TMI Blog2013 (3) TMI 694X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s appeal, the following pleadings have been made: 1. CIT (A) erred both in law and on the facts of the case in sustaining the following additions:- Rs. 1 Interest paid at the time of purchase of Securities 21,58,64,295 2 Fall in the market value of Securities 6,70,20,792 3 Expenses attributable to Tax Free Interest 31,32,000 4 Deduction u/s.80M 2,45,17,235 5 Interest paid to SIDBI and NABARD 8,08,418 6 Other expenses 84,33,569 2. He erred in not following the decision of the Appellate Authorities in the appellant's own case and the decision of Madras High Court in the case of CIT Vs. Karur Vysya Bank Limited, in respect of the following:- (a) Interest paid at the time of purchase of Securities (b) Fall in the market value of Securities The SLP filed by the Department in the case of CIT vs. Karur Vysya Bank Limited before the Supreme Court against the order of the Madras High Court was dismissed by the Supreme Court. 3. If for any reasons it is held that the interest paid on purchase of securities is not deductible, the profit/loss of sale of Securities may be reworked and that the resultant deduction may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee bank has failed to produce the details of the asset classified by RBI as doubtful and loss assets. 3. The CIT(A) failed to note that the assessee fails to prove that the vehicles which are leased out by the assessee are used in the business of running on hire. 4. For these and among other reasons that may be adduced at the time of hearing, the order of the CIT(A) may be cancelled and that of the assessing officer be restored. 3. Brief facts of both cases are that the assessee is a bank. For the impugned assessment year, it had filed its return on 29.10.2004 declaring income of ₹ 32,89,55,725/-, which was summarily processed. Thereafter, the Assessing Officer finalized scrutiny assessment vide assessment order dated 29.12.2006 computing total income as ₹ 87,09,71,779/- after making following additions: Para No. Additions Amount (Rs.) 1.1 Interest paid at the time of purchase of securities 21,58,64,295 2.1 Depreciation on investments 6,70,20,792 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned Counsel for the assessee has pointed out that the issue has been decided in favour of the assessee by the Jurisdictional High Court in the assessee s own case vide decision dated 07.02.2006 for the assessment year 1985-1986 and 1986-1987. We note that the Hon ble Jurisdictional High Court has decided this issue in favour of the assessee. Respectfully following the decision of the Hon ble High Court, we decide this issue in favour of the assessee and against the Revenue. In this background, the assessee also cites case law of United Commercial Bank v. CIT 240 ITR 355 (SC) and submits that since it is a bank supposed to follow Reserve bank of India guidelines for treating the securities as stock-in-trade/investments, its claim has been wrongly denied by the authorities below. 7. Per contra, the Revenue placed strong reliance on the order of CIT(A). However, no distinction has been pointed qua facts of the instant case vis- vis those involved in earlier assessment years. 8. We have heard both parties and perused the findings in the assessment order, CIT(A) s order as well as case law (supra) cited by the assessee. It transpires from the assessment order that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank v. CIT (supra) has decided the issue as under: In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier, what is to be taxed is the real income which is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as involved either in terms of interest on the amount invested in securities or manpower and therefore no disallowance was required to be made. The Assessing Officer could not believe that there should be some expenditure in form of travel telephone, postage, stationery and Manpower must have been involved in earning income which is exempt under Income tax Act. Thus the Assessing Officer has disallowed, 2% of the exempted income under Sec. 14A r.w. Rule 8D to meet the requirement of Sec. 14A. The Authorised Representative of the appellant of the appellant argued that the entire expenditure is towards is indivisible of banking and purchase and sale securities, no part of expenditure can be said to have been incurred directly for earning tax free income. The Hon'ble ITAT in the case of appellant's own case restricted this disallowance to the extent of 2% of such income and this has been accepted by the appellant bank itself even for the earlier years on this issue. The appellant bank itself suo moto disallowed 2% of the expenses on tax free income of ₹ 3,37,17,118 in the AY 2007-08. However the appellant bank has omitted to take into account tax free income to the tune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment order and after placing reliance on the case law of ED Sasun Co vs. CIT 69 ITR 237 (SC), the Assessing Officer made disallowance and held that due date of 1st May (supra) would fall after the closure of the assessment year on 31.03.2004, the amount in question could not be deducted from the income of the impugned