ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 IN INCOME TAX APPELLATE TRIBUNAL C BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri S.S. Viswanethra Ravi, JM] I.T.A Nos. 1202/Kol/2012 Assessment Year: 2008-09 UCO Bank, (PAN: AAACU3561B) Vs. Deputy Commissioner of Income-tax, Circle-6, Kolkata. (Appellant) (Respondent) & I.T.A Nos. 1281/Kol/2012 Assessment Year: 2008-09 Deputy Commissioner of Income-tax, Vs. UCO Bank, Circle-6, Kolkata. (Appellant) (Respondent) Date of hearing: 25.08.2016 Date of pronouncement: 05.10.2016 For Assessee: S/Shri D.S.Damle & Akkal Dudhwewala, FCA For Revenue: Shri G. Mallikarjuna, CIT, DR ORDER Per Shri M. Balaganesh, AM: Both these appeals by assessee and revenue are arising out of common order of CIT(A)-VI, Kolkata vide appeal No. 103/VI/Cir-6/10-11/Kol dated 11.06.2012. Assessment was framed by DCIT, Circle-6, Kolkata u/s. 143(3) and 115WE(3) of Income tax Act, 1961 (hereinafter referred to as Act ) for AY 2008-09 vide his order dated 31.12.2010. For sake of brevity, we dispose of both appeals by this consolidated order. 2. DISALLOWANCE OF PROVISION FOR BAD AND DOUBTFUL DEBTS CLAIMED U/S 36(1)(viia) OF ACT IN EXCESS OF PROVISIONS CREATED IN BOOKS Rs. 162,56,86,471/- brief facts of this issue is that ld AO observed that assessee had actually written off Rs. 306,03,64,654/- as bad and doubtful debts comprising of rural and non-rural advances. assessee also claimed provision of Rs. 532,63,60,653/- u/s 36(1)(viia) of Act. Out of these amounts of Rs. 532,63,60,653/- , amount of Rs. 370,06,74,182/- had 2 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 been debited as provision in profit and loss account on account of provision of bad and doubtful debts of rural and non-rural mixed. Out of provisions of Rs. 370,06,74,182/-, amount of Rs. 27.06 crores pertained to rural branches which has been written off in accounts. This amount of Rs. 27.06 crores has not been claimed separately as bad and doubtful debts written off due to same being deducted out of provisions for rural branches. assessee claimed provision of Rs. 532.63 crores in computation of income against provision for bad and doubtful debts of Rs. 370.06 crores debited in profit and loss account. Therefore, ld AO found that there is additional provision deduction claimed by assessee in computation of income amounting to Rs.162,56,86,471/-. This was also confirmed by ld CITA in first appeal. Aggrieved, assessee is in appeal before us on following ground:- 1. For that on facts and in circumstances of case, CIT(Appeals) was grossly unjustified in upholding disallowance for provision for bad & doubtful debts amounting to Rs. 162,56,86,471/- on ground that deduction under Section 36(1)(viia) needs to be restricted to actual provision made in books. 2.1. ld AR argued that this issue pertains to claim of deduction towards provision for bad and doubtful debts as per provisions of section 36(1)(viia) of Act in excess of provision created in books. He argued that intention of legislature while inserting provision u/s 36(1)(viia) of Act and its scope has to be understood. It was argued that from provisions of section 36(1)(viia) of Act, it is evident that for scheduled bank in order to claim deduction, essential pre-requisite is provision for bad and doubtful debts must be created in respect of advances given in its books of accounts. Thus, on creation of such provision, assessee is automatically entitled to such deduction i.e aggregate of 7.5 % of total income and 10% of aggregate average advances made by rural branches. According to Learned AR, thus, if provision for bad and doubtful debts is made by scheduled bank having rural branches, assessee is entitled to deduction which should not be restricted to provision for bad and doubtful debts made in accounts but is to be allowed at rate of 7.5% of total income and 10% of aggregate rural advances made by assessee. It was argued further that such provision has been inserted so as to promote rural banking. It was argued that legislature has provided that extent of deduction which it deems fit irrespective of whether corresponding provision 3 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 has been made in books or not. In response to this, Learned DR vehemently supported orders of lower authorities. 