TMI Blog2017 (4) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... ment was considered incidental to the business of banking to the assessee, in our opinion, Section 14A of the Act could not have been applied. Thus disallowance under Section 14A of the Act could not have been made in the assessee’s case for investments which were considered as part of stock-in-trade for tax purposes. - Decided in favour of assessee Method of calculation of Aggregate Average Rural Advances for the purpose of application of Section 36(1)(viia) not adjudicated by the Ld. CIT(Appeals) - Held that:- Irrespective of the fact whether computation made by the Assessing Officer is having an effect on the taxable income of the assessee, Ld. CIT(Appeals) ought to have decided the ground raised by the assessee on merits. We are, therefore, of the opinion that ground No.10 raised before the Ld. CIT(Appeals) needs to be adjudicated by him. We, therefore, set aside the order of the CIT(Appeals) and remit the issue back to the file of the Ld. CIT(Appeals) for consideration Disallowance of clam under Section 36(1)(viii) - Held that:- Assessee cannot be stopped from making an enhanced claim of deduction. It is not a case where the assessee had not made any claim under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d held that ex-gratia payments could not be disallowed if it was found to be commercial expedient. Therefore, in our opinion, Ld. CIT(Appeals) was justified in disallowing this issue.- Decided in favour of assessee Disallowance of entertainment expenses - Held that:- It is not disputed that the claim of entertainment expenditure was in relation to customers of the assessee-bank. There is no ground for the Revenue that entertainment expenditure was incurred by the employees of the assessee for their own benefit. In the nature of business of the assessee, we cannot say that the entertainment expenditure claimed by the assessee was not required to be incurred. In any case, there is no reason why an ad-hoc disallowance of 5% was made. If the Assessing Officer was of the opinion that any expenditure was not vouched, he could have made disallowance for such expenditure. In our opinion, the CIT(Appeals) was justified in deleting 5% disallowance made by the Assessing Officer. Addition made for interest accrued on NPAs - Held that:- Only for non-viable or sticky advances having irregularities falling within sub-clause (ii) alone the six months limitation apply. However, where accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gave rise to such income. The Assessing Officer held that this was not acceptable. He applied Section 14A of the Act read with Rule 8D of Income-tax Rules, 1962. However, the disallowance was restricted to 2% of such income. Such disallowance came to ₹ 5,46,512/-. 5. Aggrieved, assessee moved in appeal before the CIT(Appeals). Argument of the assessee was that investments made were a part of its treasury operations. As per the assessee, the expenditure relating to Treasury Department was a necessary corollary to the banking operations. Claim of the assessee was that for the purpose of income- tax, entire portfolio of investments, including the tax-free securities, were treated as stock-in-trade. As per the assessee, since the investments were part of stock-in-trade, disallowance under Section 14A of the Act could not be made. However, Ld. CIT(Appeals) was not impressed by the above argument. According to him, assessee had received tax-free dividend of ₹ 1,66,21,733/- on shares worth ₹ 82.72 Crores and dividend of ₹ 41,07,03,886/- on mutual funds units of ₹ 573.44 Crores. As per Ld. CIT(Appeals), assessee itself had admitted using its Treasury Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. According to him, assessee had classified the shares under the head Investments and not stock-in- trade in its balance sheet prepared in accordance with Banking Regulation Act. As per Ld. D.R., assessee was claiming such investments to be a part of stock-in-trade for the purpose of income- tax only. According to him, Section 14A of the Act clearly applied and the Ld. CIT(Appeals) correctly applied Rule 8D(2)(iii). 8. We have heard the rival contentions and perused the orders. Claim of the assessee is that shares/units held by it whether classified as investment or stock-in-trade in balance sheet, that has to be considered as stock-in-trade only for tax purpose, and Section 14A of the Act had no application. Circular No.18 dated 02.11.2015 of CBDT is reproduced hereunder:- Subject: Interest from non-SLR securities of Banks Reg. It has been brought to the notice of the Board that in the case of Banks, field officers are taking a view that, expenses relatable to investment in non-SLR securities need to be disallowed u/s 57(i) of the Act as interest on non-SLR securities is income from other sources. 2. Clause (id) of sub-section (1) of Section 56 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es was exempt from tax in view of sections 10(15)(iv)(h),(34) and (35). This was incidental to its business of banking. The business income on account of the assessee trading in the securities is assessable under the head Profits and gains of business or profession . The expenditure incurred in relation to stock-in-trade arising as a result of investment in shares and debentures is deductible under sections 28 to 37. 