Ita/355/2013 Of The Commissioner Of Income Tax v. M/S. State Bank Of Mysore

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 15 DAY OF OCTOBER 272020PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADLT.A. NOCO.355 OF 201 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TAX LTU, JSS TOWERS BSK III STAGE, BANGALORE. 2.|THE ADDL. COMMISSIONER OF INCOME-TAX LTU, JSS TOWERS 100 FEET RING ROAD BSK III STAGE, BANGALORE-560085. ... APPELLANTS(BY SRI. K.V. ARAVIND, ADV.,) AND" M/S. STATE BANK OF MYSOREHEAD OFFICE, P.B. NO.9727K.G. ROAD, BANGALORE-560254. (BY SRI. ANKUR PAI, FOR SRI. K.R. VASUDEVAN, ADV.) ~. RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961 ARISING OUT OF ORDER DATED 28.02.2013 PASSED IN ITA.NO.1242/BANG/2011, PRAYING TO: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (II) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE ITAT, BANGALORE IN ITA NO.1242/BANG/2011—DATED 28.02.2013 CONFIRMING THE ORDER OF THE APPELLATE.COMMISSIONER AND CONFIRM THE ORDER PASSED BY THEADDITIONALCOMMISSIONEROF.INCOME|TAX,|(LTU),.BANGALORE. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY,ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short)Nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2003-04.The appeal was admitted by a bench of this Court videorder dated 12.08.2013 on the following substantialquestions of law:| (i) Whether the Appellate Authoritieswere correct in holding that the assessee|has claimed the provision created under|Section 36(1)(viia) of the Act and the bad|debt written off is adjusted to the provisionand no bed debt Is written off under Section|36(1)(vil) of the Act and hence provisions|of Section 41(1)/41(4) of the Act are not|attracted on a subsequent recovery of the| written off debt, when the provision created|under Section 36(1)(viia) of the Act is|allowed as a deduction and recorded 2sperverse finding? (ii) Whether the Appellate Authoritieswere correct in holding that the employees.contribution deducted by the assessee has|been credited under the respective statue|before filing return of income and henceallowable deduction witnout taking into|consideration, the provisions of Section|2(24)(x) read with Section 36(va) of the|Act? (iii) Whether the Appellate Authoritieswere correct in holding that the AssessingOfficer has not discharged his burden of.proving that the entire income under|investment is from the [Investments medeby utilizing borrowed funds, when 80% of.the funds employed in the business are|borrowed funds and recorded a perverse|finding? (iv) Whether the Appellate Authoritiescommitted an error in not taking’ intoconsideration tnat the [Income earned Isexempt and the expenditure incurred for|earning the exempt income is not allowable Under Section 14A of the Act and theburden of establishing non-incurring — oexpenditure was on the assessee? (v) Whether the Appellate Authoritiescommitteddf)Crror;In|not.takingconsideration that 80% of the total fundsemployed are borrowed funds and the|investment by the assessee is from the|borrowea funds and thne_ correspondeninterest Is liable to be disallowed under.section 14A of the Act? (vi) Whether the Appellate Authoritiescommitted an error in not taking’ intoconsideration that the assessee has earned|income exempted under Section 80M of theAct and the corresponding expenditure Is reguired to be disallowed under section 14Aof the Act? (v) Whether the Appellate Authoritiescommitteddf)Crror;In|not.takingconsideration that 80% of the total fundsemployed are borrowed funds and the|investment by the assessee is from the|borrowea funds and thne_ correspondeninterest Is liable to be disallowed under.section 14A of the Act? (vi) Whether the Appellate Authoritiescommitted an error in not taking’ intoconsideration that the assessee has earned|income exempted under Section 80M of theAct and the corresponding expenditure Is reguired to be disallowed under section 14Aof the Act? 2 |Facts leading to filing of this appeal brieflystated are that the assessee is subsidiary of state Dankof India and is governed by State Bank of India(Subsidiary Banks) Act, 1959. The assessee filed thereturn of income for the Assessment Year 2003-04 on.24.11.7003|and|declared|atotalincome|ofRs.109,80,14,986/-. The assessment under Section143(3) of the Act was completed on 27.03.2006 Dy.whicn taxable income of tne assessee was determined at.Rs.209,05,29,960/-. The Commissioner of Income Tax.(Appeals) by an order dated 25.03.2008 passed underSection 263 of the Act held that order dated 27.03.2006.passed by the Assessing Officer was erroneous and.prejudicial to the interest of revenue. Thereafter, theAssessing Officer passed an order dated 31.07.2008under Section 143(3) of the Act making various addition/ disallowances to the taxable income, in addition to theone's already made in the order dated 27.03.2006. 