Unsupportable disallowance of expenditure under Section 14A because the investment in shares was stock-in-trade

Fact and issue of the case

The captioned appeals relate to the same assessee and are cross appeals filed by the assessee and revenue against orders passed by the Commissioner of Income Tax (Appeals),Patiala,(hereinafter referred to as ‘CIT(A)’) pertaining to assessment year 2011-12, 2013-14 & 2014-15, while the assessee has filed appeal against orders passed by the CIT(A), Patiala, for A.Y.2012-13 & 2015-16

It was common ground between both the parties that the issue involved in all the appeals was common ,therefore they were all heard together and are being disposed off by way of a common, consolidated order for the sake of convenience. We shall first be dealing with the cross appeals relating to A.Y 2011-12

ITA No.861/Chd/2017: Assessee’s appeal for A.Y.2011-12

Ground No.1 raised by the assessee reads as under

The Ld. CIT(A) failed to appreciate that for creation of reserve u/s 36(1)(viii) no time limit was prescribed in the Act, when the same was created before the completion of assessment, the deduction u/s 36(1)(viii) should have been granted by the AO

In the above ground the assessee has challenged the action of the Ld.CIT(Appeals) in upholding disallowance of deduction claimed by the assessee u/s 36(1)(viii) of the Income Tax Act, 1961 (in short ‘the Act’) amounting to Rs. 120 crores. The assessee bank had claimed deduction of Rs. 120 crores on account of a special reserve created for the impugned assessment year, under the provisions of section 36(1)(viii) of the Act. The same was denied by the Assessing Officer since he found that the special reserve was not created before finalization of the books of the assessee for the impugned year. The Assessing Officer found that the assessee had created the special reserve only in financial year 20 12-13 relevant to assessment year 2013-14. He, therefore, held that the assessee was not entitled to claim deduction u/s 36(1)(viii) of the Act

The Ld.CIT(Appeals) upheld the disallowance, holding that the assessee was duty bound to create and maintain the special reserve out of the profits of the eligible business during the relevant financial year itself and having not done so he held that the Assessing Officer had rightly denied the said claim of the assessee. The Ld.CIT(Appeals) distinguished all the case laws relied upon by the assessee in support of its contention that it was not imperative to create reserve for the impugned year itself before claiming the said deduction

During the course of hearing before us, the Ld. counsel for assessee pointed out that identical issue had been dealt with by the Delhi Bench of the I.T.A.T. in the case of Power Finance Corporation Limited Vs. JCIT (2008) 16 DTR 519(Del) which was followed by the Mumbai Bench of the I.T.A.T. in the case of Bank of Baroda Vs. Addl.CIT in ITA No.4619/M/2012 dated 4. 1 1.2015. Copies of the order were placed before us. The Ld. counsel for assessee pointed out therefrom that it was held by the Tribunal in the said cases that the reserve created in subsequent years, however, before finalization of grant of deduction is required to be considered while allowing the assessee’s claim of deduction made u/s 36(1)(viii) of the Act

The Ld. DR, on the other hand, relied upon the order of the Ld.CIT(Appeals) and pointed out therefrom that the Ld.CIT(Appeals) had distinguished the aforesaid case law relied upon by the assessee before it by pointing out that the said decision pertained to assessment year prior to assessment year 1998-99 and further that as per the amended provisions the pre-condition for claiming deduction u/s 36(1)(viii) is the creation and maintenance of the reserve, which the assessee had failed to do in the present case. The Ld. DR further drew our attention to the case laws relied upon by the Ld.CIT(Appeals) while upholding the order of the Assessing Officer in support of its finding that the creation of reserve is a pre-condition for claiming deduction u/s 36(1)(viii) of the Act as under

CIT Vs. Tamil Nadu Industrial Investment Corporation Ltd., 240 ITR 573 (Mad)

Kerala Financial Corporation Vs. CIT 129 Taxmann 365(Ker)

We have heard the contentions of both the parties. We have also gone through the orders of the authorities below and case laws cited before us and also the documents which were brought to our notice during the course of hearing

The issue before us pertains to allowance of deduction on account of creation of a special reserve as per the provisions of section 36(1)(viii) of the Act which though not created in the books of account in the relevant previous year and created later in the A.Y. 2013-14, but before the assessment for the impugned year was completed

Observation of the court

The Hyderabad Bench of the Tribunal in the case of State Bank of Hyderabad (supra) has considered and decided a similar issue; though in the case of bank in paras 13 & 14 as under