9. Once holding of investment was considered incidental to the business of banking to the assessee, in our opinion, Section 14A of the Act could not have been applied. Para 26 of the very same judgment is also relevant and it is reproduced hereunder:- 26. What is of vital importance in the above judgment are the observations emphasized by us. Each of them expressly states that what is disallowed is expenditure incurred to earn exempt income. The words in relation to in section 14A must be construed accordingly. Thus, the words in relation to apply to earning exempt income. The importance of the observation is this. We have held that the securities in question constituted the assessee s stock-in-trade and the income that arises on account of the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer restricted the claim to ₹ 24,48,02,775/- being the actual provision made for bad and doubtful debts in its Profit Loss account. Work out given by the Assessing Officer read as under:- (a) Aggregate average rural advances during the year 18,45,11,366/- (b) Deduction allowable on aggregate rural advances [@ 10% of (b)] 1,84,51,137/- (c) 7.5% of Gross Total Income before deduction under chapter VIA 26,39,18,480/- (d) Total of (b) and (a) 28,23,69,617/- (e) Provision made for Bad and doubtful debts by the Bank 24,48,02,775/- (f) Least of (d) or (e) allowable as deduction u/s 36(1)(viia) 24,48,02,775/- 14. Aggrieved, the assessee moved in appeal before the CIT(Appeals). Ld. CIT(Appeals) was of the opinion that the actual amount of deduction computed by the assessee as well as the Assessing Officer was very same. As per the Ld. CIT(Appeals), the ground was purely academic, since, according to him, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on the judgment of Hon'ble Apex Court in Goetze (India) Ltd. v. CIT (284 ITR 323). As per the Ld. A.O., the calculation adopted by the assessee in the original claim was for ₹ 16,25,20,366/- whereas only ₹ 13,22,62,398/- was allowable. 21. In its appeal before the CIT(Appeals), argument of the assessee was that it was eligible for a claim of ₹ 20,00,00,000/-. Assessing Officer had reduced the claim by not accepting the deduction of non-cash expenditure. As per the assessee, it had created a special reserve of ₹ 20 Crores and was eligible for deduction of ₹ 20 Crores under Section 36(1)(viii) of the Act. Ld. CIT(Appeals) was of the opinion that the enhanced claim could not be allowed in an appellate proceeding. As per Ld. CIT(Appeals), assessee had not placed before the Assessing Officer the re-worked computation of profits from eligible business. Relying on judgment of Apex Court in the case of Jute Corporation of India v. CIT (1991) 187 ITR 688, Ld. CIT(Appeals) held that only a bonafide ground, which could not be raised earlier for good reasons, could be considered in an appellate proceeding. Relying on the judgment of Apex Court in Nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36(1)(viii) of the Act back to the file of the A.O. for consideration afresh in accordance with law. 25. Ground No.4 of the assessee stands allowed for statistical purposes. 26. Now, we take up the cross-appeal of the Revenue. 27. Revenue has raised 15 grounds. Ground No.1 and 15 are general needing no adjudication. 28. Vide its grounds numbered 2 to 5, grievance raised by the Revenue is on an addition made by the Assessing Officer for stale draft account which was deleted by the Ld. CIT(Appeals). 29. Facts apropos are that balance sheet of the assessee for relevant previous year disclosed outstanding liability of ₹ 8,82,15,584/- towards stale draft account. The above sum represented unclaimed money on demand drafts, which were issued more than three years earlier. As per the A.O., legally, such money which remained unclaimed for more than three years could no more be claimed by the creditor, since limitation period kicked in. He treated the sum as income of the assessee, but, restricted that addition to ₹ 2,68,97,833/- being the accretion relatable to the relevant previous year. Reliance was placed on the judgment of Hon'ble Apex Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal drawer. Assessee held the money only as a trustee in fiduciary capacity. Once the money is held as trustee, the question of limitation will not arise at all. In any case, RBI itself has issued a Notification on 24.05.2014 mandating the banks to transfer such unclaimed amounts to Depositor Education and Awareness Fund Scheme . In our opinion, in such circumstances, Ld. CIT(Appeals) was justified in taking the view that the amount cannot be construed as income of the assessee. We do not find any reason to interfere in the order of the CIT(Appeals). 34. Ground Nos. 2 to 5 of the Revenue stand dismissed. 35. Vide its ground Nos.6 to 10, grievance raised by the Revenue is that the CIT(Appeals) deleted the disallowance for ex-gratia payment made by the assessee. 36. Facts apropos are that assessee had made ex-gratia payment of ₹ 8,12,68,024/- to its employees who were not covered under Payment of Bonus Act, 1965. Ld. A.O. held that it was nothing but appropriation of profits by senior employees who had income in excess of ₹ 10,000/- per month. As per Ld. A.O., there was no co- relation between the ex-gratia payment and the quality of work of these employees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex-gratia payments are required or not was a business decision. In our opinion, the Assessing Officer could not have put himself in the shoes of the businessman and decide whether employees concerned were eligible for such ex-gratia payment. When part of employees alone were eligible for bonus under Payment of Bonus Act, the assessee, in our opinion, was justified in taking a business decision as to how to treat those employees who were not covered by such enactment. Assessee cannot be faulted for making such payment so as to ensure smooth and better relationship with its employees. In any case, we find Hon'ble jurisdictional High Court in the case of Kumaran Mills Ltd. (supra) had held that ex-gratia payments could not be disallowed if it was found to be commercial expedient. Therefore, in our opinion, Ld. CIT(Appeals) was justified in disallowing this issue. 41. Ground Nos. 6 to 10 are dismissed. 42. Vide its ground No.11, Revenue is aggrieved on disallowance of entertainment expenses made by the Assessing Officer being deleted by the Ld. CIT(Appeals). 43. Assessee had claimed a deduction of ₹ 56,45,550/- as entertainment expenditure. It was clarified by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals). 