assessment year. 19. In assessee s appeal, the CIT(A) has also affirmed the addition by holding as under: 19. The appellant bank has claimed interest payable to SIDBI at ₹ 5,50,329 and also interest payable to NABARD at ₹ 2,58,089. The due dates for payment of interest for these institutions are 1st November and 1st May. The interest is due on 1st November 2003 has already been paid. The outstanding amount for the 1st installment was due on May 2004. The appellant bank claims it on mercantile basis and wants the deduction on the ground that they have accrued before the due dates prescribed by the Act. Even in mercantile system, the expenses claimed only the due dates. The due date is falling after the previous year. Therefore the amount has not become due. Hence the Assessing Officer has held that the amount payable for the next year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e. ₹ 84,33,569/- by holding the same to be personal expenses not exclusively incurred for business. 25. Aggrieved, the assessee preferred appeal, wherein the CIT(A) has confirmed the disallowance as follows: 21. The Assessing Officer during the course of assessment proceedings disallowed 10% of the expenditure claimed under other expenses at ₹ 8,43,35,691. This is in the nature of petty cash expenditure like entry charges, ticket cancellation charges, bank cleaning expenses, wax candle, paper cups, plates and bags for carrying cheques/ cash. This expenditure cannot be included under other broad heads. The bank has 224 branches, 8 divisional offices and head office. The amount per branch / office will insignificant. However, the Authorised Representative of the appellant could not produce any vouchers or account for the above expenditure maintained at branch level or head office level and no vouchers have been produced either before the Assessing Officer or before the undersigned and therefore the Assessing Officer's decision is confirmed as the addition made is on estimated basis on persons expenditure on the items mentioned by the Assessing Officer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed deduction of bad debts under section 36(1)(viia) of the Act as under: 1. On rural advances ₹ 9,20,35,109 2. On non-rural advances ₹ 4,10,56,320 3. 10% of Doubtful Loss assets ₹ 8,89,08,571 Total ₹ 22,20,00,000 As the assessment order suggests, the Assessing Officer did not agree to the aforesaid assessee s claim and held that it had not created a provision in its account for bad and doubtful debts which is a primary condition. He observed that the assessee had not segregated the details of advances made by the concerned branches during the relevant accounting period pertaining to the impugned assessment year and also it did not exercise any option as clarified by the Reserve Bank of India as doubtful or loss assets. Accordingly, he rejected assessee s claim of bad debts of ₹ 22,20,00,000/- in the assessment order. 31. In assessee s appeal, the CIT(A) has accepted assessee s contention as stated herein below: 15.2 Now the question for consideration is whether on facts and circumstances of the case, the appellant bank is eligible for deduction of the bad and doubtful debts actually written off in view of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso on the basis of actual write off under clause (vii). 15.4 This situation is taken care of by proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess if any of the write off over the amount standing to the credit of the account created under Clause (viia). Even though the Revenue disputes the position that the proviso to clause (vii) refers only to advances stating that thereare no such words in the proviso which indicates that the proviso would apply to rural advances. The Hon'ble Supreme court however rejected the Revenue's stand, and further stated that the CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and, another, on the basis of clause (viia) in respect of a mere provision. To prevent a double deduction the proviso to clause (vii) was inserted which says that in respect of bad debts arising out of rural advances, the deduction on account of actual write of would be limited to the excess of amount written off over the amount of the provision allowed under clause (viia). Thus the proviso to clause (vii) stood introd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2). 42. Consequently, while answering the question in favour of the assessee, we allow the appeals of the assessees and dismiss the appeals preferred by the Revenue. Further, we direct that all matters be remanded to the assessing officer for computation in accordance with law, in light of the law enunciated in this judgment. Taking cue from the same, we are of the view that the CIT(A) has ignored the decision of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose claim is also supported by the Hon'ble ITAT and High Court order the contention of the Authorised Representative of the appellant is accepted and therefore the addition made by the Assessing Officer in restricting the depreciation on estimated basis at ₹ 70,023 is deleted. Therefore the appellant appeal on this ground is allowed. Therefore, the Revenue has raised the instant ground. 