2.2. We have heard rival submissions and gone through facts and circumstances of case. We hold that there cannot be any question of considering claim for any deduction u/s 36(1)(viia) of Act if there is no provision for bad and doubtful debts made by assessee bank because clause (viia) starts with phrase In respect of any provision for bad and doubtful debts made by . No doubt that deduction is to be restricted to 7.5% of total income and 10% of aggregate rural advances, but result of such workings cannot be allowed in excess of provision charged to profit and loss account for year. We find that issue is squarely covered against assessee by decision of Hon ble Punjab and Haryana High Court in case of State Bank of Patiala vs CIT reported in (2005) 272 ITR 54 (P&H) (supra) wherein it was held as under:- bare perusal of above shows that deduction allowable under above provisions is in respect of provision made Therefore, making of provision for bad and doubtful debt equal to amount mentioned in this section is must for claiming such deduction Tribunal has rightly pointed out that this issue stands further clarified from proviso to clause (vii) of section 36(1) of Act, which reads as under: "Provided that in case of assessee to which clause (viia) applies, amount of deduction relating to any such debt or part thereof shall be limited to amount by which such debt or part thereof exceeds credit balance in provision for bad and doubtful debts account made under that clause" This also clearly shows that making of provision equal to amount claimed as deduction in account books is necessary for claiming deduction under section 36(1) (viia) of Act Tribunal has distinguished various authorities relied upon by assessee wherein deductions had been allowed under various provisions which also required creation of reserve after assessee had created such reserve in account books before completion of assessment It has been correctly pointed out that in all those cases, reserves/provisions had been made in books of account of same assessment year and not of subsequent assessment year. In present case, assessee has not made any provision in books of account for assessment year under consideration, ie, 1985-86, by making supplementary entries and by revising its balance-sheet provision has been made in books of account of subsequent year. We are, therefore, satisfied that Tribunal was right in holding that since assessee had made provision of Rs 1,19,36,000 for bad and doubtful debts, its claim for deduction under section 36(1) (viia) of Act had to be restricted to that amount only Since language of statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this court. appeal is, accordingly, dismissed No costs. 4 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 Respectfully following decision cited supra, ground no.1 raised by assessee is dismissed. 3. DISALLOWANCE U/S 14A OF ACT ld AO observed that assessee earned dividend income from shares amoutnign to Rs. 3,58,25,045/- . In computation of income filed by assessee, no expenditure was disallowed u/s 14A of Act relatable to earning of exempt income. Accordingly ld AO invoked provisions of Rule 8D and worked out disallowance u/s 14A of Act to tune of Rs. 22,83,24,845/- in assessment. ld CITA held that investments were held as stock in trade by assessee and Hon ble Apex Court in assessee s own case reported in 240 ITR 355 (SC) had held that investments held by assessee are to be held as stock in trade. Moreover, all these investments were statutorily required to be maintained as per policy of RBI on socio-economic considerations. bank has to make these investments as legal necessity although many of them may not be remunerative in terms of returns. Therefore, he held that investments held for stock in trade is meant only for purpose of business of assessee bank. Accordingly, he held that provisions of Rule 8D(2)(ii) of Rules for disallowance of interest should not be invoked in assessee s case. Only administrative expenses are to be disallowed in terms of Rule 8D(2)(iii) at 0.5% of average value of investments. Aggrieved, both assessee as well as revenue are in appeal before us on following ground:- Assessee s grounds of appeal: 2. For that on facts and circumstances of case, Ld. CIT(Appeals) was grossly unjustified in law and on facts in upholding disallowance of Rs.1,73,01,418/- by invoking Rule 8D(2)(iii) of I T Rules without establishing any proximate cause between expenditure incurred and earning of tax free income. 