Under Section 36(1)(vii), bad debts connected to non-rural branches are admissible

Fact and issue of the case

These are cross appeals filed by the assessee and Revenue against the order of the CIT(A)- 14, Bengaluru dated 31.12.2018 for AY 2015-16

In ITA No. 321/Bang/2019 the assessee has raised the following grounds of appeal

The order of the learned Commissioner of Income Tax (Appeals) is bad in law and against the facts of the case

The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 912,36,87,935/- u/s 36(1)(vii) being the non-rural write off by the bank

The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 565,92,40,708/- u/s 36(1)(viia)

The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance of Rs. 58,30,00,000/- u/s 36(1)(viii)

The learned Commissioner of Income Tax (Appeals) erred in holding that Rs. 1,38,11,847/- paid to NPCI is in the nature of technical and managerial service covered u/s 194J of the Income Tax Act

The learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs 5,16,000/- paid to RBI

The learned Commissioner of Income Tax (Appeals) erred in holding that provisions of Section 115JB are applicable to the bank

Without prejudice to the above ground, the learned Commissioner of Income Tax (Appeals) erred in adding various items to arrive at the book-profit which are beyond the scope of the section

In ITA No. 528/Bang/2019 Revenue has raised the followinggrounds of appeal

The Order of the Ld. C1T(A), LTD, Bengaluru dated 31.12.2018 is opposed to the law and facts of the case

The Ld. CIT(A) held in law in confirming the method of calculation adopted by the assessee in computing the eligible quantum of provision for bad debts u/s 36(l)(viia) relating to rural advances

The Ld. CIT(A) erred in failing to appreciate that the phrase in Rule 6ABA(a)- ‘the amounts of advances made by each rural branch as outstanding at the end of the last day of each month’ signifies that the eligible quantum should necessarily relate to ‘fresh / incremental advances’ of rural branches

The Ld. CIT(A) erred in failing to read the words ‘advances made’ and ‘outstanding at the end of the last day of each month’ in conjunction

The Ld. CIT(A) failed to appreciate that by accepting the computation of the assessee, the same sums of rural advances, finding a place in the opening value at the start of the year or repeatedly considered for deduction u/s 36(l)(viia)

The Ld. CIT(A) erred in law in confirming that the assessee is eligible for provision for depreciation on investments with regard to HTM Category

The Ld. CIT(A) failed to appreciate that directive provided by the CBDT Instruction No. 17 dated 26.11.2008 (F No. 228/3/2008-ITA -lll) which held that ‘investment classified under HTM category need not be marked to mark and are to be carried at acquisition cost

The Ld. CIT(A) failed to appreciate the guidelines issued by RBI which holds that diminution of value of investment in HTM Category cannot be allowed

The Ld. CIT(A) erred in law in failing to uphold the disallowance u/s 14A r.w.r Rule 8D

The Ld. CIT(A) erred in law to accept the computation of disallowance adopted by the assessee, which is redundant consequent to the insertion of Rule 8D from A. Y. 2008-09 onwards

The Ld. CIT(A) failed to appreciate the latest decision of the Hon ‘ble Supreme Court in the case of Maxopp Investment Ltd. reported in (2018) 91 taxmann.com 1 54 (SC), wherein it was held that even in case of stock-in-trade, tax free income should result in disallowance u/s 14A to the extent attributable and proportionate to the quantum of tax-free income

The Ld. CIT(A) erred in failing to take cognizance of the essential finding of the Hon ‘ble Supreme Court in the case of Maxopp Investments Ltd (supra) which overruled the decision of the Punjab & Haryana High Court in the case of State Bank of Patiala reported in (2017) 78 taxmann.com 3 to hold that the test of dominant intention applied by P& H High Court are to be discarded

For those and other reasons that may be adduced at the time of hearing, it is humbly pleaded that the Order of CIT(A) be set aside and that of the Assessing Officer be restored and thus render justice

The brief facts of the case are that the assessee, a leading bank in Karnataka has filed its return of income on 28.09.2015 for AY 2015-16 declaring total income at ‘Nil’. The assessee filed revised income by declaring total income at Nil by making additional claim of 200/- crores under Section 36(1)(vii) of the Income Tax Act, 1961 (the Act). The case was selected for scrutiny under CASS and notice under Section 143(2) of the Act dated 13.04.2016 was issued and served upon the assessee. Notices under Section 142(1) were also issued on various dates along with questionnaires calling for various details to verify the claims made by the assessee in the return of income. After hearing the assessee, assessment was completed by determining total income at Rs.1750,77,68,383/-

Aggrieved by the above order, the assessee filed appeal before the CIT(A). The CIT(A) granted partial relief to the assessee vide order dated 3 1.12.2018

Aggrieved by the above order of the CIT(A) both assessee and Revenue are in appeal before the Tribunal on the above mentioned

We have heard the rival contentions and perused the material on We first take up the assessee’s appeal

Ground No. 1 is general in nature and requires no adjudication

Observation of the court

After hearing the rival contentions, we note that assessee has received exempt income of Rs.28.62 crores and suo motu disallowed of Rs.2,87,520. Since this issue is a recurring issue and has been decided by the coordinate Bench of the Tribunal in assessee’s own case for the AY 2014-15 i ITA No. 1834/Bang/2018 order dated 03.2022 wherein it was held that

We heard the parties on this issue and perused the record. We notice that the co-ordinate benches have decided this issue prior to rendering of decision by Hon ’ble Supreme Court in the case of Maxopp Investment Ltd (2018 (3) TMI 805) (SC). However, before us, the Ld A.R relied upon certain other decisions in order to contend that no disallowance u/s 14A is called for. In view of the subsequent development of law on this issue, in our considered view, this issue requires fresh examination at the end of AO by duly considering the various decisions on the subject. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of AO for examining it afresh

Respectfully following the above decision of the coordinate Bench, we set aside the order of the CIT(A) and restore the issue to the AO for examining it afresh in the light of above cited details. Accordingly the grounds raised by the revenue is allowed for statistical purposes

To sum up, the appeal filed by the assessee and revenue are partly allowed for statistical purposes. Copy of this common order passed shall be kept in the respective appeals

Order pronounced in the open Court on 25th April, 2023