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TMI Blog2011 (3) TMI 1691X X X X Extracts X X X X X X X X Extracts X X X X ..... ears, which are as under:- a) For assessment year 2002-03 - Ground Nos. 1 & 3 b) For assessment year 2003-04 - Ground Nos. 2, 3 & 4 c) For assessment year 2004-05 - Ground Nos. 3 to 5& 8 d) For assessment year 2005-06 - Ground Nos 1 & 5 to 8 e) For assessment year 2006-07- Ground Nos 1, 6 & 7 4. The learned AR pointed out that COD approval had been granted for the balance grounds. In the absence of COD approval, all the abovesaid grounds raised by assessee are dismissed. Accordingly, the aforesaid grounds of appeal relating to the respective assessment years as indicated above, filed by the assessee, are dismissed for technical reasons. 5. Consequently, the following grounds of appeal are left for adjudication by the Tribunal in respect of the assessment years indicated against each:- Assessment year 2002-03 Ground No.3 - That the learned Commissioner of Income-tax (Appeals) Patiala has erred in upholding the addition of ₹ 2,93,24,755/- on account of bad debts recovered during the year. Assessment year 2003-04: Ground No.1 - that the Ld. CIT(A), Patiala has erred in upholding the disallowance of ₹ 66,44,710/- u/s 14A of the Act against tax free incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered during the year. 5. That the Ld. CIT(A) has erred in holding that prior period expense and prior period income as per Tax Audit Report pertains to respective previous years without following the order of the Hon'ble ITAT and, as such, retaining the addition of ₹ 41,58,174/-. 6. We proceed to take up the appeal in ITA No.136/Chd/2009 relating to A.Y. 2003-04 to dispose off the grounds of appeal, for which approval has been granted. 7. The issue in Ground No.1 raised by the assessee is against the disallowance made u/s 14A of the I.T.Act. 8. The brief facts of the case are that the assessee had filed return of income declaring net income of ₹ 543.72 Cr. Case was picked up for scrutiny in view of the Board's Circular. The assessee filed a revised return on 22.12.2004 declaring income of ₹ 538.97 Cr. The reasons for revising the return of income, as per the assessee, were (a) Revised claim of deduction u/s 10(23G); (b) Credit for TDS on account of 57 TDS certificates received late; (c) All debits written off in earlier year recovered during the year have been reduced from the income; (d) Prior period expenses not added back to the income; and (e) The revi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0/-. The assessee is in appeal against the said order of CIT(Appeals). 10. The learned AR for the assessee pointed out that the assessee being a banking company, its main business was acceptance of deposits and earning of income from funds received as deposits. He further pointed out that investment in securities, was incidental to the main banking business and was on account of statutory requirement of Banking Regulation Act for maintaining statutory liquidity ratio. Learned AR further submitted that only its actual expenditure could be disallowed and no disallowance on the basis of estimated expenditure could be made. Further it claimed that expenditure had been incurred for the purpose of earning business income which was exempt to a certain extent. Reliance was placed on the ratio laid down by the Kerala High Court in CIT V Catholic Syrian Bank Ltd. & Ors (2011) 49 DTR 57 (Ker). 11. The Learned DR for the Revenue placed reliance on the under mentioned decisions : i) Godrej & Boyce Mfg.Co.Ltd. V DCIT & Anr, 234 CTR 1 (Bom) ii) Punjab National Bank V DCIT, 103 TTJ 908 (Del) iii) Pradeep Kar V ACIT, 319 ITR 416 (Kar) iv) DCIT V Tata Investment Corporation Ltd., 113 TTJ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, and the total infrastructure is used for the purpose of attainment of its objects which include investment in group concerns and other companies. The income earned on such investments by way of dividend income was exempt under the provisions of Section 10(33) and by invoking the provisions of S.14A, such expenditure attributable to earning of dividend income was to be disallowed under the provisions of the Act. Therefore, the A.O. was directed to disallow the portion of salary expenditure incurred during the year under consideration which in turn had been incurred for the purpose of carrying out the objects of the assessee company. The assessee was directed to furnish the break up of salary expenditure incurred during the year under consideration, where services of such employees had been utilized for the purpose of carrying out the objectives of the assessee company. In case of failure on the part of the assessee to furnish the requisite details, the A.O. was left with no option but to estimate such expenditure which is attributable to earning of dividend income, which in turn can be limited to the extent of percentage of dividend income earned vis-à-vis the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entirety of the abovesaid ratios laid down on the subject and the facts of the present case, we are in conformity with the order of the CIT(Appeals) that in the absence of the details being maintained in respect of expenditure incurred on the exempt income and the taxable income separately, the expenditure attributable to earning of tax free income needs to be estimated. We find the CIT(Appeals) had estimated the said disallowance at 2.5% of the tax free income earned by the assessee. Upholding the same, we dismiss the Ground No.1 raised by the assessee. 17. The issue in Ground No.5 is against the addition on account of bad debts recovered during the year. The assessee, in the revised return filed had reduced ₹ 4,52,49,330/- from its income, on account of bad debts which were recovered during the year on the plea that income of bad debts was neither claimed and nor allowed as a deduction in the years in which it was written off and hence are not covered under the provisions of Section 41(1) of the I.T.Act. In the Audit Report at Sr.No.18 of column No. 3CD, the CA had mentioned that the amount recovered on account of advance written off was credited to the Profit & Loss Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off and whether claimed as deduction or not. The learned AR failed to furnish the requisite details except to reiterate its stand before the authorities below. The learned DR placed reliance on the orders of authorities below and pointed out the same is includible in the hands of assessee. 