The provisions of Sec.ll53B will be applicable to all companies. However, it is contended that Sec. 115JB will be applicable only where the assessee is required to show profit & loss account in accordance with schedule VI of companies act. As the banks are required to prepare balance sheet and profit & loss account in accordance with the Banking Regulation Act, provision of 115JB cannot be applied to the banks. In the case of Maharashtra State Electricity Board vs. CIT (82 ITD 422) it was held that provisions of book profit cannot be applied to Electricity Companies. Banking Companies and companies engaged in generation and supply of electricity do not have to prepare their accounts in accordance with parts II and III of Sch. VI of the Companies Act by the virtue of proviso to sec 21 1(2) of the Companies Act. We find that by the Finance Act 2012, with effect from 1.4.2013, even companies to which Proviso to sec 211(2) applies (the banking Companies and companies engaged in generating and distribution of electricity), should prepare their P&L and balance Sheet in accordance with the provisions of the Act Governing such companies. This would mean that prior to AY 2013-14, provisions of sec 1 15)B will not apply to companies to which proviso to sec 211(2) of the companies Act, 1956 applies. 77? Assessee being a company to which proviso to sec 211(2) of the Companies Act 1956 applies, will not be liable to be taxed under sec 115JB

The Mumbai Tribunal in the case of Krung Thai Bank Vs. JCIT (133 777 435), to which one of us is a party has held that provisions of sec 115JB cannot be applied to the banking company

Similarly, in the case of Reliance Energy (supra), the coordinate Bench of this Tribunal has held in paras 28 & 29 as under

As discussed above when it is not possible to prepare the accounts under the Companies Act for the purpose of computation u/s 115JB, therefore, the assesses cannot be forced to prepare the accounts when it is not possible. Therefore, we are in agreement with the contentions of the assessee in as much as the accounting policies followed in the electricity accounts if followed for the preparation of Companies Act account will not disclose true and fair view and will not be in accordance with part II and III of Schedule V of the Companies Act, The ratio of the decisions of the Hon’ble Supreme Court and the ratio of the decision of the Tribunal discussed above are in support of the contentions of the assessee. We further found that the issue of applicability of sec. 115} came before the Tribunal for AY 88-89. Taking into cons/deration the preparation of accounts under the Electricity Act and other contentions the assessee including the decisions of the Supreme Court in the case of B.C. Srinivasa Setty (supra), the Tribunal has held that the provisions of sec. 115] are not attracted on the facts of the present case. 29 As discussed above, the assessee is following the accounting policies under the Electricity Supply act and prepared its accounts in view of those very policies. Following those very policies, the accounts in accordance with part II & III of Schedule VI of the Companies Act are not applicable at all. Once there is no possibility for preparing the accounts in accordance with the part II & II of Schedule VI of Companies Act then the provisions of sec, 115JB cannot be forced, Therefore, in view of the above facts and circumstances and respectfully following the above decisions of the Hon’ble Supreme Court and the decision of the Tribunal for AY 88-89, we hold that provisions of sec. 115JB are not applicable on the facts of the present case

Following the decisions of the coordinate Benches of this Tribunal, we hold that when the insurance companies, banking companies and electricity generation and distributions companies are treated In the same class as per the provisions of sec 211 of the Companies Act in preparing their final accounts, then these companies cannot be treated differently for the purpose of sec. 115JB and accordingly, the provislons of sec, L15JB are not applicable in the case of the assessee,” Accordingly, this issue is decided in favour of the assessee and against the revenue

Though, section 115JB has been amended to bring all the Companies in its ambit vide Finance Act 2012, w.e.f 1.4.2013, however, the said amendment is not applicable in the assessment year under consideration

Following the decision of co-ordinate bench of this Tribunal we decide this issue in favour of the assessee. The Ld. DR has not brought to our notice any contrary decision of the I.T.A.T. or the Hon’ble High Court or any higher judicial authority in this regard

In view of the same, therefore, the action of the Assessing Officer in making addition of expenses disallowed u/s 14A to the book profits of the assessee, we hold, was unwarranted. We, therefore, uphold the order of the Ld.CIT(Appeals). Ground No.3 raised by the Revenue is also dismissed

In effect, the appeal of the Revenue is dismissed. ITA No/482/Chd/2017:Revenue’s Appeal for A.Y 2012-13 40. Ground No.1 raised by the Revenue reads as under

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs.18,25,14,604/- made by the Assessing Officer on account of apportionment of expenses against exempted income u/s 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962

It was common ground between both the parties that the issue raised in the above ground was identical to that raised in ground No. 1 of the Revenue’s appeal in ITA No.787/Chd/2017 dealt with in earlier part of our order. We therefore hold that the decision rendered therein at para 27 will apply mutatis mutandis to this ground. Following the same we dismiss the ground of appeal No. 1 raised by the Revenue

Ground Nos.2 & 3 raised by the Revenue read as under

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs.3,38,08,1167- made by the Assessing Officer on account of disallowance of excess depreciation on ATM

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in adjudicating that the provisions of section 1 15JB of the Income Tax Act, 1961 are not applicable to the case of the assessee for the year under consideration

