If the AO does not specifically inquire about the CBS expenses, Section 263 may be used

Fact and issue of the case

This is an appeal preferred by the assessee bank against the order of the Ld. Principal Commissioner of Income Tax-02, Mumbai passed under section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 26.03.2022 for assessment year 2017-18

At the outset, the Ld. AR of the assessee drew our attention to the additional ground of appeal preferred by the assessee wherein it has challenged the validity of AO passing the order in the name of erstwhile Bhartiya Mahila Bank Limited (hereinafter “BMBL”), even though, it was merged with M/s. State Bank of India w.e.f. 01.04.2017 (vide notification dated 22.02.2017). In this regard, it is noted that from 01.04.2017, Bhartiya Mahila Bank Ltd got merged/amalgamated with State Bank of India which is an incident happening in subsequent AY 2018-19, but the AO was aware of this amalgamation from a perusal of the assessment order dated 05.12.2019 (i.e. after the amalgamation w.e.f. 01.04.2017). The Ld AR assails the action of AO to have framed the assessment order in the name of M/s. Bhartiya Mahila Bank Ltd. instead of State Bank of India. According to Ld. AR, the AO despite knowing about the fact of amalgamation, he erred in framing the assessment order on 05.12.2019 in the name of M/s. Bhartiya Mahila Bank Ltd , which action of AO is bad in law because Bhartiya Mahila Bank Ltd is not existing in the eyes of law. However, we note that AO has framed the assessment titled Bhartiya Mahila Bank Ltd; c/o State Bank of India, therefore, the name of the amalgamated entity i.e. State Bank of India is found to be mentioned at the Title/Caption itself. Moreover we note that AO has referred State Bank of India, as representative assessee and statutory notice was issued to the successor viz SBI which fact is discernable from the acknowledgement made by him at first page of assessment order dated 05.12.2019 wherein AO observes “The phrase “assessee bank” in this order shall refer to the erstwhile M/s. Bharatiya Mahila Bank Limited as it stood before amalgamation with M/s. state Bank of India. M/s. State Bank of India shall be referred to as the representative assessee bank for the purpose of this order. Consequently, notices u/s 142(1) were issued to the successor”. So taking in to consideration the aforesaid action of AO, the legal issue raised by assessee regarding passing of order in name of amalgamated entity on the facts and circumstance as noted is rejected and according to us, the case laws cited are distinguishable and so, we proceed to deal with the next legal issue regarding jurisdiction of Ld PCIT

Next legal issue raised by the assessee is against the action of the Ld. PCIT exercising revisional jurisdiction u/s 263 of the Act

Brief facts regarding this issue is that the Ld. PCIT notes that the assessee company had filed the return of income on 30.10.2017 declaring total income of Rs.14,36,43,872/-. Pursuant to the order no. GSR 158(E) dated 22.02.2017, the erstwhile Bhartiya Mahila Bank Limited (in short BMBL) has been merged/amalgamated with the present assessee M/s. State Bank of India w.e.f. 01.04.2017. And assessment was completed on 05.12.2019 at assessed income of Rs.17,06,40,460/-. The Ld. PCIT observes that while he was going through the records, he found that the assessee has claimed an amount of Rs.14,60,92,479/- towards “CBS Implementation Fees” under the head of other Expenses and also noted that in AY. 2015-16 the assessee has made similar claim of Rs.14,97,10,844/- towards CBS implementation fees. The Ld. PCIT acknowledged that Scheduled 18-Notes to the Accounts, and under other disclosures this claim has been disclosed by the assessee. And thereafter, he notes that the AO had called for details of expenses in the notice u/s 142(1) of the Act vide letter dated 04.09.2019 as under

Furnish explanation in respect of such item of expenses and receipts appearing in trading account and profit & loss account, (either by way of excess or reduction) in comparison to last year

Pursuant thereto, the assessee had replied vide letter dated 20.09.2019 and requested the AO to refer to Schedule-14 regarding other income and Schedule-16 and operating expenses for comparative analysis of the Annual Report for FY. 2016-17. And the AO thereafter allowed the claim of expenses (CBS fees). So the Ld. PCIT taking note of the aforesaid facts observes and points out the following facts/error

