TMI Blog2012 (9) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to have been made as a matter of business expediency. The payment was made by the assessee to keep up the reputation of the assessee bank, to avoid long protracted litigation, to continue the business relationship with the PSUs and their employees, to increase the business in the long run, promoting its business and in the interest of business the compensation payments were made. Thus it can be said that the amount of compensation of ₹ 15.62 crores is an expenditure has been incurred wholly and exclusively for the purpose of assessee’s business - As far as the payment of penalty of ₹ 5 lacs pursuant to the order of RBI is concerned, relying on the decision of Apex Court in the Maddi Vankataraman (1997 (12) TMI 3 - SUPREME COURT) held that expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction u/s 37 and in view of the fact that the penalty was levied for violation of Banking Regulation Act, the same cannot be allowed as deduction - partly in favour of assessee. Deduction in respect of professional fees paid for implementation of Visa Module and FM support to base 24 switches & upgrada ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss and services accordingly it decided to terminate the understanding with the assessee compensated the landlord by making a payment of ₹ 6 lacs in full and final settlement of all its claims. Thus from the facts it is clear that the transaction in respect of which the compensation was paid arose during the course of business and was for the purpose of business. The expense has been incurred by the assessee to protect its interest and in lieu of the claims that could have been raised by the landlord - in favour of assessee. Disallowance of fees paid to KPMG and traveling expenses - no prior permission was received from RBI before incurring such expenses - Held that:- As the submissions and case laws relied by the assessee CIT (A) has given a finding that the expenses are of revenue nature and were incurred for the expansion of existing business and accordingly deleted the addition made by the AO and the Revenue has not controverted the findings of CIT(A) nor has brought on record any material to the contrary - in favour of assessee. Disallowance of computer cabling expenses - Held that:- CIT(A) has given a finding that the expenses on shifting of telephone line from one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Co-operative Banks and Gramin Banks in primary market issues since January, 2001. These advisory services were being provided to meet the clients ongoing requirements for Government Securities/PSU Bonds which were available in the secondary market. Since the bank was not a registered broker with any stock exchange, its services were restricted to advising/facilitating the clients in sourcing their requirements from brokers at competitive market rates. Where deals are facilitated by advisors, the investors make payment directly to the brokers after receiving the confirmation of the traction from the advisors since the advisors role was restricted to providing the advisory services only and not receiving the consideration of the transaction. Initially, transactions relating GOI/ PSU Bonds were routed through the Bank, i.e. the payment was directly received by the Bank and passed on to the brokers subsequently by the bank within specified delivery time limit of 60 days. As most of the investors did not maintain SGL or constituent SGL with any scheduled bank, the mode of delivery was in physical form only. Further in certain cases, securities had to be converted to marketable lots ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAL 16.88 Out of the aforesaid amounts, ₹ 15.56 crores was paid by the bank to the respective buying counter parties and this was claimed as loss on account of fraud. 6. The A.O. also noticed that Reserve Bank of India vide its order dated 24-1-2003 levied a penalty of ₹ 5 lac on the assessee in respect of the above syndication. The R.B.I. held that the Bank had contravened the provisions of section 6(1) of the Banking Regulation Act, 1949 by acting as a broker for purchase or sale of Govt. Securities and for selling the securities without taking the delivery of the securities thereby indulging in short selling which is prohibited by RBI guidelines. After considering the aforesaid facts, the A.O. held that the out of the fraud expenses of ₹ 20,87,88,103/- an amount of ₹ 15.56 crores was paid to various Provident Fund organization cannot be termed as fraud expenses interalia for the following reasons. (1) The transaction entered into by the assessee has been held to be in violation of section 6(1) of the Banking Regulation Act, 1949 by the Bank and thereby a penalty of ₹ 5 lacs was imposed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave ruined the reputation of the bank. (c) The bank was holding large deposits from PSUs and provident funds. There were many employees who were constituents of the bank. The bank would have lost the confidence of these constituents by taking a strict view while, ironically, the bank could consolidate its position and reputation as a result of the payment. (d) Having regard to the quantum of funds involved, legal proceedings of all forms against the bank, with a view to seeking refund of the funds, was a very strong possibility; this could have dragged the bank into enormous litigation. (e) The bank realized while the bank as also the investors were innocent and were the victims of the fraud, as between two innocent persons, the loss may be suffered by a person who has been privy to making offer to another innocent person. 