It was common ground between both the parties that the issues raised in the above grounds were identical to that raised in ground Nos.2 & 3 respectively of the Revenue’s appeal in ITA No.787/Chd/2017 dealt with in earlier part of our order. We therefore hold that the decision rendered therein at para 32 and para 37 will apply mutatis mutandis to these grounds. Following the same we dismiss the grounds of appeal Nos. 2 & 3 raised by the Revenue

The appeal of the Revenue is dismissed. ITA No. 510/Chd/2017:Assessee’s appeal for A.Y 2013-14 45. One of the issues raised in the above appeal has been referred to the Hon’ble President, ITAT,for constituting a Special Bench of the Tribunal. The appeal therefore is not being dealt with by us,as per the Rules and Procedures for the administration of the ITAT prescribed in the Office Manual of the ITAT. ITA No.483/Chd/2017 Revenue’s appeal for A.Y 2013-14

The issues raised in the above cross appeal of the Revenue, for A.Y 2013-14,we find are not connected with the issues raised in the assessees appeal in ITA No.510/Chd/2017 for the impugned year, which has not been dealt with by us on account of reference having been made on one of the issues raised in the appeal to the President, ITAT, for constituting a Special Bench ,as stated above. Also admittedly the issues raised in the present appeal are identical to that raised in Revenues appeal for A.Y 2011-12 in ITA No.787/Chd/2017,which has been dealt with in earlier part of our order. We therefore consider it appropriate to adjudicate the present appeal

Ground No.1 raised by the Revenue reads as under

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting 1 ie addition of Rs.28,82,80,000/- made by the Assessing Officer on account of apportionment of expenses against exempted income u/s 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962

It was common ground between both the parties that the issue raised in the above ground was identical to that raised in ground No.1 of the Revenue’s appeal in ITA No.787/Chd/2017 dealt with in earlier part of our order. We therefore hold that the decision rendered therein at para 27 will apply mutatis mutandis to this ground. Following the same we dismiss the ground of appeal No.1 raised by the Revenue

Ground No.2 raised by the Revenue reads as under

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs.3,38,08,ll6/- made by the Assessing Officer on account of disallowance of excess depreciation on ATM

It was common ground between both the parties that the issue raised in the above ground was identical to that raised in ground No.2 of the Revenue’s appeal in ITA No.787/Chd/2017 dealt with in earlier part of our order. We therefore hold that the decision rendered therein at para 32 will apply mutatis mutandis to this ground. Following the same we dismiss the ground of appeal No.2 raised by the Revenue

The appeal of the Revenue is dismissed. ITA No. 538/Chd/2017 Assessee’s Appeal for A.Y.2014-15

One of the issues raised in the above appeal has been referred to the Hon’ble President, ITAT, for constituting a Special Bench of the Tribunal. The appeal therefore is not being dealt with by us, as per the Rules and Procedures for the administration of the ITAT prescribed in the Office Manual of the ITAT. ITA No. 721/Chd/2017: Revenue’s Appeal for A.Y 2014-15

The issues raised in the above cross appeal of the Revenue, for A.Y 2014-15,we find are not connected with the issues raised in the assessees appeal in ITA No.538/Chd/2017 for the impugned year, which has not been dealt with by us on account of reference having been made on one of the issues raised in the appeal to the President, ITAT, for constituting a Special Bench, as stated above. Also admittedly the issues raised in the present appeal are identical to that raised in Revenues appeal for A.Y 2011-12 in ITA No.787/Chd/2017,which has been dealt with in earlier part of our order. We therefore consider it appropriate to adjudicate the present appeal

Ground No. 1 raised by the Revenue reads as under

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs.2,02,88,889/- made by the Assessing Officer on account of apportionment of expenses against exempted income u/s 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962

Ground No.2 raised by the Revenue reads as under

Whether in the facts and circumstances of the case, the Ld. CIT(A), Patiala is legally correct in deleting the addition of Rs. 1,79,11,078 7- made by the Assessing Officer on account of disallowance of excess depreciation on ATM

The appeal of the Revenue is dismissed. ITA No.1259/Chd/2017:Assessee’s appeal for A.Y 2014-15

One of the issues raised in the above appeal has been referred to the Hon’ble President, ITAT, for constituting a Special Bench of the Tribunal. The appeal therefore is not being dealt with by us,as per the Rules and Procedures for the administration of the ITAT prescribed in the Office Manual of the ITAT

In the result;

The appeal of the assessee in ITA No.861/Chd/2017 is partly allowed

The appeal of the Revenue in ITA No.787/Chd/2017 is dismissed

The appeal of the Revenue in ITA No.482/Chd/2017 is dismissed

The appeal of the assessee in ITA No.510,538 &1259/Chd/2017 have not been dealt with by us for reasons stated in the order

The appeal of the Revenue in ITA No.483/Chd/2017 is dismissed

The appeal of the Revenue in ITA No.721/Chd/2017 is dismissed

Order pronounced in the open court