On verification of the submission made by the assessee, it is seen from Schedule 16 under Operating Expenses of the P/L account that the CBS expense has reduced in FY. 2015-16 from Rs.21.60 cr to Rs.14.60 cr in FY. 2016-17. The AO has accepted the claim without raising any further queries. He has failed to verify

Whether deduction for an amount of Rs.14,97,10,844/- was allowable considering the observations in the Notes to Account as above, which shows that this was only a provision and not an ascertained liability; &

Whether the aforesaid expenses were capital in nature, in which case it could not have been allowed as deduction

Thereafter, the Ld. PCIT held that the AO failed to have conducted necessary inquiries while framing the assessment order dated 05.12.2019 which omission on the part of AO makes the assessment order erroneous and prejudicial to the interest of the revenue u/s 263 of the Act. And he gave show cause notice to the assessee as to why the ibid amount of Rs.14,60,92,479/- claimed as expenses towards “CBS Implementation Fees” under the head “other expenses” is required to be allowable. Pursuant to the show cause notice, the assessee replied that assessee bank had entered into service level agreement for operating lease with Fidelity National Information Services, Inc. (FIS) of Rs.14,60,92,479/- and the same was expenditure incurred for CBS implementation (fees) which has been debited in the profit and loss account, as per the consistent policy adopted by the Bank and duly reflected under the sub-head “other expenses” forming part of Schedule-18 “Operating Expenses” of the Annual Report. It was also brought to the notice of the Ld PCIT that the exact nature of the said expenses was also disclosed separately as a part of note-3 of the “Other Disclosures of the Annual Report” which is as under

3 Core Banking Solution

Bank has entered into service level agreement for operating lease with FIS on 19 November 2013 for all IT solution Including Network, Hardware, Software and Support Services. As per the agreement, ownership and operation of all facilities, network connectivity, network devices, hardware, software, Storage devices, system software and application software would be with FIS. Agreement is valid for a period of 7 years and can be extended further period of 4 (four years). This is a cancellable lease. Bank has recognized Rs. 1460.92 Lacs (Previous Year Rs. 2165.88 Lacs) as CBS implementation Fee in Profit and loss account during the FY 2016-17

Observation of the court

We have heard both the parties and perused the records. Since the assessee has assailed the validity of the revisional proceedings invoked by the Ld. PCIT u/s 263 of the Act, let us revisit the settled position of law on the same. For that, let us take the guidance of judicial precedence laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the ld. CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer’s order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer’s order is in violation of the principles of natural justice; (iii) if the AO’s order is passed without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above the order passed by the Assessing Officer can be termed as erroneous for the purpose of section 263 of the Act. It has to be borne in mind that even if the Ld. PCIT/CIT finds that the assessment order is erroneous, he cannot invoke the revisional jurisdiction u/s 263 of the Act without satisfying the requirement of second limb [i.e. the Ld. PCIT/CIT has to show that due to the erroneous assessment order, prejudice has been caused to the interest of revenue]. This essential requirement of law needs to be satisfied before the Ld PCIT/CIT invokes revisional jurisdiction. This proposition of law has been laid down by the Hon’ble Supreme Court in the case of Malabar Industries (supra) wherein their Lordship’s held that this phrase i.e. “prejudicial to the interest of the revenue” has to be read in conjunction with an “erroneous” order passed by the Assessing Officer. Further the Hon’ble Supreme Court held ‘that for invoking powers conferred by section 263 of the Act, the CIT should not only show that the AO’s order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue’. At this juncture, one has to understand what is prejudicial to the interest of revenue. Their Lordship explaining about this in the said judgment (Malabar supra) held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further held that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law