9. The assessee s submission that the compensation was an item of loss on account of fraud arising due to 3rd party fraud has been paid by the assessee in the business interest on a voluntary basis. The assessee has also not suffered anything in relation to the short sale transaction noted adversely by the RBI. The levy of penalty by RBI was for proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs, but to end the allegations that they were indulged in uncalled for activities. 3.4.(iii) The transaction entered into by the assessee has been held as violative of sec.6(1) of the Banking Regulation Act, 1949 by the RBI and as a punitive measure a penalty of ₹ 5 lacs was imposed on it and the same has been paid by it. The Chairman and MD agreed unequivocally during the hearing by the RBI that the type of transaction done by the assessee is neither permissible under the Banking Regulation Act, 1949 nor under the SEBI Act. 3.4.(iv) In view of the above indictment by the RBI, the transaction in question was not incidental to its business of banking. The question of allowance of such expenditure u/s. 37(1) is, therefore, untenable. 3.4.(v) The appellant showed this expenditure related to fraud expenses under miscellaneous expenses and also penalty levied by the RBI was also claimed under miscellaneous expenses. These payments were in violation of the banking regulations Act. The Hon. Supreme Court in the case of Maddi Venkataramanan Co. (P) Ltd. vs. CIT (1998) 229 ITR 534 (SC) held that one can carry on his trade without violating the law and after the introduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is not the case that losses were incurred for any fault of any particular employee. In the case of Badridas Daga v. CIT 34 ITR 10(SC), it was held that the loss incurred on account of embezzlement/misappropriation of funds by the agent is allowable, here it is not the case of embezzlement by any particular employee. Hence these case laws are not applicable. In the case of Annamalai Timber Trust Ltd. vs. CIT 47 ITR 814 (Ker.), it was held that for any negligence of the assessee s servants while acting on the course of their employment is also incidental to such business, the liability of the assessee to pay damages for such negligence is also incidental to the business, and loss resulting from payment of such damages is allowable. It is not the case in the present case. Therefore, in my view, the A.O. was justified in disallowing the payment made for ₹ 15.56 crores and also justified in disallowing the penalty of ₹ 5 lacs levied by the RBI. Hence ground No.2 and 3 both are rejected. 13. Aggrieved by the decision of CIT (A), the assessee is now in appeal before us. 14 Before us, the Ld. A.R. submitted that the Bank is registered with the Securities Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the customers that the assessee was also a party to the scam. This according to the assessee would have proved detrimental to the reputation and adversely affected the Banks activity to prove its business besides impairing its capability to generate business from Public Sector units and from Central and state Governments. It could have adversely affected the bank s ability to grow its business in the eastern region where Home trade limited and its associates had defrauded investors. The assessee considering the overall situation including its business interest, its brand image and goodwill felt that under the circumstances, it has a fiduciary accountability and responsibility. Thus in order to avoid protracted litigation and out of commercial expediency, the assessee decided to have a settlement with some of the investing bodies particularly because the PSU employees interest was involved in those transactions subject to the condition that the amount would be refunded to the assessee if any amount is recovered from Home Trade Ltd or their custodians. The assessee also filed a case against Giltedge Management Services Ltd for recovery of the amounts paid to the investing part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sations of the PSUs subject to the condition that they will be returning the amount as and when the payment was received from the defaulting companies. In fact there was no fraud committed on the bank as the transactions were between the broker and the PF organization. CBI has charge sheeted the employee of the assessee only in the case of Jute Corporation of India wherein the amount involved was only ₹ 75 lacs. The final order of the criminal court has not been pronounced holding as to who are found guilty in fraud. The assessee has not made any disclosure about the same in the annual accounts or in the statement of total income and there was no observation to this effect by the Auditors in their report. In these circumstances, the claim of the assessee that there was vicarious liability on the assessee is not acceptable. It was pointed out by the D.R. that the assessee s stand before the RBI was that it had never entered into short selling or brokering and the mistake had happened due to ignorance and that there was no monetary loss suffered out of the above transaction. This statement which was made before the RBI is opposite to that made during the course of assessment pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involvement which would have ruined the reputation of the bank. The assessee was also holding large deposits from PSUs and provident funds. The employees of the PSUs were the customers of the assessee. The assessee was of the view that nonpayment would have resulted into the