should have been considered against earlier years provisions which has been considered by the AO at ₹ 1,636,488,695/–. During the course of assessment proceedings neither there is any discussion not there is any detail called for by the assessing officer and therefore we do not find infirmity in the order of the learned principal Commissioner of income tax in holding that not making any enquiry by the learned assessing officer on this aspect makes the order of the learned AO erroneous so far as judicial to the interest of the revenue. Accordingly, we dismiss ground number 9 of the appeal of the assessee.
ix. Ground number 10 and 11 of the appeal are general in nature and therefore same are dismissed.
14. In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 25.01.2024.
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