Section 115JB Is Inapplicable to Banking Companies, Provision for Leave Encashment Is Disallowed Under Section 43B, and UPS Eligible for 60% Depreciation

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Section 115JB Is Inapplicable to Banking Companies, Provision for Leave Encashment Is Disallowed Under Section 43B, and UPS Eligible for 60% Depreciation

Issue

Whether (1) Section 115JB applies to a banking company, (2) unpaid provision for leave encashment is allowable under Section 43B, and (3) Uninterrupted Power Supply (UPS) is entitled to depreciation at the rate of 60%.

Facts

  • Applicability of MAT: The assessee, a banking company governed by the Banking Regulation Act, 1949, was evaluated for Minimum Alternate Tax (MAT) provisions under Section 115JB for A.Y. 2007-08.
  • Leave Encashment Provision: The assessee claimed a deduction for a provision created towards leave encashment without making actual payment during the relevant financial year.
  • Depreciation on UPS: The assessee claimed depreciation on UPS units at the higher rate of 60% applicable to computers/computer accessories.

Decision

  • MAT Applicability on Banking Companies (In Favour of Assessee): Section 115JB is not applicable to a banking company governed by the Banking Regulation Act, 1949.
  • Disallowance of Unpaid Leave Encashment (In Favour of Revenue): Deduction for a provision towards leave encashment is not allowable without actual payment, in view of Section 43B.
  • Depreciation Rate on UPS (In Favour of Assessee): UPS units form an integral part of computer systems and are eligible for depreciation at the rate of 60%.

Key Takeaways

  • Banking Sector Exclusion: For A.Y. 2007-08, banking companies governed by the Banking Regulation Act are outside the purview of MAT under Section 115JB due to non-applicability of Companies Act financial statement formats.
  • Actual Payment Rule: Deductions in respect of leave encashment provisions are strictly governed by Section 43B and require actual payment within the prescribed timeline to be allowable.
  • UPS Classification: UPS is treated as a computer accessory/peripheral, making it eligible for the higher depreciation rate of 60%.

 

HIGH COURT OF MADRAS
Commissioner of Income-tax
v.
Indian Overseas Bank Accounts Department
Dr. Anita Sumanth and S. Raveekumar, JJ.
TCA. No. 18 of 2014†
SEPTEMBER  29, 2026
Mrs. V. Pushpa, Sr. Standing Counsel for the Appellant. R. Venkatanarayanan and Subbaraya Aiyar Padmanabhan for the Respondent.
JUDGMENT
Dr. Anita Sumanth, J. – This is a departmental appeal relating to assessment year (AY) 2007-2008 challenging an order of the Income Tax Appellate Tribunal ‘A’ Bench, Chennai (Tribunal) dated 19.03.2013 and giving rise to the following substantial questions of law that have been admitted on 29.04.2014.
“i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that Section 115JB is not applicable to banking company governed by the Banking Regulation Act, 1949?
(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in allowing the claim of deduction for provision made for leave salary without actual payment contrary to the provisions of Section 43B?
(iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in allowing higher rate of depreciation on UPS (uninterrupted power supply) when UPS is not an integral part of the computer?”
2. Both Mrs.Pushpa, learned Senior Standing Counsel for the Income Tax Department and Mr.R.Venkatanarayanan, learned counsel for the assessee, would agree that the issues are covered by various decisions of the Supreme Court and High Courts.
3. As far as the first issue is concerned, it is covered by a decision of this Court in Commissioner of Income Tax, Chennai v. Indian Overseas Bank [T.C.A.Nos.151 & 152 of 2014, dated 08.12.2025], wherein the question was answered in favour of the assessee applying the decision of the Karnataka High Court in CIT v. Karnataka Bank Ltd.  (Kar.)]. The operative portion of the judgment reads as follows:-
“3. The operative portion of the judgment in Commissioner of Income-Tax v. Karnataka Bank Ltd. (supra) is as follows:

‘. …

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee against the order dated 19-01-2018 passed by the Income Tax Appellate Tribunal. The subject matter of the appeal pertains to the Assessment year 2008-2009. The appeal was admitted by a bench of this Court on the following substantial questions of law:

