TMI Blog2017 (7) TMI 1289X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, the legal expenses incurred to defend the suit against the bank to avoid the full compensation should be allowed as deduction in computing the total income u/s 28 of the Act, since the same was incurred in the ordinary course of carrying on the banking business to contest a substantial original demand of USD 10 Billion against the assessee which was reduced substantially in the appeal. We are of the view that the compensation paid in term of judgment of Hon ble High Court of Justice Chanclry Division, Companies Court, London is allowable deduction in view of the commercial expediency. Respectfully following Hon ble Supreme Court, we allow the claim of assessee. This issue of assessee s appeal is allowed. Disallowance of lease premium paid in respect of its bank premises - HELD THAT:- Assessee has made claim of ₹ 1,50,53,817/- on account of lease and premium of various lease of land by the Bank claiming that it is a proportionate of the total leased amount paid because the total lease and premium is spread over the life of lease and proportionately this amount is claimed in each year. AO treated the same as capital expenditure and CIT(A) also treated the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 550,03,05,865/-. For this assessee has raised following grounds: - 1.1 The Commissioner of Income Tax (Appeals) [CIT (A)] erred in confirming disallowance of bad debts written off amounting to ₹ 550,03,05,865/- contrary to law and facts and circumstances of the case. 1.1 The Commissioner of Income Tax (Appeals) [CIT (A)] erred in confirming disallowance of bad debts written off amounting to ₹ 550,03,05,865/- contrary to law and facts and circumstances of the case. 1.2. The CIT (A) erred in arriving at the balance in the provision for bad and doubtful account referred to in sec 36(1)(viia) by artificially pegging the credit balance in the provision account by the amount allowed u/s 36(1)(viia) in the previous and the current assessment year which is unreasonable and uncalled for. 1.3. The CIT(A) ought not to have ignored the account for provision for bad and doubtful accounts as maintained by the appellant having made entries for debits and 'C credits of actual amount of provision allowed and bad debt written off as required under the provisions of the Act and hence the same cannot be rejected. 1.4. The CIT(A) ought to have appreciated that sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision in the provision for bad debt in fact there was provision for bad and doubtful debt of ₹ 348, 79,62,0551- for A. 1'. 2003-04 and for A. Y. 2004-05 the provision was R5.375,96,30,8451% As a matter of fact no bad debt was allowed in AY: 2003-04. Hence, the same is available for adjusting the claim of bad debt of It. 132,93,97,624/- in this year. Since the claim of bad debt is less than the provision, the A.0. has rightly disallowed the claim of the appellant. The disallowance is confirmed and appeal on this round is dismissed. Following the decision of my predecessor the ground of appeal is dismissed. Aggrieved, now assessee is in second appeal before Tribunal. 4. At the outset, the learned Counsel for the assessee stated that exactly the identical issue has been allowed by Tribunal in assessee s own case for the AY 2001-02 in ITA No. 1498/Mum/2011 vide order dated 09-04-2014. The Tribunal following the decision of Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (2012) 343 ITR 270 (SC) allowed the claim of the assessee by observing in Para 2.5 to 2.7 as under: - 2.5 Having considered the rival submissions and careful perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rustrate the object of granting such deductions. The Revenue's argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) Vijaya Bank 323 ITR 166 (SC) referred). 10. In that case the Apex Court has held that the bank would be entitled to both the deductions, one under Clause (vii) on the basis of actual write off and another on the basis of clause (viia) in respect of mere provision. Further to prevent to double deduction, 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 off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). It follows that deduction u/s 36(1)(viia) is to be allowed only on the amount of provision made for bad and doubtful debts subject to the maximum on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quidators of BCCI as per the orders of courts in UK contrary to law and facts and circumstances of the case. 2.1 The CIT (A) erred in confirming the disallowance of compensation of ₹ 364,64,32,957/- paid to the liquidators of BCCI as per the orders of courts in UK contrary to law and facts and circumstances of the case. 2.2 The CIT(A) failed to note that the compensation was required to be paid in deference to a court order and as a matter of business expediency since non-payment would prejudice continuation of banking business in U.K. and therefore is allowable in full. Reliance is placed on the decision of Apex Court in CIT V Udaypur Distillery Co. Ltd. 314 ITR 181. 2.3 The CIT (A) ought not to concluded that the appellant hank was a party to the fraud committed by BCCJ against its creditors and hence the payment of compensation did not arise in the course of carrying on its banking business over-looking the fact that the order of court is in connection with a civil proceeding against the appellant and the payment was only a compensation as by the court order itself. 2.4 Without prejudice to the above, the CIT(A) ought to have allowed in any case the interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... committed by BCCI and because the assessee was a party who connived with the BCCI in the fraud. Therefore, the A.O. has rightly disallowed the claim of the assessee holding it as expenditure incurred on account of fraud not relating to the normal business of the assessee. The claim of the assessee relating to the interest on the compensation and litigation expenses regarding the said claim are also not allowable for the same reasons because they are also related to the fraudulent activity and compensation for that. 16. The A.O. has also disallowed the claim of the assessee on the basis that expenditure does not pertain to the year under consideration, which has also been disputed by the assessee. But once it has been held that it is relating to a fraud, the relevant year will not make any difference. But in any case if at any sage it is found as allowable business expenditure then it can be considered under the year under consideration in view of the decision of Saurashtra Cement and Chemical Industries