assessee being drawn into long drawn litigation. In view of all these factors, the Assessee decided compensate the investors by making payment of ₹ 15.56 crore and this payment was claimed as loss due to fraud. The aforesaid facts are undisputed facts and have not been controverted by the Revenue. The only dispute is whether the amount of compensation of ₹ 15.56 crore paid is an allowable expenditure or not. In the case of CIT vs. Georgepolous (1984) 146 ITR 380, (Mad.) the Hon ble Madras High Court has held that U/s 37 there is no requirement that an item of expenditure or outgoing must be incurred or laid out with a view to earn the profits nor is there any requirement that the expenditure must be incurred in order to meet an obligation arising either out of a commercial contract or out of any provision of law or custom. All that the section requires is that the expenditure must be incurred or la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 782 (Guj.) the Hon ble Gujarat High Court has held that what has to be considered while applying the test of commercial expediency is whether particular expenditure can be justified not because of any obligation under which the assessee paid the same but even on the ground of amount being expended voluntarily in the case of any application under which the assessee-company paid the same but even on the ground of the amount being expended voluntarily by the assessee-company. If the assessee derives any indirect benefit also, then the amount paid is to be considered to have expended wholly and exclusively for the purpose of business and therefore allowable. In the case of Maddi Vankataraman Co. (P) Ltd. vs CIT (1998) 229 ITR 534 (SC), the facts of the case is that the assessee was engaged in the tobacco business. The assessee had indulged in transactions in violation of the provisions of FERA. The assessee s plea was that if it had not entered into such transaction, it would have incurred a loss. In those facts the H ble Apex court held that spur of loss cannot be a justification for contravention of law. If the assessee contravenes the provisions of FERA to cut down its losse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be treated as capital expenditure. He accordingly disallowed the expenses as Revenue expenses but allowed depreciation at the applicable rates. 22. The AO also observed that assessee had paid ₹ 25,84,000 to NCR Corporation Ltd being payment made for upgradation of ATMs. The assessee submitted that it represented the cost of change in the software loaded on the ATMs so that ATMs can accept Visa cards and customers of other banks can start using the bank s ATMs. The AO considered it to be capital expenditure as addition to the existing ATMs and granted depreciation on the same. 23. On both the above additions the assessee carried the matter before CIT (A). CIT (A). CIT(A) vide para 4.3 on page 18 of his order held that the expenditure incurred resulted into modification of existing system and supplementing of additional features and accordingly held it to be of capital expenditure and thus upheld the order of AO. Aggrieved by the order of CIT(A) the assessee is now in appeal before us. 24. Before us, the Ld. A. R. pointed out to the fact that the AO himself vide para 7.3 and 7.5 stated that the assessee be granted depreciation of the aforesaid expenditure but n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount after allocating it to the investments for exempted income. The appellant has filed the details before the A.O. admitting that only part of the interest bearing funds is used for investing in the investments giving tax exempted income. The interest cost is calculated at ₹ 6.23 cr. which is offered for taxation. Hence, the A.O. is not justified in further allocating the interest expenditure for this purpose disregarding the fact that the appellant has surplus funds. However, as regards the other operating expenses are concerned, the appellant has not filed any details as to how much expenditure is to be apportioned for earning the exempted income. The total operating expenses are ₹ 205.47 cr. and the exempt income claimed by the appellant is ₹ 39.65 cr. whereas the total income earned by the appellant is ₹ 1595.40 cr. Hence the exempted income is 2.485% of the total income. Therefore, by allocating the operating expenses of ₹ 205.47 cr. in this ratio, the expense allocable to the exempt income comes to ₹ 5.11 cr. (205.47 x 2.485%) Therefore, this expenditure has to be disallowed out of the total expenditure for earning the exempt income und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance u/s 14A of ₹ 32.76 crore which is far more than the amount of exempt income. The Assessee had earned cash profits of ₹ 599 crores during the assessment year in question. The own funds as on 31st march 2003 was ₹ 919 crores comprising of share capital of ₹ 230 crore and Reserves of ₹ 689 crores. The Ld. A.R. placed on record the copies of the audited balance sheets in support of its contentions that it had sufficient interest free funds and therefore no interest bearing funds were utilized for making the investments. The Ld. A.R. also furnished a chart showing the position of interest free funds vis a vis tax free investments as on the balance sheet dates right from 31st march 1995 to 31st March 2003. From the chart it was pointed out that as on 31st March 2003, the interest free funds in the form of capital, reserves and interest free demand deposits was to the extent of ₹ 3404 crore as against the tax free investments of ₹ 589 crores. Thus the interest free funds were far in excess of the