2012 (9) TMI 790 - AT - Income Tax

Disallowance u/s 14A Assessee is a Bank AO disallow 0.5% of average of investment yielding tax free income - Assessee contended that the same cannot exceed the proportionate expenditure incurred by the treasury department and amount relating to tax free income proportionately arrived at based on exempt income to total income amounts to ₹ 15,76,875 Held that - As the disallowance is to be made on a reasonable basis. Assessee have not shown any working on the disallowance, and how they arrived at figure of ₹ 15,76,875 and why 0.5% of average of investment yielding tax free income was excessive. Issue remand back to AO. Disallowance of Prior Period expense The expenditure stated as relating to prior period consisted of rent, electricity charges, payment to R & T agents, repairs etc Held that - Following the decision in case of Union Bank of India (2012 (6) TMI 500 - ITAT MUMBAI), even though they are treated technically as prior period expenses, it relates to a continuous flow of expenditure. Therefore, there is no justification in disallowing the expenditure, otherwise normally eligible for deduction. Issue decided in favour of assessee Disallowance of Lease premium expenses Assessee claim lease premium as revenue expenditure Following the decision in case of Mukund Limited(2007 (2) TMI 358 - ITAT MUMBAI), the claim of expenses made by the assessee have been treated as capital in nature and hence cannot be allowed. Issue decide in favour of revenue Disallowance of claim of Bad debts AO hold that the bad debt is allowable only if it is irrecoverable and is actually written off in the books of accounts Held that - Following the decision in case of Vijaya Bank(2010 (4) TMI 46 - SUPREME COURT) debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee has correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet, and, consequently at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance-sheet is shown as net of the provision for impugned bad debt , the assessee will be entitled to the benefit of deduction under section 36(1)(vii), as there is an actual write off by the assessee in his books. Disallowance cannot be made on an apprehension that if the assessee failed to close each and every individual account of its debtor, it may result in the assessee claiming deduction twice over , allowed the appeal of the assessee, allowing the claim of bad debts. Issue decides in favour of assessee Income from foreign branches Assessee excluded the income from foreign branches as per provision of DTAA AO denied the benefit of foreign except branches at Singapore and Japan Held that - In all the foreign countries the operation is carried out through its branches which is a PE situated outside India. Hence the income attributable to these branches cannot be taxed in India. Therefore, consistent with the earlier finding of the Tribunal in assessee s own case for the earlier years case, we do not see any merit in the ground taken by the Revenue. Therefore issue decides in favour of assessee

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of prior period expenses.
3. Disallowance of lease premium expenses as capital expenditure.
4. Charge of interest under Section 234D.
5. Allowance of bad debts.
6. Exclusion of profits from foreign branches.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee bank challenged the disallowance under Section 14A, arguing that no expenditure was incurred to earn tax-free income. The CIT(A) had directed the AO to compute disallowance at 0.5% of average investments yielding tax-free income. The assessee contended that this was against various decisions, including ITAT Mumbai in Godrej Agrovet Ltd vs. ACIT. The ITAT noted that disallowance should be reasonable and restored the issue to the AO for re-computation, considering various decisions of coordinate Benches.

2. Disallowance of Prior Period Expenses:
The assessee argued that expenses such as rent and electricity, claimed as prior period expenses, were incurred in the current year due to the continuous nature of its operations. The CIT(A) had disallowed these expenses due to lack of evidence. ITAT referred to decisions in Toyo Engineering India Limited vs. JCIT and Union Bank of India vs. ACIT, which allowed similar claims, and deleted the addition of Rs. 2,93,434.

3. Disallowance of Lease Premium Expenses as Capital Expenditure:
The assessee's claim of lease premium expenses was treated as capital expenditure by the AO. The CIT(A) upheld this view, and the ITAT sustained the disallowance, following the Special Bench decision in JCIT vs. Mukund Limited.

4. Charge of Interest under Section 234D:
The assessee contested the charge of interest under Section 234D. The CIT(A) directed the AO to charge interest as per law. ITAT upheld this direction, considering the insertion of Explanation 2 to Section 234D by the Finance Act, 2012.

5. Allowance of Bad Debts:
The AO disallowed the bad debts claimed by the assessee, arguing that they were not actually written off. The CIT(A) allowed the claim, relying on the Supreme Court decision in Vijaya Bank v/s CIT. The ITAT upheld this decision, noting that the issue was settled in favor of the assessee.

6. Exclusion of Profits from Foreign Branches:
The AO included profits from foreign branches in the total income, but the CIT(A) excluded them based on Double Tax Avoidance Agreements (DTAA). The ITAT upheld the CIT(A)'s decision, referring to the Supreme Court decision in CIT vs. PV.AL. Kulandagan Chettiar and the ITAT's earlier decisions in the assessee's own case, confirming that income attributable to foreign branches cannot be taxed in India.

Conclusion:
The ITAT provided a detailed analysis for each issue, partially allowing the assessee's appeal and dismissing the department's appeal. The key points included restoring the disallowance under Section 14A to the AO for re-computation, deleting the addition of prior period expenses, sustaining the disallowance of lease premium expenses, upholding the charge of interest under Section 234D, allowing the claim of bad debts, and excluding the profits from foreign branches from the total income.

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