3. For that on facts and circumstances of case, Ld. CIT(Appeals) grossly erred in considering shares & securities held as 'stock-in-trade' to be 'investment' for purposes of computing disallowance under Sec 14A read with Rule 8D(2)(iii). 4. For that on facts and circumstances of case, disallowance made u/s 14A be deleted and/or reduced. Revenue s grounds of appeal 5 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 1. That on facts and circumstances of case, Ld. CIT(A) erred in law in deleting disallowance computed under 14A read with Rule 8D(2)(ii) both under normal computational provisions as well as book profit uls.115JB of Income Tax Act 1961. 3.1. ld AR argued that Hon ble Apex Court in assessee s own case reported in 240 ITR 355 (SC) had held that investments held by assessee bank are to be construed as stock in trade. Accordingly, assessee becomes dealer in shares where even cost of purchase of shares and every expenses incurred thereon would have direct nexus to trading of shares. If provisions of Rule 8D are to be applied, then entire expenditure incurred would have to be disallowed, which results in absurdity. In this regard, ld AR placed reliance on decision of this tribunal in case of DCIT vs Gulshan Investment Co. Ltd reported in (2013) 31 taxmann.com 113 (Kolkata Trib) wherein it was held that disallowance under Rule 8D of Rules will be restricted to direct expenditure only. Further, it was held that Rule 8D(2)(ii) and Rule 8D(2)(iii) of Rules can be applied in situations where shares are held as investments and it does not apply where shares are held as stock in trade. Without prejudice to aforesaid arguments, he stated that in any case, only dividend bearing investments should be considered for working out disallowance, if any, u/s 14A read with Rule 8D for which he placed reliance on decision of co-ordinate bench of this tribunal in case of R.E.I.Agro Ltd vs DCIT reported in (2013) 144 ITD 141 (Kol Trib). 3.2. In response to this, ld DR argued that provisions of section 14A of Act are indeed applicable to stock in trade and placed reliance on decision of co-ordinate bench of this tribunal in case of DCIT vs Teenlok Advisory Services (P) Ltd reported in (2016) 159 ITD 991 (Kolkata Trib) , which in turn placed reliance on Third member decision of Mumbai Tribunal in case of D.H.Securities (P) Ltd vs DCIT reported in (2014) 146 ITD 1 (Mumbai Trib ) (TM ). He argued that said third member decision in turn placed reliance on decision of Hon ble Jurisdictional High Court in case of Dhanuka & Sons vs CIT reported in 339 ITR 319 (Cal). He also argued that said third member decision had already considered decision of this tribunal in case of Gulshan Investment supra while rendering its decision. He also argued that provisions of Rule 8D uses expression value of investments and not held as investment and this fine distinction has already been considered and upheld by special bench of Mumbai 6 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 Tribunal in case of ITO vs Daga Capital Management (P) Ltd reported in 117 ITD 169 (Mum) (SB). 3.3. We have heard rival submissions. facts stated hereinabove remain undisputed and hence same are not reiterated for sake of brevity. dividend received by assessee is exempt from tax as per section 10 of Act. law does not differentiate whether said dividend is received from investments held as investments or investments held as stock in trade. In both scenarios, dividend received thereon is exempt from tax. It is not in dispute that assessee bank is in receipt of both taxable as well as exempt income. We find that intention behind introduction of provisions of section 14A of Act in statute was only to curb practice of assessee claiming deduction, towards expenditure incurred for earning exempt income, from taxable income and thereby reducing taxable profit. In instant case, assessee had not made any disallowance u/s 14A of Act in its return of income. ld AO resorted to make disallowance u/s 14A of Act by applying computation mechanism provided in Rule 8D of Rules. Since investments of assessee were held as stock in trade by assessee bank, it was argued that provisions of Rule 8D cannot be made applicable as computation mechanism itself fails therein. However, we find from wordings of Rule 8D, it only uses expression value of investments and not held as investments . Hence we hold that investments even though held as stock in trade would still fall under computation mechanism provided in Rule 8D of Rules. 