Keeping the aforesaid legal principle in mind, when we adjudicate the assessee’s challenge against the action of the Ld. PCIT to have invoked the revisional jurisdiction u/s 263 of the Act, we note that the Ld. PCIT has alleged no enquiry into the allowability of the claim of deduction of Rs.14,60,92,479/- in the profit and loss account against CBS expenses. When the Ld. PCIT confronted the assessee about this issue, the assessee claimed that the AO had enquired about this claim and the assessee had replied to the same. So according to assessee, on this issue, enquiry was carried out by the AO and based on assesse’s reply, no adverse view was taken by AO, who allowed the claim, which is a plausible view [refer decision/ratio of this Tribunal (Bangalore) in the case of Kotak Mahindra Bank Ltd supra]. Let us examine this contention of assessee bank. In this regard we note that the AO vide notice dated 04.09.2019 had asked the following question

Please furnish explanation in respect of such item of expenses and receipts appearing in trading account and profit & loss account. (either by way of excess or reduction) in comparison to last year. The comparative details may be furnished in the following format

Head expenses

Expenses during the year

Expenses during the year as % of turnover

Expenses last year

Expenses of last year as % of turnover

% increase or decrease visà-vis last year

And the assessee had replied to it, vide letter dated 20.09.2019 as under

Please furnish explanation in respect of such item of expenses and receipts appearing in trading account and profit & loss account, (either by way of excess or reduction) in comparison to last year. The comparative details may be furnished in the following format: (Point 17)

Reply: Please refer Schedule-14 – Other income and Schedule-16- Operating Expenses for comparative analysis of the Annual Report for FY. 2016-17

Thus, from the aforesaid query/reply, we note that the AO during the assessment proceedings had requested the assessee to furnish explanation in respect of such items of expenses and receipt appearing in the trading accounts and profit and loss accounts (either by way of excess or reduction) in comparison to last year. And AO also has asked for comparative details in the form of a chart as given above (supra). And in reply, it can be seen that the assessee in-turn had asked the AO to refer Schedule-14 ‘other income’ and Schedule-16 ‘operating expenses’ for comparative analysis of the Annual Report. And it is noted that assessee even did not bother to give the details as asked for in the form of chart. Moreover, as rightly observed by the Ld. PCIT, the details called for by the AO were only general details pertaining to increase/decrease in income/expenditure during the year when compared to previous year. No specific queries were raised by AO regarding this claim of expenditure regarding CBS fees or even other expenses; and the assessee was not sked to prove any expenses it had booked or claimed in the profit & Loss account. And the reply of the assessee to the general query of AO to refer to schedule cannot be termed to be enquiry on the issue flagged by Ld PCIT. Merely production of financial notes an audit or reference to it when queried cannot be accepted as enquiry carried out by AO, who was bound by law to act both in the capacity of Investigator & Adjudicator; and failure to do any one duty [either that of Investigator or Adjudicator] can attract the supervisory jurisdiction of Ld PCIT u/s 263 of the Act and in this case, the AO has failed to discharge his duty as an investigator regarding CBS fees/expenditure to the tune of Rs.14.60 cr

Moreover, as noted supra, the AO did not raise specific query regarding expenses claimed in respect of CBS to the tune of Rs.14,60,92,479/-; and even during the revisional proceedings in year 2022 before Ld PCIT, the assessee failed to produce the invoice raised by M/s. FIS for the services rendered by it till the year end (31.03.2017) i.e, even after four to five years the assessee was unable to support the expenditure claimed on account of CBS fees/expenditure

Therefore, the action of the Ld. PCIT cannot be faulted firstly for non-specific inquiry by the AO as well as the failure on the part of assessee to even produce the invoice relating to the expenditure before the Ld. PCIT. Therefore, we relying on the decision of the Hon’ble Bombay High Court in the case of Jeevan Investment & Finance (P.) Ltd. Vs. CIT (2017) 88 com 552 (Bom) (2017) 291 CTR 241 (Bom), find that the AO failed to examine the claim of expense and erred in allowing such an expenses/CBS Fees. In the absence of examination of the claim made by the assessee the finding of Ld. PCIT that the order of the AO is erroneous and prejudicial to the interest of the revenue qua the expenditure claimed as CBS Fees is upheld. Therefore, we hold that exercise of the revisional jurisdiction u/s 263 of the Act by the Ld. PCIT is proper and valid. And therefore, we dismiss the appeal of the assessee

In the result, the appeal of the assessee is dismissed

Order pronounced in the open court on this 21/04/2023