TMI Blog2007 (8) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... AO came to the conclusion that the provision for bad and doubtful debts relating to 10 per cent of the rural advances for the AY 2002-03 is to be allowed, but at the same time, the AO was of the opinion that total sum to be deducted from the total bad debts written off as per proviso to s. 36(1)(vii). In short, the AO made the disallowance in respect of the bad debts written off and provision for bad and doubtful debts. We find that this issue is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of South Indian Bank Ltd. [ 1999 (3) TMI 43 - KERALA HIGH COURT] . Respectfully following the same as well as the decision of this Tribunal in assessee's own case, we hold that the CIT(A) has rightly deleted the addition made by the AO in respect of the bad debts written off. We, therefore, confirm the order of the CIT(A) on this issue. Pro rata disallowance u/s 14A - expenditure estimated to be incurred for earning tax-free income - HELD THAT:- An identical issue had come for the consideration of this Tribunal in the case of Dhanlakshmi Bank Ltd.[ 2006 (7) TMI 524 - ITAT COCHIN] held that; '' We are, therefore, of the opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the terms of bipartite agreement between the associate bank management and the union, the assessee paid Rs. 50 lakhs as its contribution towards the formulation of the fund under the scheme. On a bare reading of the sec 40A(9), it is very clear that any sum paid by the assessee as an employer towards setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, etc. except to the extent provided by or under cls. (iv) and (v) of s. 36(1) or required by or under any other law for the time being in force is not an allowable expenditure. In the present case, the fund is not controlled by the assessee bank. In our opinion, the decision relied on by the Revenue of Hon'ble Andhra Pradesh High Court in the case of Raasi Cement Ltd.[ 2004 (12) TMI 55 - ANDHRA PRADESH HIGH COURT] is not helpful. In our further considered opinion, the bona fide contribution made by the assessee as an employer to the fund set up as a part of the settlement between the assessee bank and its executive employees is not hit by sub-s. (9) of s. 40A. We, therefore, uphold the order of the CIT(A) on this issue. In the result, the Revenue's appeal is dismissed. - N. BA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide of the provision account and at the same time, debiting the entire bad debts which are at a much higher figure than the provision on the debit side of the same provision account without making any adjustment in the provision account as required by the proviso to Section 36(1)(vii) of the Act and as required Under Section 36(2)(v) of the Act. In the opinion of the AO, the proviso to Section 36(1)(vii) and Section 36(2)(v) clearly states that the assessee has to debit bad debts claimed during the year to the provision for bad and doubtful debts and deduction of bad debts Under Section 36(1)(vii) of the Act is limited to the amount which exceeds the credit balance available in the provision for bad and doubtful debts Under Section 36(1)(viia) of the Act. The AO asked the assessee to furnish the break-up of the bad debts pertaining to the rural branches as well as non-rural branches. The assessee filed the reply contending that the entire write off of bad debts pertains to the non-rural branches and provision for bad and doubtful debts relating to advances made on rural branches. Finally, the AO came to the conclusion that the provision for bad and doubtful debts relating to 10% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 36(1)(vii). We also find that this issue is covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of South Indian Bank Ltd. (supra). Respectfully following the said decision of the Jurisdictional High Court as well as the decision of this Tribunal in assessee's own case, we hold that the CIT(Appeals) has rightly deleted the addition made by the AO in respect of the bad debts written off. We, therefore, confirm the order of the CIT(Appeals) on this issue. 8. The next issue is whether the CIT(Appeals) is justified in deleting the addition made amounting to Rs. 44,33,575/- by making the pro-rata disallowance Under Section 14A of the Act. We have heard the parties. The briefly stated facts are as under: On verifying the return of income, the AO found that in the computation statement, the assessee has deducted a sum of Rs. 4,94,13,505/- as dividend income, another sum of Rs. 1,67,50,000/- being interest on tax free bonds and a further sum of Rs. 1,14,98,000/- being interest exempt Under Section 10(23G) of the Income Tax Act totalling Rs. 8,86,71,505/-. The AO noted that as per Section 14A, For the purposes of computing the total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 19-9-2006 for the asst. year 2000-01. He further submitted that identical issue had come for consideration of this Tribunal in the case of Dhanalakshmi Bank Ltd. in ITA Nos. 949 and 990(Coch)/2004 order dated 28-7-2006. The ld. DR was fair enough to submit that this issue is covered in favour of the assessee bank by the decision of this Tribunal in assessee's own case as well as by the decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra). 11. An identical issue had come for the consideration of this Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) wherein it was held as under: 10. Now, before the introduction of Section 14A, the Apex Court has dealt with this issue in the case of Rajasthan State Warehousing Corporation 242 ITR 450. In the said case also, the Assessing Officer had made disallowance of the expenditure which was referable to the non-taxable income being exempt Under Section 10(29) of the Act. The Apex Court also referred to the judgment in the case of Indian Bank Ltd. 56 ITR 77(SC), The Apex Court has laid down the following principles: In view of the above discussion, the following principles may be laid down: (i) if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come or in other words Income which does not form part of the total income. Moreover, the ratio decidendi of Rajasthan State Warehousing Corporation (supra) could not be nullified even after introduction of Section 14A that if the business of the assessee is indivisible one, then no disallowance can be made on proportionate basis and entire expenditure is allowable. 