3.3.1. Now law is also clear that said provisions of section 14A of Act are applicable with retrospective effect from 1.4.1962 onwards. provisions of Rule 8D is applicable only from Asst Year 2008-09 onwards. However, we hold that application of Rule 8D for purpose of disallowance is not automatic and should be used as last resort if determination of disallowance could not be made by ld AO in terms of section 14A of Act. For sake of convenience, provisions of section 14A of Act are reproduced below:- Section 14A - Expenditure incurred in relation to income not includible in total income 7 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 (1) For purposes of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act. (2) Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed , if Assessing Officer , having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. (3) provisions of sub-section (2) shall also apply in relation to case where assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income under this Act. Provided that nothing contained in this section shall empower Assessing Officer either to reassess under section 147 or pass order enhancing assessment or reducing refund already made or otherwise increasing liability of assessee under section 154, for any assessment year beginning on or before 1st day of April, 2001. 3.3.2. We are aware that computation mechanism provided in Rule 8D would sometimes result in absurdity in terms of disallowance figure computed thereon. It might result in disallowance figure exceeding even total expenditure claimed by assessee in its profit and loss account. These type of situations may predominantly arise in case of investment companies, where value of investments would be very huge. In our considered opinion, legislature in its wisdom , in order to prevent such situation, had provided for computation mechanism in terms of section 14A of Act itself , by providing powers to ld AO for computing disallowance having regard to accounts of assessee. In our considered opinion, legislature in its wisdom , had duly addressed absurdity , by conferring powers on Assessing Officer to determine disallowance on its own by some rational method , without resorting to Rule 8D. In such case, we hold that expression shall used in Section 14A(2) of Act, had to be read as may in order to give full weightage to provisions of Act, taking into account intention behind introduction of provisions of section 14A of Act and to address absurd situation. It is well settled that Rules cannot override Act and is only subordinate piece of legislation. In instant case before us, assessee bank had not furnished any workings of disallowance u/s 14A of Act using some rational method 8 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 before ld AO or before ld CITA. No working is furnished even before us. In these circumstances, there is nothing wrong in resorting to computation mechanism provided in Rule 8D as last resort. 3.3.3. It is now well settled by decision of Third member of Mumbai Tribunal in case of D.H.Securities (P) Ltd vs DCIT reported in (2014) 146 ITD 1 (Mumbai Trib ) (TM ) that provisions of section 14A of Act read with Rule 8D of Rules are applicable even for stock in trade. It is also well settled that third member decision is equivalent to special bench decision and hence has got binding precedent on all co-ordinate benches of tribunals. This third member decision placed reliance on decision of Hon ble Calcutta High Court in case of Dhanuka & Sons vs CIT reported in 339 ITR 319 (Cal) by stating that principles laid down thereon would be applicable. We find that assessee placed heavy reliance on decision of co-ordinate bench of this tribunal in assessee s own case for Asst Year 2009-10 wherein it was held that provisions of section 14A of Act are not applicable for investments held as stock in trade. We find that decision of Third Member of Mumbai Tribunal supra was not considered while deciding appeal for Asst Year 2009-10. Accordingly, we hold that same need not be followed by us now. We are also aware that Mumbai Bench of Tribunal in case of CIT v. India Advantage Securities Ltd in ITA No. 6711/Mum/2011, dated 14-9- 2012 had held that provisions of section 14A of Act are not applicable for stock in trade. It was also argued that appeal