35. We have heard the contentions of both parties in the light of findings of the Assessing Officer as well as CIT(A). The contention of the assessee before the Assessing Officer was that for the vehicles leased and used in hiring business, it is entitled for depreciation @ 40%, which was declined by the Assessing Officer, but accepted by the CIT(A). The submission of the Revenue is that the Tribunal s order in assessee s case for the earlier assessment years stands challenged before the Hon ble High Court. In, our view, this is not a sufficient ground not to follow the decision on the same issue in case of the same assessee. Therefore, we reject this ground and uphold the findings of the CIT(A). 37. As sequel to our above discussion, assessee s appeal stands partly accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The Appellant submits that in any case the additions made are excessive and unreasonable. 8. The Appellant, therefore, prays that the additions sustained by the CIT(A) may be deleted and that the provisions relating to MAT may be held as not applicable to the Appellant. Similarly, the sole substantive ground raised by the Revenue reads as under: 1. xxxxxxxxxxxxx 2. The CIT(A) erred in interpreting the 2nd limb of section 36(1)(viia). The CIT(A) allowed deduction on the total Average outstanding rural advances made by the bank at the end of the accounting year without restricting the deduction to the incremental advance made during the year. The CIT(A) failed to appreciate the fact that income for each year is required to be computed separately as each accounting year is a separate unit for assessment purpose and therefore deduction was available only on incremental rural advance during the year and not on total outstanding at the end of the accounting year. 3. xxxxxxxxxxxxx 39. A perusal of the aforesaid grounds raised by the assessee reveals that apart from the pleas, the assessee raises 4 interconnected issues pertaining to securities. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses stand accepted in part and disallowed @ 5% by the Assessing Officer and CIT(A) merely on presumption (supra). In our view, without any cogent material on record as relied upon the evidence by the authorities below, they have erred in disallowing the claim raised by the assessee merely on conjunctures and surmises. Therefore, following our reasoning qua other expenditure (supra), ground raised by the assessee in assessment year 2004-05 decided hereinabove, we accept the instant ground as well. 46. Ground No. 4 in assessee s appeal pertains to disallowance of pooja expenses which were claimed by the assessee as revenue expenditure. The Assessing Officer and CIT(A) rejected/added an amount of ₹ 3,73,149/- by holding that they had been incurred for religious activities. 47. Before us, the assessee reiterates pleading in relevant ground which is contested by the Revenue. 48. After hearing the arguments of both parties, we find that in the case law of CIT vs. Aruna Sugars Ltd. (pleaded in relevant ground), the Hon ble Jurisdictional High Court has held as under: Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year relevant to the impugned assessment year, the assessee had sold the jewellery pledged to it by its customers against the loan availed. Per assessee, the excess amount on sale thereof had arisen as compared to the amount lent/due after computing the interest. The Assessing Officer, in the assessment order held that the surplus on sale of jewellery would be assessee s taxable income. The same findings have also been affirmed by the CIT(A). 52. We have heard both parties. The only issue is as to whether the excess amount in question raised by the assessee after putting the sale of jewellery gives rise to its income or not. From the order of the Tribunal cited by the assessee (supra), it transpires that the same very issue had arisen and decided by the Coordinate Bench as under: 4. We have duly heard and considered the rival submissions. The assessee-bank had sold certain jewels for the purpose of realising the loans advanced by it, on the pledge of the said jewels to defaulting loanees. After adjusting the amount due to the Bank, a sum of ₹ 51,155/- stood to the credit of the borrowers as surplus in the jewellery account. The bank has not appropriated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he principal from the borrowers is remote. As per Sec.43D, which is applicable to Banks, the interest on loans classified as NPA, as per RBI Guidelines, is assessable only on receipt and not accrual basis. The Appellant argued that since Sec. 43D of the Act is unambiguous, Rule 6EA cannot override the provisions of the Act. Any income can be considered to have accrued only when an assessee had reasonably good chances of recovery. When the principal itself is doubtful of recovery, the chances of recovering the interest are remote and, therefore, the income did not accrue. 