13. In the case of the assessee bank, it is an admitted position that the assessee is having the indivisible business and considering the nature of the business of the assessee the investment in the tax free bonds or investment in the shares may be in the nature of stock-in-trade. There is no identity in respect of the funds applied for investment in the tax free bonds, or shares and funds which are applied for earning taxable income. The ld. Counsel submitted that the assessee bank is also having the surplus funds and reserves from which the investment is made and that makes the case of the assessee that the funds applied for investment cannot be said to be interest or cost bearing funds alone. 14. The Assessing Officer has adopted the method which is not prescribed as per the provisions of Sub-section (2) of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee by the decision of the Jurisdictional High Court in the case of CIT v. Nedungadi Bank Ltd. 264 ITR 545 (Ker) and CIT v. Citibank NA 264 ITR 18 (Bom). The ld. DR was fair enough to submit that this issue also covered in favour of the assessee by the decision relied on by the assessee's CA. 15. An identical issue had come for the consideration before the Hon'bie High Court of Kerala in the case of Nedungadi Bank Ltd. (supra) wherein it was held as under: The last question arising for consideration in some of these appeals is as to whether the Tribunal was justified in allowing the claim for deduction of the interest paid for the broken period for the acquisition of the securities till the date of such acquisition. In fact, the said question is squarely covered by the decision of this court in South India Bank Ltd.'s case [2000] 241 ITR 374. This court in the above decision held that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of the total income of the bank under the head Profits and gains of business or profession. In view of the said decision, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Jurisdictional High Court in the case of Travancore Cements Ltd. 161 CTR 124 (Ker). 18. The ld. DR vehemently submitted that the CIT(Appeals) has not at all properly appreciated the facts as well as the principles laid down in the case of Rasi Cements Ltd. v. CIT 275 ITR 579 (AP). He further argued that presuming that the assessee bank made the contribution in consequence of honouring the agreement between the associate banks and bank officers' association, it cannot be denied that the same contribution was for floating the funds and there is a specific bar for allowing the deduction Under Section 40A(9) of the Act. 19. Per contra, the ld. CA for the assessee submitted that the Associate Bank Officers Association has raised some demands on the management of the State Bank of India and its subsidiary banks. One of the demands was formulation of medical scheme for the retired officers. He further submitted that for the settlement of the demands of the Associate Bank Officers Association a meeting of the management of the associate banks and the office bearers of the association was held at Simla on 23-6-1997. In the said meeting, negotiations were held in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs' union, it is out of business expediency. The ld. CA further argued that in the case of Rasi Cements Ltd. (supra), there was no agreement between the said assessee's management and the union of the executive officers and on that basis, it was held that it was a unilateral act on the part of the said assessee company to make the payment and hence though the ld. Sr. DR has relied on the decision of the Andhra Pradesh High Court in the case of Rasi Cements Ltd. (supra), the said decision is distinguishable on facts. The ld. CA supported the order of the CIT(A). 21. We have heard the rival submissions of the parties. We have also given thoughtful consideration to the facts pertaining to this issue as per record available before us. For a better understanding of the facts in respect of the contribution made by the assessee bank to the medical scheme, we have directed the assessee bank to file the relevant documents. The ld. CA of the Act has filed the copies of the following documents: Sr. No. Date Particulars 1. 15-9-1997 Letter from State Bank of India to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees, Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion out of the sums paid by the assessee be transferred to him and where any such claim is so made such asset shall be transferred to the assessee as early as possible. 23. Sub-section (10) to Section 40A was also introduced at the same time for giving relief, it being in the transitional stage and that was to ensure the bonafide contribution made before the 1st March, 1984. Sub-section (10) and Sub-section (11) had a limited application to contributions made between 1-4-1979 to 1-3-1984. Section 40A(9) reads as under: 40A(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under Clause (iv) or Clause (v) of Sub-section (1) of Section 36, or as required by or under any other law for the time being in force. On a bare reading of the said provision, it is very clear that any sum paid by the assessee as an empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s aspect has to be taken into consideration for keeping a healthy relation with its employees as a good businessman. 26. It isn't in dispute that the Circular issued by the CBDT are contempotanea exposition and that can be used as an aid for interpreting the legislative intent for introducing a particular provision or enactment as held by the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO 131 ITR 597(SC). The CBDT has issued the Circular No. 387 dated 6-7-1984 which is reproduced hereinabove. The basic intention of the legislature for insertion of Sub-section (9) to Section 40A is for discouraging the practice of creation of camouflage trust funds, etc. ostensibly for the welfare of the employees and transferring huge sums to such trusts by way of contribution. Some of the trusts are to be created or set up as a discretionary trust with absolute discretion to the trustees, to utilize the trust properties in such manner without any proper scheme or safeguards. Moreover, the investment of the trust corpus was also left to the complete discretion of the trustees and it was seen that many a times, the contributions made by the employer used to flow back in the for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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