Commissioner of Income Tax vs State Bank of India

S.H. Kapadia, J.—This group of references raise common questions of law and fact and, therefore, they are disposed of together by this common judgment.

For the sake of convenience, we have taken the facts in Income Tax Reference No. 201 of 1995. In this group of references, two questions of law have been referred to us for the opinion by the Tribunal u/s 256(1) of the Income Tax Act, 1961.

Question No. 1 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the assessee''s claim of deduction of Rs. 19,17,820 on account of amount paid by the State Bank of India to its subsidiaries towards opening of new branches ?"

Arguments :

Mr. R. V. Desai, learned senior counsel appearing on behalf of the Department, contended that the State Bank of India had provided subsidy to its subsidiaries, viz., the State Bank of Saurashtra, the State Bank of Patiala, etc., u/s 48 of the State Bank of India (Subsidiary Banks) Act, 1959. He contended that u/s 48 of the said Act, 1959, subsidy is provided by the State Bank of India to meet the cost of any specific programme of development undertaken by the subsidiary bank. He submitted that when the State Bank of India gave a subsidy, it incurred capital expenditure as the subsidy was given as cost of the development programme. He submitted that the subsidy was given by the State Bank of India to the aforestated subsidiaries to open new branches all over India and, therefore, such expenditure cannot be revenue expenditure. That, it was capital expenditure and, therefore, the State Bank of India was not entitled to claim deduction u/s 37 of the Income Tax Act Mr. Desai further contended that u/s 48(2) of the said Act of 1959, it is further provided that any subsidy received by a subsidiary bank u/s 48(1) shall not be treated as income of the subsidiary bank and, consequently, he argued that if receipt of such subsidiary does not constitute income in the hands of the subsidiary bank then, even expenditure incurred by the State Bank of India by way of subsidy cannot constitute revenue expenditure. In other words, it was argued that the test, which applies to the recipient of the subsidiary, should also equally apply to the payer of the subsidy. He further contended that the State Bank of India had paid subsidy to enable its subsidiaries to open new branches and, consequently, the subsidy was used to create assets and, therefore, the expenditure was capital expenditure and not revenue expenditure incurred by the State Bank of India.

Findings :

We do not find any merit in the arguments advanced on behalf of the Department. The Statement of Objects and Reasons for enacting the said Act of 1959 indicates reconstitution of the State Bank of Patiala, the State Bank of Saurashtra, the State Bank of Travancore, etc., which were earlier State Associated Banks owned in part by the State Governments. These banks were reconstituted as subsidiaries of the State Bank of India. The State Bank of India was constituted under the State Bank of India Act of 1955. u/s 32 of the said Act of 1955, the State Bank of India was required to act statutorily as agent of the Reserve Bank of India. Section 32 falls under Chapter VI of the said Act of 1955. Chapter VI deals with business of the State Bank of India. u/s 32(4) of the said Act of 1955, the State Bank of India was authorised to transact banking business itself or as agent of the Reserve Bank of India. Therefore, when the State Bank of India gave subsidy u/s 48(1)(a), it was a part of its business u/s 32 of the State Bank of India Act of 1955. It was also a part of the statutory duty cast on the State Bank of India by the said Act of 1959. Lastly, by giving subsidy to the State Bank of Patiala, the State Bank of Saurashtra, etc., for opening branches, assets were created, but these assets belonged to the subsidiaries. The assets did not belong to the State Bank of India. Similarly, profits were earned by the subsidiaries and not the State Bank of India. At the highest, by giving subsidy u/s 48(1) of the Act, the State Bank of India got a business advantage. In the circumstances, we hold that the expenditure incurred by the State Bank of India in giving subsidies to the State Bank of Saurashtra, the State Bank of Patiala, etc., u/s 48(1) of the said Act of 1959, represented revenue expenditure. Lastly, we may mention that in the case of Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , it has been held by the Supreme Court that what may be a capital receipt in the hands of the payee, need not necessarily be capital expenditure in relation to a payer. In the circumstances, there is no merit in the argument of the Department that because the subsidy is not income in the hands of the payee, it cannot be revenue expenditure in relation to the payer.

Accordingly, we answer the above quoted question in the affirmative, i.e., in favour of the assessee-bank and against the Department.

Question No. 2 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee''s claim for deduction u/s 35B of the Act in respect of its foreign branches is allowable ?"

Arguments :

Mr. R. V. Desai, learned senior counsel appearing on behalf of the Department, contended that in this case, two points arise for determination. He submitted that the State Bank of India was not eligible to claim weighted deduction u/s 35B as the State Bank of India was not an exporter of goods or services. Secondly, he contended that even assuming for the sake of arguments that the State Bank of India was eligible for weighted deduction u/s 35B of the Act, even then weighted deduction u/s 35B was admissible only on certain types of expenditure incurred on specified activities mentioned in Section 35B(1)(b)(i) to (ix). He relied upon the judgment of the Supreme Court in the case of Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., . He, therefore, contended that on both counts, the State Bank of India was not entitled to weighted deduction.

We do not find any merit in the above arguments. Section 35B provides that any assessee who incurs revenue expenditure for development of export market is entitled to weighted deduction of a specified amount. This allowance is available in respect of expenditure incurred by the taxpayer directly or in association with any other person. The admissibility of this allowance is irrespective of the question whether the assessee has exported any goods during the relevant year or whether he has earned any profits out of exports (see Law and Practice of Income Tax by Kanga and Palkhiwala, volume I, page 420--VII edition.) Section 35B does not refer to export profits as in the case of Section 80HHC. Section 35B refers to expenditure incurred by an assessee to promote export markets. It is not in dispute that the State Bank of India has branches all over the world outside India. It certainly facilitates and promotes export markets, both in India and outside India. Therefore, we hold that the State Bank of India is eligible for this allowance u/s 35B of the Income Tax Act. However, as stated above, it was argued on behalf of the Department that even if the State Bank of India was eligible for allowance u/s 35B, still the State Bank of India was required to lead evidence to prove the activity, which it undertook, on which it claims to have expended the amount. That, weighted deduction was admissible on certain types of expenditure incurred on specified activities u/s 35B(1)(b)(i) to (ix) and that in this case, the State Bank of India has not proved that the expenditure was incurred by it on any of the abovementioned specified activities. We do not find any merit in this argument. Firstly, we may point out that the matter stood remanded to the Income Tax Officer after the State Bank of India was found to be eligible for export markets development allowance u/s 35B of the Act. We are informed across the Bar that after the remand, the Income Tax Officer has given a finding of fact, which is not in the paper book, under which deduction has been allowed to the State Bank of India u/s 35B(1)(b)(iv), which refers to maintenance of branches outside India for the promotion of the sale outside India of goods, services or facilities. Therefore, on both counts of eligibility and deduction, the State Bank of India succeeds.

Accordingly, the above quoted question is answered in the affirmative, i.e., in favour of the assessee-bank and against the Department.

Accordingly, all three references stand disposed of. No order as to costs.