34. Section 43D which taxes the interest income with regard to bad and doubtful debt on receipt basis, no addition is called for on NPAs which are more than 180 days old on accrued basis, but interest on accrual basis have to be offered for tax with regard to NPAs (which are of the category sticky advances) which are more than 90 days NPAs but are not bad and doubtful debts being less than 180 days old under Rule 6EA r.w.s 43D. 34.1 The Authorised Representative of the appellant could not furnish any details of type of NPAs which are more than 90 days of old NPAs but are not bad and doubtful under Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from the assessment order that the Assessing Officer has called upon the assessee to furnish the details in question. Therefore, we hold that the disallowance/addition has been made by the Assessing Officer and confirmed by the CIT(A) is de hors details from the assessee by applying the relevant provisions of the Act. Hence, without expressing our opinion on merits of the case and in order to avoid multiplicity of proceedings before the Assessing Officer and CIT(A), we deem it appropriate to restore the issue back to the file of the Assessing Officer who shall reconsider it afresh in accordance with law. The assessee would be given adequate opportunity of being heard, who in turn, shall also place the relevant details on record. We give liberty to the assessee to refer to the case law (supra) cited before us and any other relevant material as well, if any, as applicable to the facts in the issue. We also clarify that the Assessing Officer shall pass fresh order without getting influenced by the earlier interpretation. 59. Ground No. 8 in assessee s appeal challenges applicability of MAT provision invoked by the Assessing Officer and upheld by the CIT(A). 60. In the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the provisions relating to MAT are not applicable to Banks. 64. We have given our thoughtful consideration to the issue involved in the light of relevant facts and submissions of both parties. It is evident from the assessment order that the assessee had itself computed its liability under section 115JB of ₹ 69,96,798/-. After making additions, the Assessing Officer ignored MAT computation. In our view, once the Assessing Officer himself has not applied MAT, there is hardly any justification on assessee s part to raise this plea. So, we decline to accept assessee s argument reject the ground. 65. Coming to the Revenue s appeal for the assessment year 2007-08, the sole substantive plea of the Revenue is that the CIT(A) has wrongly deleted the addition of bad debts made by the assessee by wrongly interpreting the 2nd limb of section 36(1)(vii). The DR submits before us that the issue in hand is similar to ground No. 2 raised in Revenue s appeal for the assessment year 2004-05 decided hereinabove and the findings therein would also cover the instant appeal. The said assertion of the Revenue is also not contested by the assessee. In this view of the matter and acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for earning the tax free interest is to be added and that then only a portion of the expenses relating to the Treasury Department, which is dealing in the purchase and sale of Securities, can be disallowed. 6. He failed to appreciate that only the reimbursement of expenses to the bank officers were not Entertainment Expenses. 7. He erred in not following the decision of the Madras High Court in CIT vs. Aruna Sugars Limited 132 ITR 7I8 (Madras) in sustaining the disallowance of pooja expenses. 8. He also erred in not following the decision of the ITAT in the Appellant's own case while sustaining the addition on sale of jewellery. 9. He failed to appreciate that interest on Non Performing Assets was includible only on receipt basis as per Section 43D of the Act and that therefore the interests on NPA were not includible. 10. He failed to appreciate that the Ex-gratia payment has been made only to the employees of the bank and therefore it is wholly relatable to the business. 11. The Appellant submits that in any case the additions made are excessive and unreasonable. 12. The Appellant, therefore, prays that the additions sustained by the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (v) and section 36(1)(ii) which could not be allowed. Accordingly, he made disallowance and added it in assessee s income. 72. In appeal, the CIT(A) has confirmed the addition by observing as follows: 27. The Assessing Officer has disallowed an amount of ₹ 52,31,948 on account of ex-gratia payment on the ground that this payment is nothing but appropriation of profit and only to reduce the taxable profit by the appellant bank. As there is no business expediency and also not covered u/s 36(1)(ii) for bonus paid for services rendered as per Bonus Act, the Assessing Officer has treated the payment of ex-gratia by circumventing the provisions of Bonus Act as employees are not eligible are being compensated by way of ex-gratia and even u/s 37(1) of the Income tax Act stipulates that it does not cover the expenditure which is of the nature described under Sec. 30 to 36 of the Income tax Act. No deduction can be allowed for payment to the employee for the business expediency unless the payment is routed through approved gratuity fund. The Assessing Officer has relied upon the various judicial decision as per para No. 7.4 on page No. 22 of the assessment order and ..... 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