Court Slams Revenue for Inconsistent Appeals, Upholds Bank's Tax Deduction

Get the full picture - access the original judgement of the court order here.

Case Name:

Commissioner of Income Tax Vs State Bank of India ( High Court of Bombay)

Income Tax Appeal No.269 of 2013

Key Takeaways:

1. The court emphasized the importance of uniformity in legal treatment as a fundamental aspect of the Rule of Law.

2. The Revenue department should not challenge subsequent tribunal orders on issues they've previously accepted.

3. The court established guidelines for the Revenue department when filing appeals against tribunal decisions.

4. The judgment reinforced the validity of certain tax deductions for financial corporations, including public and government companies.

Issue

Was the Income Tax Appellate Tribunal (ITAT) correct in allowing the deduction under Section 36(1)(viii) (of Income Tax Act, 1961) to State Bank of India for the assessment year 2006-07?

Facts

1. The case pertains to the assessment year 2006-07.

2. The Commissioner of Income Tax (CIT) exercised revisionary powers under Section 263 (of Income Tax Act, 1961).

3. The ITAT had allowed a deduction under Section 36(1)(viii) (of Income Tax Act, 1961) to State Bank of India.

4. The ITAT's decision was based on its earlier ruling in the Union Bank of India case.

5. The Revenue department had accepted the Union Bank of India decision without filing an appeal.

Arguments

The Revenue department raised two main arguments:

1. The ITAT incorrectly allowed the deduction by following the Union Bank of India case while ignoring the Kerala High Court's decision in the Federal Bank Ltd. case, which distinguished between financial corporations and scheduled banks.

2. The ITAT erred in allowing the deduction for the assessment year 2006-07, as the Kerala High Court had ruled that the benefits of Section 36(1)(viii) (of Income Tax Act, 1961) didn't extend to banking companies until the Finance Act 2006 amendment, effective from April 1, 2007.

Key Legal Precedents

1. Union Bank of India vs. ACIT (2011) 16 Taxman 304 ITAT (Mum):

This case held that deduction under Section 36(1)(viii) (of Income Tax Act, 1961) should be allowed to Government Banks even for years prior to the assessment year 2007-08.

2. CIT v/s. Smt. Veena G. Shroff:

In this case, the court observed that when the Revenue challenges a Tribunal order that relies on an earlier decision on the same issue, and the Revenue had accepted the earlier order, it should not challenge the subsequent order on the same issue.

Judgement

The High Court dismissed the appeal, ruling in favor of State Bank of India. The court's reasoning included:

1. There was no occasion for the CIT to exercise powers under Section 263 (of Income Tax Act, 1961), as the Assessing Officer's view granting the deduction was a possible interpretation.

2. The ITAT's decision was further supported by its ruling in the Union Bank of India case, which the Revenue had accepted.

3. The Explanation to Section 36(1)(viii) (of Income Tax Act, 1961), as it existed at the relevant time, defined a Financial Corporation to include public and government companies, which would cover the respondent-assessee.

FAQs

Q1: Why did the court criticize the Revenue department's approach to appeals?

A1: The court found that the Revenue was inconsistently challenging tribunal decisions, potentially picking and choosing which orders to appeal arbitrarily, which goes against the principle of uniform legal treatment.

Q2: What guidelines did the court establish for the Revenue department when filing appeals?

A2: The court directed that when appealing a subsequent order on an issue previously accepted, the Revenue should include reasons in the appeal memo and file an affidavit pointing out distinguishing features from the earlier case.

Q3: How did the court interpret the definition of 'Financial Corporation' in this case?

A3: The court noted that the Explanation to Section 36(1)(viii) (of Income Tax Act, 1961) defined Financial Corporation to include public and government companies, which would cover the respondent-assessee (State Bank of India).

Q4: What was the significance of the Union Bank of India case in this judgment?

A4: The Union Bank of India case, which the ITAT had followed and the Revenue had accepted, supported the view that the deduction under Section 36(1)(viii) (of Income Tax Act, 1961) should be allowed to Government Banks even for years prior to the assessment year 2007-08.

1. This Appeal under Section 260 (of Income Tax Act, 1961)­A of the Income Tax Act, 1961 (the Act), challenges the order dated 6th June, 2012 passed by the Income Tax Appellate Tribunal (the Tribunal) for the Assessment Year 2006­-07.

