Supreme Court Remands Income Tax Case: Applicability of Section 35D of Income Tax Act to Banks (15 March 2019)

Date of the Judgment: 15 March 2019
Citation: 2019 INSC 251
Judges: Abhay Manohar Sapre, J., Dinesh Maheshwari, J.
Can a bank be considered an industrial undertaking for tax deduction purposes? The Supreme Court of India recently addressed this question, not by answering it directly, but by remanding the case back to the High Court. The core issue revolves around whether M/s Yes Bank Ltd. qualifies for deductions under Section 35D of the Income Tax Act, 1961, which is applicable to industrial undertakings. The bench comprised Justices Abhay Manohar Sapre and Dinesh Maheshwari, with the judgment authored by Justice Abhay Manohar Sapre.

Case Background

The case involves an appeal by the Principal Commissioner of Income Tax-8 against M/s Yes Bank Ltd. The dispute arose during the assessment proceedings for the Assessment Year 2007-2008. The Income Tax Department questioned whether Yes Bank, the respondent, could claim deductions under Section 35D of the Income Tax Act, 1961. The department’s contention was that the bank did not qualify as an industrial undertaking, which is a prerequisite for claiming such deductions. The bank, however, argued that it was indeed an industrial undertaking and thus, eligible for the deduction.

Timeline

Course of Proceedings

The Assessing Officer’s order dated 31.10.2009 led to proceedings before the Commissioner under Section 263 of the Income Tax Act, 1961. The Commissioner passed an adverse order on 14.11.2011. The Income Tax Appellate Tribunal (ITAT) subsequently allowed the bank’s appeal on 05.12.2014. The Income Tax Department then appealed to the High Court under Section 260-A of the Income Tax Act, 1961, which was dismissed by the High Court on 01.08.2017. This dismissal led to the current appeal before the Supreme Court.

Legal Framework

The core legal issue revolves around Section 35D of the Income Tax Act, 1961. This section allows deductions for certain preliminary expenses incurred by an “Indian company or a person (other than a company) who is resident in India,” provided that the expenditure is related to setting up a new industrial unit or expanding an existing one. The key question is whether a bank can be considered an “industrial undertaking” to qualify for this deduction. The Act does not explicitly define “industrial undertaking”.

Section 35-D of the Income Tax Act, 1961 states:

“(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure of a capital nature for any of the purposes specified in sub-section (2), the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial unit is completed.”

Arguments

The Income Tax Department argued that a bank does not qualify as an industrial undertaking and, therefore, is not eligible for deductions under Section 35D of the Income Tax Act, 1961. The department contended that the nature of a bank’s business is primarily financial and does not involve manufacturing or production, which are typical characteristics of industrial undertakings. The department also argued that the High Court had erred in dismissing their appeal without framing a substantial question of law.

The Respondent-Bank argued that it is an industrial undertaking and is entitled to claim the deduction under Section 35D of the Income Tax Act, 1961. The bank contended that its activities involve processing of financial data and thus, it should be considered as an industrial undertaking.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues in the traditional sense. However, the core question before the court was:

✓ Whether the High Court was justified in dismissing the appellant’s appeal without framing a substantial question of law and without deciding the issue of applicability of Section 35D of the Income Tax Act, 1961 to the respondent-bank.

The sub-issue was whether the High Court should have framed the substantial question of law on the applicability of Section 35D of the Income Tax Act, 1961.

Treatment of the Issue by the Court

Authorities

The Supreme Court did not cite any specific cases or books in its judgment. The legal provisions considered were:

• Section 35D of the Income Tax Act, 1961: This section pertains to deductions for capital expenditure on preliminary expenses.
• Section 260A of the Income Tax Act, 1961: This section deals with appeals to the High Court from decisions of the Income Tax Appellate Tribunal.

Judgment

The Court did not make any observations on the authorities.

What weighed in the mind of the Court?

The Supreme Court’s decision to remand the case was primarily driven by procedural lapses on the part of the High Court. The Court emphasized that the High Court failed to frame a substantial question of law as required under Section 260A of the Income Tax Act, 1961, and did not address the core issue regarding the applicability of Section 35D of the Income Tax Act, 1961. The Supreme Court’s reasoning focused on ensuring that the High Court fulfills its duty to consider all relevant legal questions and provide a reasoned judgment. The sentiment was that the High Court should have framed a question of law on the applicability of Section 35D of the Income Tax Act, 1961.

The Court’s decision was based entirely on legal considerations.

Logical Reasoning

The Supreme Court did not delve into the merits of the case, specifically avoiding any discussion on whether a bank can be considered an industrial undertaking. The court’s focus was solely on the procedural errors committed by the High Court. The court noted that the High Court had not framed any substantial question of law as required under Section 260A of the Act. The court also noted that the High Court had dismissed the appeal without deciding the main issue, i.e., the applicability of Section 35D of the Act to the respondent-bank. The court stated that the High Court should have framed the substantial question of law and then answered it in accordance with law.

The Supreme Court observed:

“In our view, the need to remand the case to the High Court is called for due to the following reasons. First, the High Court did not frame any substantial question of law as is required to be framed under Section 260-A of the Act though heard the appeal bipartite.”

“Second, the High Court dismissed the appeal without deciding any issue arising in the case saying that it is not necessary.”

“Third, the main issue involved in this appeal, as rightly taken note of by the High Court in para 6, was with regard to the applicability of Section 35-D of the Act to the respondent-assessee (Bank). It was, however, not decided.”

Key Takeaways

• ✓ The Supreme Court did not decide whether a bank is an industrial undertaking under Section 35D of the Income Tax Act, 1961.
• ✓ The case was remanded to the High Court due to procedural errors, specifically the failure to frame a substantial question of law.
• ✓ The High Court is now required to decide the case on merits, addressing the applicability of Section 35D to the bank.
• ✓ This judgment highlights the importance of adhering to procedural requirements in appellate proceedings.

Directions

The Supreme Court directed the High Court to decide the appeal on merits in accordance with law, after framing proper substantial question(s) of law arising in the case. The Court also directed that if another appeal on the same issue is pending before the High Court, both appeals should be decided together.

Development of Law

The ratio decidendi of this case is that the High Court must frame substantial questions of law as required under Section 260A of the Income Tax Act, 1961, and decide the appeals on merits. This judgment does not change the previous position of law but reinforces the procedural requirements for High Courts when dealing with appeals under Section 260A of the Income Tax Act, 1961.

Conclusion

The Supreme Court’s decision in this case does not resolve the core issue of whether a bank can claim deductions under Section 35D of the Income Tax Act, 1961. Instead, the Court focused on the procedural lapses of the High Court and remanded the case for a fresh decision. The High Court is now tasked with framing a substantial question of law regarding the applicability of Section 35D and deciding the case on its merits. This judgment underscores the importance of procedural correctness in legal proceedings and ensures that all relevant legal questions are addressed by the appellate courts.