1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside disallowance made under the head investment portfolio by following earlier decisions which has not reached finality even when the assessing authority rightly made disallowance by holding that irrespective of RBI guidelines were applicable to the assessee for the purposes of the I.T.Act or not, as per the principles of accountancy and the various decisions of Apex Court, income should be recognized in a way which reflects a true and fair picture of the affairs of the assessee and accordingly, when bank itself is treating the securities as “held to maturity”, for any reason whatsoever, the same should be the case for purposes of Income Tax as this representation alone reflects the true picture of the accounts of the assessee?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside disallowance made under Section 14A read with Rule 8D(2) (ii) and (iii) of the Act on expenditure incurred on earning exempt income even when the assessing authority rightly made disallowances as conditions for making such disallowances were satisfied and assessee failed to show flow of its own funds to those investments from which income is exempt?
3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law holding that the assessee-Bank cannot be considered as a Company by following decisions which has not reached finality and even when as per Section 2(17) of the Act, the Company is defined as an Institution, association or body which is or otherwise assessable or assessed as a Company and as such Section 115JB is applicable to assessee Bank for MAT purposes?
4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside disallowance in setting aside disallowance made under Section 40(a) (ia) of the Act on ATM charges of other Banks even though Section 194H and Explanation to said section is applicable to assessee Bank and as such assessee ought to have deducted TDS on such payments?”
2. When the matter was taken up today, the learned counsel for the assessee submitted that the 1st and 5 3rd substantial questions of law involved in this appeal have already been answered in favour of the assessee by this Court vide judgment dated 16.01.2020 in the case of CIT v. ING Vysya Bank Ltd. reported in 422 ITR 116 (Kar.)
3. It is further also submitted that the 2nd substantial question of law involved in this appeal also has already been answered in favour of the assessee by this Court vide judgment dated 15.02.2021 in ITA No.133/2015 the case of CIT v. Quest Global Engineering Services(P). Ltd. It is further submitted that the 4th substantial question of law is also answered by a bench of this Court vide Judgment dated 23.11.2020, passed in CIT v. Corporation Bank 431 ITR 554 in favour of the assessee and against the revenue.
4. The aforesaid submission could not be disputed by the learned counsel for the revenue.
5. For the reasons assigned by us in the aforementioned judgments supra the substantial questions of law framed in this appeal are answered in favour of the assessee and against the revenue.
In the result, appeal filed by the revenue fails and is hereby dismissed.’
4. The matters are presently being consolidated before the Hon’ble Supreme Court and leave has been granted at the instance of the revenue (See Commissioner of Income Tax, LTU v. Vijaya Bank  (SC)) and Commissioner of Income-Tax v. Karnataka Bank Ltd. ([2022] 142  (SC)).
5. In light of the above, the substantial question of law is answered in favour of the assessee.”
4. As far as the second issue is concerned, it stands covered in favour of the Revenue by a judgment of the Hon’ble Supreme Court in Union of India v. Exide Industries Ltd. 425 ITR 1 (SC). The Calcutta High Court had declared Section 43B(f) as ultra vires the Constitution of India, which decision stood reversed by the Supreme Court. The operative portion of the judgment of the Supreme Court reads as follows:-
“39. Reverting to the true effect of the reported judgment under consideration, it was rendered in light of general dispensation of autonomy of the assessee to follow cash or mercantile system of accounting prevailing at the relevant time, in absence of an express statutory provision to do so differently. It is an authority on the nature of the liability of leave encashment in terms of the earlier dispensation. In absence of any such provision, the sole operative provision was Section 145(1) of the 1961 Act that allowed complete autonomy to the assessee to follow the mercantile system. Now a limited change has been brought about by the insertion of clause (f) in Section 43B and nothing more. It applies prospectively. Merely because a liability has been held to be a present liability qualifying for instant deduction in terms of the applicable provisions at the relevant time does not ipso facto signify that deduction against such liability cannot be regulated by a law made by Parliament prospectively. In matter of statutory deductions, it is open to the legislature to withdraw the same prospectively. In other words, once the Finance Act, 2001 was duly passed by the Parliament inserting clause (f) in Section 43B with prospective effect, the deduction against the liability of leave encashment stood regulated in the manner so prescribed. Be it noted that the amendment does not reverse the nature of the liability nor has it taken away the deduction as such. The liability of leave encashment continues to be a present liability as per the mercantile system of accounting. Further, the insertion of clause (f) has not extinguished the autonomy of the assessee to follow the mercantile system. It merely defers the benefit of deduction to be availed by the assessee for the purpose of computing his taxable income and links it to the date of actual payment thereof to the employee concerned. Thus, the only effect of the insertion of clause (f) is to regulate the stated deduction by putting it in a special provision.
40. Notably, this regulatory measure is in sync with other deductions specified in Section 43B, which are also present and accrued liabilities. To wit, the liability in lieu of tax, duty, cess, bonus, commission etc. also arise in the present as per the mercantile system, but assessees used to defer payment thereof despite claiming deductions there against under the guise of mercantile system of accounting. Resultantly, irrespective of the category of liability, such deductions were regulated by law under the aegis of Section 43B, keeping in mind the peculiar exigencies of fiscal affairs and underlying concerns of public revenue. A priori, merely because a certain liability has been declared to be a present liability by the Court as per the prevailing enactment, it does not follow that legislature is denuded of its power to correct the mischief with prospective effect, including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures. Strictly speaking, the Court cannot venture into hypothetical spheres while adjudging constitutionality of a duly enacted provision and unfounded limitations cannot be read into the process of judicial review. A priori, the plea that clause (f) has been enacted with the sole purpose to defeat the judgment of this Court is misconceived.
41. The position of law discussed above leaves no manner of doubt as regards the legitimacy of enacting clause (f). The respondents have neither made a case of non-existence of competence nor demonstrated any constitutional infirmity in clause (f).”
5. As far as the third issue is concerned, it is answered in favour of the assessee following the decision of this Court in Pr. CIT v. Cholamandalam MS General Insurance Company Ltd.  (Madras)] and the decision of Delhi High Court in Pr. CIT v. Nestle India Ltd.  457 ITR 216 (Delhi). In Cholamandalam’s case (supra), the relevant paragraphs read thus:
“9. The substantial questions of law in regard to the issue of Depreciation on UPS are also answered in favour of the assessee in light of the decision of the Madras High Court in T.V. Sundaram Iyengar & Sons Ltd v. The Commissioner Of Income Tax [T.C.(A) No.684 of 2009, dated 30.11.2021]. The relevant paragraphs read thus:

4. As regards the third question of law, the learned counsel for the appellant fairly submitted that the same has already been considered and decided by this court by order dated 18.01.2019 in TCA No.23 of 2019, wherein, it was held that the assessee would be entitled to depreciation at 60% on UPS and Voltage Stabilizer, the relevant paragraphs of which are usefully reproduced below:

“4….with regard to the rate of depreciation that can be claimed for UPS and Routers, the Tribunal in the impugned order relied upon earlier decision of the Chennai Tribunal as well as the decision of the High Court of Delhi in the case of CIT v. Oriental Ceramics and Industries Limited reported in (2013) 358 ITR 49 (Del.) and held that the assessee would be entitled to depreciation at 60%. Therefore, we are of the considered view that the finding rendered by the Tribunal is just and proper.

5. An UPS which is capable of giving uninterrupted power supply for a computer of a stipulated period has not been established to have an independent usage by placing any material. If the revenue disputes that the UPS can independently function, then the Assessing Officer should have material to the said effect. We are informed that the configuration of the power output for the UPS is designed to suit the equipment for which it shall supply uninterrupted power. Similarly, Routers also are to be considered as an integral part of computer.

6. This Court had an occasion to consider as to whether the printers are eligible for depreciation at 60%. In the case of CIT v. Cactus Imaging India (P) Ltd. , reported in [2018] 406 ITR 406 (Mad) and held that the assessee was entitled to depreciation at 60%. We find that there is no finding recorded by the Tribunal on the said head. Accordingly, Substantial Question of Law No.1 stands rejected. ”

Therefore, the learned counsel agreed that the depreciation value of the UPS and stabilizer can be fixed at 60% instead of 100% as claimed by the assessee.

5. There is no serious objection on the side of the respondent/revenue on the above submissions made by the learned counsel for the petitioner.

6. In the light of the aforesaid decisions and taking note of the submissions made by the learned counsel appearing for both sides, we hold that the questions of law 1 and 2 are decided in favour of the assessee and against the revenue; and the third question of law is decided to the effect that the assessee is entitled to the depreciation at 60% as against 25% assessed by the respondent / revenue.”

6. This Tax Case (Appeal) is disposed of in the above terms. No costs.