investments. It was submitted that the AO had worked out the disallowance primarily on the presumption that interest bearing funds have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in the case of CIT Vs Reliance Utilities Power Ltd (supra) has held that if there are interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from interest free funds available. In the present case, since the assessee has suo moto disallowed ₹ 5.53 crore u/s 14A, respectfully following the decision of Bombay High Court, we are of the view that in the facts of the present case, no further disallowance over and above than what has been disallowed by the Assessee is called for. As far as disallowance of other administrative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted. Disallowance u/s 14A requires finding of incurring of expenditure. In the present case, the AO has presumed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hd/2004 3665, order dated 7.11.2008 in ITA No 1394 1894/Ahd/2003 for AY 1998-99 and order dated 23.1.2009 in ITA Nos. 4151 4400/A/2003 2001- 02. He placed the same on record at page nos 346 to 368 of the paper Book. The Ld A.R. also placed on record at page 377 of the paper book the copy of instruction No 17/2008 dated 26th Nov. 2008 issued by CBDT wherein interalia it has been stated that that while working out the deduction u/s 36(1)(vii), the opening credit balance i.e balance brought forward as on 1st April of the relevant accounting period needs to be reduced. 37. The Ld. D.R. did not seriously object to it. 38. We have heard the rival submissions and perused the material on record. We find that the identical issue was decided by the co-ordinate Bench in ITA No 81/Ahd/2005 and ITA No 3665/Ahd/2004 for AY 2001-02 by holding as under: 5. At the time of hearing both the parties submitted that identical issue has been considered in the assessee s own case in the assessment year 1998-99 in which a view has been taken that the amount of deduction claimed by the assessee u/s 36(1)(viia) of the Act in respect of bad debts written off was not required to be reduced b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed with the offer and consented to withdrew all his claims against the assessee. 44. The AO disallowed the compensation of ₹ 6 lacs for the reason that the assessee had not occupied the property and there was no formal lease agreement signed with the landlord, the consent letter was signed by Mr. Ramadoss only while the property is in the name of Mr and Mrs Ramadoss, the landlord did not have any actionable claim over the assessee and the compensation of ₹ 6 lac was unreasonable since there was no evidence of landlord having incurred any cost for modification of the property as per the assessee s requirement. Aggrieved by the order of the AO, the assessee preferred appeal before CIT (A). Before CIT (A), the assessee made various submissions. The Ld. A. R. also relied on various decisions in its support. CIT (A) agreed with the contentions of the assessee and deleted the addition made by the AO. Aggrieved by the action of the CIT(A), the Revenue is in appeal before us. 45 Before us, the Ld. D.R. relied on the order of the AO and submitted that the expenses is not for the purpose of business. The Ld. D.R. therefore urged that the action of the AO be upheld. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT Department. In view of the aforesaid facts and respectfully following the Apex Court we are of the view that the disallowance made by the Ao was rightly deleted by CIT(A) and it does not call for any interference. In the result, this ground of the Revenue is rejected. 48. The next ground is with respect to the fees of ₹ 26.25 lacs paid to KPMG and travelling expenses of ₹ 5.58 lacs. 49. The AO observed that assessee has made payment of ₹ 26.25 lacs to KPMG. The Assessee explained that the expense was incurred for exploring the possibility of branch abroad. Similarly the assessee had spent ₹ 5.58 lac on the travelling expenses including travelling expenses and allowance of the Chairman of the assessee bank to visit USA and UK for exploring business opportunity in overseas market. The AO was of the view that since the assessee is governed by Banking Regulation Act, 1949, prior permission of RBI was necessary for opening any foreign branch and incurring expenditure. Since in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abling expenses of ₹ 1.50 lacs. 53. The AO observed that the assessee has paid ₹ 25.84 lacs to NCR Corporation India Ltd being payment for upgradation of ATMs for visa implementation. The Assessee submitted that the expense represented the cost of change in software loaded on the ATMs so that the ATMs can accept Visa cards and customers of other banks can also use the bank s ATMs. It was further submitted that the modification does not enhance the productivity of the ATM and the payment does not constitute payment for capital expenditure. The AO was of the view that enabling the existing ATMs to accept the visa cards and use of ATMs by the customers of other banks was an additional facility generated. Accordingly he rejected the submissions of the assessee and added ₹ 25.84 lacs to the income of the assessee. 54. Assessee had paid ₹ 1,52,893/- to Nilme electric for telephone cable expenses. The assessee submitted that the expense was made for replacement of computer network and telephone wires on shifting of some of the banks departments to the new leased premises. The Ao held the same to be of capital in nature and disallowed it but granted depreciati ..... 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