3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 28.09.2011 inter alia held that asdeduction is under Section 36(1)(vila) of the Act, theSubsequent recoveries are not taxable under Section.41(1) or Section 41(4) of the Act. It was further heldthat disallowance under Section 14A of the Act towards.borrowed fund on investment should be restricted to 2%of the interest on tax free Donds. Tne Commissioner of.Income Tax (Appeals) deleted the disallowance ofexpenditure incurred on earning the income exemptunder Section 80M of the Act. The appeal was partlyallowed. Being aggrieved, the revenue approached the)Income Tax Appellate Tribunal (hereinafter referred to.as the tribunal for short). The tribunal by an orderdated 28.02.2013.inter aliaheld that assessee jI|Sentitled for deduction as the entire amount of employeescontribution is credited under the restricted statute.before filing the return. The tribunal also allowed the. deduction of expenditure under Section 14A of the Acton the ground that burden of proving the expenditure on—the exempt income for disallowance of claim underSection 14A of the Act is on the Assessing Officer, which|he has failed to discharge. The tribunal by following itsearlier order held that expenditure disallowed forearning of income exempt under Section 80M of the Actis not sustainable and the entire expenditure wasallowed. In the aforesaid factual Dackground, tnerevenue has filed this appeal. 4Learned counsel for the assessee submittedthat the revenue had filed a miscellaneous petitionbefore the Income Tax Appellate Tribunal which has.been allowed.by the Tribunal vide orderdated05.03.2016 and the matter has been remitted to the'Assessing Officer. The aforesaid submission could notbe disputed by the learned counsel for the revenue. In.view of the order dated 05.03.2016 passed by theIncome Tax Appellate Tribunal, the 1[Ss]substantial question of law involved in this appeal has been.rendered academic. However, all contentions with|regard to the 1 substantial question of law are kept|open for the time being. 4Learned counsel for the assessee submittedthat the revenue had filed a miscellaneous petitionbefore the Income Tax Appellate Tribunal which has.been allowed.by the Tribunal vide orderdated05.03.2016 and the matter has been remitted to the'Assessing Officer. The aforesaid submission could notbe disputed by the learned counsel for the revenue. In.view of the order dated 05.03.2016 passed by theIncome Tax Appellate Tribunal, the 1[Ss]substantial question of law involved in this appeal has been.rendered academic. However, all contentions with|regard to the 1 substantial question of law are kept|open for the time being. 5.|Learned counsel for the assessee furtherSubmitted that the 2[nd]substantial question of law as wellas 6th substantial question of law are answered against|therevenuebyaBench|Of|this|CourtIn|‘COMMISSIONER OF INCOME-TAX Vs. SABARTIENTERPRISES’ (2008) 298 ITR 141 (KAR)and‘COMMISSIONER OF INCOME-TAX VS. KARNATAKA|BANK|LTD. ',(2014)49TAXMANN.COM246(KARNATAKA).The aforesaid legal position could notbe disputed by the learned counsel for the revenue. For.the reasons assigned by a Bench of this Court in.SABARI ENTERPRISESandKARNATAKA BANK LTD.fSUPId, the 2[nd]as well as 6[th]substantial question of law.are answered against the revenue and in favour of the.aSSe@SSAEC 6.|Now we may advert to substantial questionsof law Nos.3, 4 and 5. learned counsel for the revenue.Submitted that the tribunal committed an error of law In!shifting the burden on Assessing Officer to establish that|the investment is out of the interest bearing funds. It issubmitted that Section 37 of the Act imposes burden onthe assessee to establish that expenditure is incurred forbusiness purposes. It is also pointed out that profit andjoss account establisnes tne fact that 80% of the.borrowed funds were utilized for tax free investments,|which has not been disputed by the assessee. However,the tribunal has failed to record any finding on this|aspect. It is also urged that contention of the assessee|that investment is out of surplus funds is not correct andthe aforesaid contention does not find mention in the!order of the tribunal. 