preferred by revenue against this tribunal decision before Hon ble Bombay High Court has been dismissed by High Court. But decision of Hon ble Jurisdictional High Court which has been considered in third member decision would act as binding precedent for this tribunal. Hence we hold that provisions of section 14A of Act read with Rule 8D would be applicable for investments held as stock in trade. We hold that since investments in instant case were held as stock in trade and more so when investments were made in order to comply with statutory liquidity ratio prescribed by RBI mandating assessee bank to invest in certain Government securities and bonds, and in view of fact that assessee is having sufficient own funds, we hold that borrowed funds were not utilized for purpose of making investments. ld CITA had also given categorical finding that borrowed funds were utilized only for purpose of business. Hence, provisions of Rule 9 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 8D(2)(ii) cannot be invoked in instant case, as rightly held by ld CITA. However, provisions of Rule 8D(2)(iii) wherein 0.5% of average value of investments had to be considered for disallowance u/s 14A of Act is to be made. We find that ld CITA had only given direction to ld AO to work out disallowance in terms of Rule 8D(2)(iii). We find that similar issue has been addressed by co-ordinate bench of this tribunal recently in case of DCIT vs Teenlok Advisory Services (P) Ltd reported in (2016) 159 ITD 991 (Kolkata Tribunal) wherein all these aspects and case laws have been considered in detail and it was held that provisions of section 14A of Act are applicable for shares held as stock in trade. However, we find lot of force in alternative arguments of ld AR that only dividend bearing investments which were held as stock in trade should be considered for purpose of working out disallowance in terms of Rule 8D(2)(iii). We find that reliance placed in this regard on co-ordinate bench decision of this tribunal in case of R.E.I.Agro Ltd vs DCIT reported in 144 ITD 141 (Kolkata Trib) in this regard is well founded. We direct ld AO accordingly to recompute disallowance u/s 14A of Act in terms of Rule 8D(2)(iii) by considering only investments which yielded dividends. Accordingly, Ground Nos. 2, 3 & 4 raised by assessee are partly allowed as directed above and Ground No. 1 raised by revenue are dismissed. 4. next issue to be decided in this appeal of assessee is as to whether ld CITA is justified in upholding disallowance made by ld AO towards provision for leave encashment in facts and circumstances of case. 4.1. brief facts of this issue is that ld AO observed that assessee had claimed provision for leave encashment amounting to Rs. 26,26,00,000/- as deduction and also claimed that same is not required to be disallowed u/s 43B of Act in view of decision of Hon ble Calcutta High Court in case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal). ld AO observed that assessee had actually paid leave encashment to tune of Rs. 86,94,828/- before due date of filing return of income and further sum of Rs. 3,52,83,477/- was paid before end of previous year. Accordingly he granted deduction for both these sums and disallowed provision 10 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 amount u/s 43B of Act in view of fact that Hon ble Supreme Court had passed interim order pending disposal of main civil appeal, that assessee shall pay tax on provision for leave encashment as if section 43B(f) of Act is present in statute. This was also confirmed by ld CITA. Aggrieved, assessee is in appeal before us on following ground:- 5. For that on facts and in circumstances of case, learned CIT(Appeals) was grossly unjustified in disallowing provision for leave encashment amounting to Rs. 25,39,05,172/- under Section 43B of I.T. Act, 1961. 