2. The Revenue has formulated the following questions of law for our consideration:

“(1) Whether on the facts and in the circumstances of the case and in law, the ITAT was correct in allowing the deduction u/s. 36(1)(viii) (of Income Tax Act, 1961) of the I. T. Act, following the decision in the case of Union Bank of India v/s. ACIT [(2011) 16 Taxmann.com 304 ITAT (Mum)], ignoring the decision pf the Kerala High Court in the case of Federal Bank Ltd. v/s. ACIT (198 Taxmann 491) in which it is held that financial corporation are separate and distinct entities different from scheduled banks which are covered by the provisions of Banking Regulation Act?

(2) Whether on the facts and in the circumstances of the case and in law, the ITAT was correct in allowing the deduction u/s. 36(1)(viii) (of Income Tax Act, 1961) of the I. T. Act, for the A. Y. 2006­07, ignoring the decision of the Kerala High Court in the case of Federal Bank Ltd. v/s. ACIT, (198 Taxman 491) in which it is held that the provisions of Section 36(1)(viii) (of Income Tax Act, 1961) did not extend the benefits of deduction to banking companies until the section was amended by the Finance Act 2006 w.e.f. 01.04.2007 and the amendment has been held to be prospective, i.e. A. Y. 2007­08?”

3. We find that the impugned order dated 6th June, 2012 has held that there was no occasion for the Commissioner of Income Tax to exercise its power of the revision under Section 263 (of Income Tax Act, 1961) on the question of deduction claimed under Section 36(1)(viii) (of Income Tax Act, 1961). This conclusion was reached by following its decision in Union Bank of India v/s. ACIT (2011) 16 Taxmann.com 304 holding that deduction under Section 36(1)(viii) (of Income Tax Act, 1961) is to be allowed to the Government Banks even for the years prior to Assessment Year 2007­08. The amendment in the Assessment Year 2007­08 includes the banking companies.

4. We were at the very outset fairly informed by Mr. Suresh Kumar, learned Counsel appearing for the Revenue that on the aforesaid issue, the decision of the Tribunal in Union Bank of India (supra) has been accepted by the Revenue. Mr. Suresh Kumar points out that although an appeal has been filed by the Revenue on the other issues, no appeal has been filed on this issue.

5. We have on an earlier occasion in the case of CIT v/s. Smt. Veena G.Shroff have observed in our order dated 27th January, 2015 that when Revenue challenges the order of the Tribunal which in turn relies upon another decision rendered by it on the same issue, then in cases where the Revenue has accepted the order by not preferring any Appeal against the earlier order, the Revenue should not challenge the subsequent order on the same issue. In case an appeal is preferred from the subsequent order, then the Memo of appeal must indicate the reasons as to why an appeal is being preferred in later case when no appeal was preferred from the earlier order of the Tribunal which has merely been followed in the later case. In any case, the Officer concerned must atleast file an Affidavit before the matter comes up for admission, pointing out distinguishing features in the present case from the earlier case,warranting a different view in case the appeal is being pressed. The absence of this being indicative of non­application of mind, does undoubtedly give an opportunity to the Revenue to arbitrarily pick and chose the orders of the Tribunal which they would challenge in the Appeal before the this Court. Uniformity in treatment at the hands of law is a basic premise of Rule of Law. We trust that the Revenue would take appropriate steps to ensure that the aforesaid directions be implemented in all subsequent matters which are pending Admissions before this Court.

If this exercise is done by the Officers of the Revenue, precious time of all concerned would be saved.

6. Counsel for the Revenue is directed to serve copy of this order to the Chief Commissioner of Income Tax for appropriate action.

7. Be that as it may, in the facts of the present case, there is no occasion for the CIT to exercise his powers under Section 263 (of Income Tax Act, 1961) as the view taken by the Assessing Officer granting deduction under Section 36(1)(viii) (of Income Tax Act, 1961) to the Respondent­Assesseee was a possible view. This possible view is further fortified by the decision of the Tribunal in Union Bank of India (supra) which has also been accepted by the Revenue.

8. Besides, even Explanation to Section 36(1)(viii) (of Income Tax Act, 1961) as existing at the relevant time, a Financial Corporation has been defined to include a Public Company and the Government Company.

9. We failed to understand how the Respondent­Assessee would not be covered by definition of 'Financial Corporation' as stated in the Explanation to Section 36(1)(viii) (of Income Tax Act, 1961).

10. In view of the above, we see no reason to entertain the present Appeal.

11. Accordingly, Appeal dismissed. No order as to costs.

(G.S.KULKARNI,J.) (M.S.SANKLECHA,J.)