7On the other hand learned counsel for the.assessee submitted that investment in securities earningexempt income have been made only out of surplus. funds of bank and no expenditure has been incurred in.earning the exempt income. It is also pointed out thatAssessing Officer has not demonstrated the proximatecause between the exempt income and the expendituredisallowed. It is also argued that Income Tax AppellateTribunal and the Commissioner of Income Tax (Appeals) have|notedtheSUDMISSIONSOf|respondentthat|investment in the securities earning exempt income hasbeen made only out of surpius funds of the bank andCommissioner of Income Tax (Appeals) has observed.that disallowance made by the Assessing Officer was—based on the presumption that entire investment is in.tax free bonds / eligible investments would Nhaveinvariably come from borrowed funds only” withoutsubstantiating the claim anything with evidentiary value.It is further submitted that Commissioner of Income Tax(Appeals) and Income Tax Appellate Tribunal havefollowed the rule of consistency and Nave upheld the suo.motu disallowance of 2% of exempt income. It is contended that the tribunal has rightly held that the|burden is on the revenue to demonstrate that the.expenditure incurred for earning exempt income. It is.also urged that Section 14A(2) of the Act is not!applicable for Assessment Year 2003-04 and theAssessing Officer not having identified the expenditureand assuming the entire interest expenditure to the|extent of exempt income without demonstrating therelatability / nexus with the exempt income, thedisallowance under Section 14A Is not sustainable. In/Support of aforesaid submissions, reliance has been.placed on decisions in‘CIT VS. WALFORT SHARE &STOCK BROKERS (P) LTD’, (2010) 326 ITR 1 (SC),"CIT VS. ALOM EXTRUSIONS LTD’, (2009) 319 ITR.306 (SC), ‘CIT V. SYNDICATE BANK’, (2020) 115TAXMANN,.COM28/(KARNATAKA),'CIT|VS.KARNATAKA BANK LTD’, (2014) 226 TAXMAN 187(KARNATAKA) ‘CANARA BANK VS. ASST CIT,(2014) 265 CTR 385 (KARNATAKA), CIT VS.| SABARTENTERPRISES,(2008)2—ISITR141(KARNATAKA),MAHARASHTRA APEXCORPORATION LTD V. CIT (2006) 286 ITR 585(KARNATAKA). 8 _We have considered the submissions made.by learned counsel for the parties and have perused therecord. Section 37(1) of the Act provides that anyexpenditure not being expenditure of the naturedescribed in Sections 30 to 36 and not being in the|nature of capital expenditure or personal expenses ofthe assessee, laid out or expended wholly andexclusively for the purposes of the business orprofession shall be allowed in computing the income|chargeable under the nead Profits and gains of Dusiness—or profession’. Thus, it is evident that the burden is on.the assessee to prove that the expenditure has been.incurred for Dusiness purposes and investment is made.out of surplus funds. In the instant case, from theperusal of tne order of the Assessing Officer, it is evident. that Assessing Officer on perusal of the balance sheet|filed by the assessee has recorded a finding that 80% ofthe funds employed in the business are borrowed funds,on which the assessee is paying interest and therefore,|the investment has been made by the assessee on tax.free bonds should have invariably come from borrowedfunds only. It was further held that the assessee hasnot made any effort to discharge the onus of proving.that sucn investment or any part was made out of itsown fund and not out of borrowed capital. oiDuring the course of hearing before theCommissioner of Income Tax (Appeals), the assesseealong with written submissions dated 15.07.2011|produced documents to show that it had madeinvestment in securities earning exempt income out of surplus funds of the bank and disclosed the particulars.of the income earned by the bank by investing in surplus.funds. However, the Commissioner of Income Tax.(Appeals) has also not recorded any finding in this regard. The tribunal in paragraph 9 of its order that it was the duty of the Assessing Officer to identify theexpenditure which is relatable to earning of the exemptincome and only such part of expenditure has to bedisallowed under Section 14A of the Act. However,neither the Commissioner of Income Tax (Appeals) nor.the tribunal has recorded any finding whether the bank|had made investment in the securities earning exemptincome out of surplus funds. Therefore, we are left with.no option but to remit the matter to the Commissioner.of Income Tax (Appeals). For the aforementionedreasons, we hold that the tribunal erred in holding that|the Durden was on the Assessing Officer to prove that|entire income under investment is from the investment|made by utilizing borrowed funds. Accordingly, thesubstantial questions of law Nos.3, 4 and 5 areanswered. In the result, the order passed by the tribunalas well as Commissioner of Income Tax (Appeals) ishereby quashed. The Commissioner of Income Tax. (Appeals) shall examine the material produced by theassessee to show that the investment in. securitiesearning exempt income was made from surplus funds ofthe Bank and thereafter, shall proceed to decide thematter in accordance with law. The issue with regard to.applicability of Section 14A for the Assessment Year.2003-04 as well as all other contentions are kept open. In the result, the appeal is disposed of. Sd/-JUDGE. SS| Sd/-JUDGE.