50. Facts apropos are that assessee was mandated by RBI guidelines to maintain their books on accrual basis. As per A.O., Rule 6EA, which was framed in accordance with Section 43D of the Act, prescribed the categories of bad and doubtful debts in relation to which and the extent to which interest had to be recognized. According to him, if no interest was being paid by a borrower for six months, then such sticky accounts had to be treated as bad and doubtful debts or in other words, Non-Performing Asset. Ld. A.O. noted that RBI had lowered the limit for recognizing an account as NPA from 180 days to 90 days. However, as per the Ld. A.O., there was no such change either in Section 43D or Rule 6EA. As per the A.O., interest was required to be offered for taxation on accrual basis on all NPAs which were more than 90 days old but were less than 180 days old as well. Ld. A.O. demarcated the additions to the list of NPAs made in the last quarter of relevant previous year since these fell under the category of accounts which were more than 90 days old but less than 180 days. He computed an accrued interest of ₹ 74,60,000/- on such accounts having balance of ₹ 59.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be given preference over the provisions of the Act and Income-tax Rules. According to him, clause (a) of Rule 6EA mandated time period of six months, for classifying a loan account as sticky advance. According to him, the CIT(Appeals) was not justified in substituting the period of six months with 90 days. The addition, as per the Ld. D.R., was correctly worked by the A.O. 54. Per contra, the Ld. AR strongly supporting the order of the CIT(Appeals), submitted that this issue had come up before Kolkata Bench of this Tribunal in the case of DCIT v. The Royal Bank of Scotland N.V. 2016(11) TMI 665 and it was held that interest on loans should not automatically be recognized on accrual basis and this had to be in line with RBI prudential norms for income recognition. Reliance was also placed on the judgment of Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. (2011) 330 ITR 440. 55. We have heard rival contentions and perused the orders. A.O. had refused to consider accounts on which principal and interest were outstanding for a period of more than 90 days but less than 180 days, as sticky. According to him, interest on such advances had to be considered on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nature specified in sub-clause (ii) are noticed in the accounts of the borrowers for a period of six months and more and there are no minimum prospects of regularisation of accounts, or where the accounts or information in relation to such accounts reflect usual signs of sickness, such as,-- 1. apparent stagnation in the business as a result of the slow or negligible turnover; 2. frequent requests for over-drawing or issue of cheques without ensuring availability of funds in the account; 3. bills purchased or discounted remain overdue for 3 months and more or the recovery of such bills from the borrower poses difficulties; 4. in the case of term loans, instalments which are overdue for 6 months or more; 5. unexplained delays by the borrower in submission of quarterly or half-yearly operating statements or stock statements or balance-sheets and other information required by the bank; 6. slow movement or stagnation of stocks observed during inspections; 7. low or negligible level of activity observed during inspections or suspension or closure of the business; 8. persistent delay in compliance with vital requirements like execution of do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .T. Act. This issue has been addressed by the Hon'ble Supreme Court in the case of Southern Technologies Ltd. supra in the context of allowability of deduction towards Provision for NPA'. We find that the same decision clearly stated that the interest income on NPA accounts should not be recognized on accrual basis which is in line with RBI prudential norms for income recognition. This fine distinction has been duly considered in the decision of the Hon'ble Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. supra. When the account becoming NPA is not disputed by the revenue, the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances respectfully following the decisions of Hon'ble Delhi High Court in 330 ITR 440 and various other decisions referred to supra, we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Accordingly, the grounds raised by the assessee are allowed. 56. Therefore, in our opinion, CIT(Appeals) was justified in deleting the addition made on interest on NPAs. We do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on 27.04.2010 which fell in previous year ended 31.07.2011 relevant to assessment year 2011-12. 65. The assessee had during the course of appellate proceedings for the impugned assessment year staked a claim for ₹ 17,66,43,818/- being the wage settlement amount disbursed to its employees. As per the assessee, it had disbursed the said sum of ₹ 17,66,43,818/- during the relevant previous year, on dates falling between 22.05.2010 and 18.03.2011. The Ld. CIT(Appeals) was of the opinion that the assessee having disbursed ₹ 17,66,43,818/-, the claim was allowable. 66. Now before us, the Ld. Departmental Representative submitted that the CIT(Appeals) had believed the claim of the assessee regarding actual disbursement of wage arrears without giving any opportunity to the Assessing Officer to verify the facts. 67. Per contra, the Ld. AR strongly supported the order of the CIT(Appeals). 68. We have heard the rival contentions and perused the orders. The CIT(Appeals) had allowed the claim of disbursement of ₹ 17,66,43,818/- on actual payment basis. The provision made by the assessee for such wage arrears in earlier year was disallowed. Against such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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