19. We have heard the rival contentions. The assessee during the year had recovered bad debts totaling ₹ 4.52 Cr. In the original return of income, the same was included as income by the assessee. However, the assessee filed Revised Return of Income and vide Note No.3 it was claimed as under : "Bad debts written off earlier year and recovered during the year amounting ₹ 4,52,49,329/- though credited to profit and loss account have been reduced from income as debts have been neither claimed nor allowed as deduction in the year of writing off and hence are nor covered by provision of Section 41(1) of the Act." 20. The return of income was revised to the extent of bad debts recovered totaling ₹ 4.52 Cr. The copy of revised computation of income is placed at pages 5 to 5 of PB-1. During the course of assessment proceedings, the explanation of the assessee was as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad debts recovered during the year are to be included as income in the hands of the assessee in view of the provisions of Section 41(4) of the Act. 22. The Assessing Officer during the assessment proceedings carried out pursuant to notice issued u/s 148 of the Act relating to assessment year 2002-03, in respect of claim of bad debts recovered not being chargeable to tax, had issued letter dated 23.10.2008 u/s 133(6) of the Act to the auditor G.S.Goel &Co. and in response it was replied as under:- "We are in receipt of your above referred letter on 29.10.2008 and have noted its contents. In response to the same we wish to submit the following reply. The amount of ₹ 2,93,24,755.99 recovered against bad debts written-off and allowed as expenditure in earlier years u/s 36(1)(vii) of the Act is chargeable to Income Tax U/s 41(4) of the Income Tax Act, 1961…………….. In our Tax Audit report, in reply to Point No.20 regarding amount chargeable to tax u/s 41, we have mentioned that amount recovered in respect of advances written off is ₹ 2,93,24,755.99 and is chargeable to tax u/s 41 of the Income Tax Act, 1961. However, the same has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(viia) of the Act. However, the CIT(A) directed the Assessing Officer to verify the list of branches submitted by the assessee and worked out the addition on that basis. 26. We have heard the rival contentions of the parties and perused the records. Under Section 36(1)(viia) of the Act, deduction is to be allowed in respect of any provision for bad and doubtful debts made by a scheduled bank or non scheduled bank or specified c-operative bank equal to an amount no exceeding 7 ½ % of total income computed before allowing any deduction under this clause and Chapter VI A and "an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. 27. Further deductions are enshrined in the various provisos under the sub-section. However, in the present case the issue i.e. in connection with the 'advances made by Rural Branches". The term "Rural Branch", for the purpose of this clause has been defined under Explanation to Section 36(1)(viia), Clause (ia), which provides as under : (ia ) 'rural branch' means a branch of a scheduled bank {or a non-scheduled bank ] situated in a place which has a population of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is further stated "Therefore, while classifying towns or rural areas only the Final Population Total be used not the Provisional Population totals, which in some cases may vary significantly from the population. This final population figures were released in December,2003 for use by data." Hence the final population figures were released in December, 2003. 33. Thus, for the purpose of 36(1)(viia) read in conjunction with the meaning of 'Rural Branches', provided vide the Explanation under the sub-section, is the branch situated in a place with population less than 10000 as per the figures of Census, which had been published before the first day of the previous year is to be considered for computing the deduction. The word used is 'published' and same refers to final figures of population and not the provisional figures of population, which admittedly are released within one month. Vide letter dated 21.7.2001 only provisional results for Census 2001 were published upto town level and no date was released at village level. The final population figures were released in December, 2003 as per communication dated 10.5.2008 and 31.5.2006. In the above said facts and circumstances, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with ground No.5 raised in assessment year 2003- 04, we dismiss the present ground of appeal raised in assessment year 2002-03. 40. The ground No.7 raised by the assessee is in connection with the computation of deduction u/s 36i)(viia) of the Act. The assessee had raised similar issue vide ground No.6 in assessment year 2003-04 and the same has been allowed by us in the paras hereinabove with directions. The factual aspects being identical in the year under appeal as no data was available on 1.4.2003, the Census report 1991 was applicable for determining the rural branches for allowing deduction u/s 36(1)(viia) of the Act. However,, we remit the issue back to the Assessing Officer to determine the said deduction in line with our direction vis-a-vis ground No. 6 raised in assessment year 2003-04. 41. In the result, appeal of the assessee in ITA No. 328/Chd/2009 is partly allowed. Assessment years 2005-06 & 2006-07 42. The issue in ground Nos. 2 & 3 in both the years are identical to the issues raised vide ground Nos 1 & 2 in assessment year 2004-05 and the facts being identical, the same are also dismissed in line with our order in paras hereinabove. 43. The issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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