4.2. We have heard rival submissions and gone through facts and circumstances of case. At outset, it is noticed that assessee has claimed Rs. 26,26,00,000/- for AY 2008-09 on account provision for leave encashment on accrual basis. Ld. counsel for assessee stated that deduction on account of provision of leave encashment was made on basis of judgment of Hon'ble jurisdictional High Court in case of Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (Cal) but he fairly conceded that subsequently Hon'ble Supreme Court has stayed this judgment of Hon'ble jurisdictional High Court vide order 08-05-2009 by following observations:- Pending hearing and final disposal of Civil Appeals, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as outstanding interest demand as of date is concerned, it would be open to Department to recover that amount in case Civil Appeal of Department is allowed. We further make it clear that assessee would, during pendency of this Civil Appeal, pay tax as if section 43B(f) is on Statue Book but at same time it would be entitled to make claim in its returns. In view of above, Ld. counsel for assessee fairly stated that let Hon'ble Supreme Court decide issue and by that time matter can be remitted back to file of AO for fresh adjudication in term of decision of Hon'ble Supreme Court. On this, Ld. CIT DR has not objected to same. Accordingly, we set aside this issue to file of AO to await decision of Hon'ble Supreme Court and decide issue accordingly. This issue of assessee s appeal is remitted back to file of AO and allowed for statistical purposes. 5. other grounds (i.e. Ground Nos. 6 to 10 raised by assessee are with regard to applicability of provisions of section 115JB of Act for assessee bank and disputes in making certain adjustments contemplated thereon. Similarly revenue had raised other 11 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 grounds (i.e Ground Nos. 2 to 5) with regard to certain adjustments to be made in computation of book profits u/s 115JB of Act. 5.1. We find that this issue has been dealt in detail by several decisions of this tribunal and other tribunals wherein it had been categorically held that provisions of section 115JB of Act are not applicable to assessee unless it is registered as company under Companies Act, 1956 and prepares its financial statements in accordance with provisions of section 211 and Part II and Part III of Schedule VI of Companies Act, 1956. We place reliance on recent decision of co-ordinate bench of this tribunal in case of UCO Bank vs DCIT reported in (2015) 64 taxmann.com 51 (Kolkata Trib) dated 27.11.2015 (assessee s own case) in this regard. In said decision, it was also held that amendment brought in by Finance Act 2012 in section 115JB of Act is applicable only from Asst Year 2013-14 onwards and not earlier. Respectfully following said judicial precedent, we hold that provisions of section 115JB of Act are not applicable to assessee bank for year under appeal. Hence, ground nos. 6 & 7 raised by assessee are allowed. 5.1.1. With regard to grounds raised by assessee vide Ground Nos. 8 to 10 and Ground Nos. 2 to 5 raised by revenue regarding adjustments to be made in computation of book profits u/s 115JB of Act, we have already held that provisions of section 115JB of Act are not applicable to assessee bank for year under appeal. Hence adjudication of these grounds becomes academic and accordingly Ground Nos. 8 , 9 & 10 raised by assessee are allowed and Ground Nos. 2 , 3, 4 & 5 raised by revenue are dismissed. 6. We find that assessee had raised separate ground seeking direction to ld AO to recomputed set off and carry forward of unabsorbed business losses and depreciation brought forward from earlier years. We find that this issue is consequential in nature and also direct ld AO to recompute brought forward business and depreciation loss from earlier years and give clear finding in giving effect order regarding same. Accordingly, Ground No. 11 raised by assessee is allowed for statistical purposes. 12 ITA No. 1202&1281/Kol/2012 UCO Bank, AY 2008-09 7. Ground No. 12 raised by assessee is with regard to charging of interest u/s 234B and 234 D of Act which are only consequential in nature and does not require any adjudication. 8. Ground No. 13 raised by assessee and Ground No. 6 raised by revenue are general in nature and does not require any adjudication. 9. In result, appeal of assessee in ITA No. 1202/Kol/2012 is partly allowed for statistical purposes and appeal of revenue in ITA No. 1281/Kol/2012 is dismissed. Order pronounced in open court on 05.10.2016 Sd/- Sd/- (S.S. Viswanethra Ravi) (M. Balaganesh) Judicial Member Accountant Member Dated : 5th October, 2016 Jd.(Sr.P.S.) Copy of order forwarded to: 1. APPELLANT UCO Bank, 10, B.T.M. Sarani, Kolkata-700 001. 2 Respondent DCIT, Circle-6, Kolkata. 3. CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar. UCO Bank v. Deputy Commissioner of Income-tax, Circle-6, Kolkata