Ltd. vs. CIT 213 ITR 523 (Gui) and Toyo Engg. India Ltd. vs. JCIT 100 TTJ 373, ITAT, Mumbai, both the judgments are relied upon by the assessee. To this limited extent the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom total income and therefore the loss sustained by a foreign branch cannot be allowed as deduction. He argued that as per the provisions of section 90(2) of the Act, the provisions of the Indian Income Tax Act shall apply to the extent they are more beneficial to the assessee and in respect of London branch where there was a loss, the income should be taxed in accordance with the normal provisions of the Act. Hence the above loss should be reduced in computing the total income. He further explained that the AO disallowed the above sum on the ground that it does not relate to the current assessment year since the transactions took place during financial years 1981 to 1986. He submitted that the liability to pay has crystallized arose and became payable only in the current year based on the orders of High Court of Justice, Chancery Division, Companies Court, UK dated 19/03/2004 and 26/03/2004 and therefore cannot be disallowed for the current assessment year. He placed reliance on the decisions in support of its contention of Hon ble Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd Vs CIT 213 ITR 177 523 (Guj) and ITAT Mumbai Tribunal in the case of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimate winding up. The assessee had absolutely no control or supervision of the management whatsoever on the transactions entered into by BCCI, which is a separate and distinct and legal entity from the assessee. Hence the said BCCI was ultimately held liable for payment of certain sums, consequent on which the assessee was also required to pay compensation. Further even under normal proceedings of law present in India, the banks incur huge losses in respect of loans and advances granted by them in normal course of banking due to fraudulent practices followed by the borrowers, and not utilizing loans for the purpose for which it was sanctioned, large scale diversion of bank loans for personnel use, not having sufficient stock or other securities and utilizing the bank funds for speculative purposes, as a result of which the banks are unable to realize their dues in full. In such circumstances the banks usually write off such debts either as bad debts or trading loss and no questions are raised about the misuse of the banks funds by the borrowers and the losses are allowed in full even though the borrowers had cheated or defrauded the banks in such cases resulting in criminal pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... things. The first is that each of the transactions was entered into by BCCI SA and BCCI Overseas to assist them and their holding company, BCCI Holdings (Luxembourg) SA ( BCCI Holdings ), to maintain the concealment of serious had debts and losses incurred by the group on a number of customer accounts and as a result of metal trading carried out for their own account There is no dispute about this. The conduct of BCCI (by which I refer to the group as a whole) was undoubtedly fraudulent and this is now common ground between the parties to this application. The second allegation is that BOI, by entering into these six transactions under review, knowingly participated in the carrying on of the business of BCCI SA and BCCI Overseas with intent to defraud the creditors of those companies or for a fraudulent purpose. If this allegation (which is denied) is made out, then I have jurisdiction u/s. 213 of the Insolvency Act 1986 to order BOI to pay compensation to the liquidators for the losses to creditors which have been sustained. 10. We have gone through the argument of both the sides and noted that the transactions of the London Branch of the assessee were perfectly legal and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 the Tribunal has held that the heroin seized was the assessee's stock in trade it is implicit that the Tribunal reiterated to view that the assessee was doing the business of manufacture and sale of heroin. Once the Income Tax authorities records such a finding of fact, it follows that any loss from such a business is a business loss. The facts of this case are squarely covered by the decision of this Court in CIT vs. Piara Singh AIR 1980 SC 1271 which was a case of an assessee carrying on smuggling activity and this Court held that the loss arising out of confiscation of currency notes must be allowed as a business loss. In the order of the Tribunal dated 14.10.1998 there is a finding of fact in paragraph 8 to the effect that the heroin forms part of the stock in trade of the assessee. In view of this finding, the Tribunal allowed the assessee's claim of deducting the loss of 5 kg. of heroin whose value was assessed by the Tribunal at ₹ 2 lacs as a business loss. We fully agree with the view taken by the Tribunal. The High Court, however, in paragraph 10 of its judgment observed: The assessee in this case was engaged in profession of doctor. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in computing the total income. Further, the legal expenses incurred to defend the suit against the bank to avoid the full compensation should be allowed as deduction in computing the total income u/s 28 of the Act, since the same was incurred in the ordinary course of carrying on the banking business to contest a substantial original demand of USD 10 Billion against the assessee which was reduced substantially in the appeal. 12. In view of the above facts of the case, we are of the view that the compensation paid in term of judgment of Hon ble High Court of Justice Chanclry Division, Companies Court, London is allowable deduction in view of the commercial expediency. Respectfully following Hon ble Supreme Court, we allow the claim of assessee. This issue of assessee s appeal is allowed. 13. The next issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of lease premium paid in respect of its bank premises amounting to ₹ 1,50,53,817/-. For this assessee has raised following grounds: - 3.1 The CIT (A) erred in disallowing as capital expenditure the amortized lease premium paid in respect of its bank premises amounting to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the reason that the stamp duty paid in relation to acquisition of lease or land for a long period. The details of lease period were not furnished before the AO and hence the AO disallowed the same as capital expenditure. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the vide Para 35 of his appellate order as under: - 35. I have considered the facts of the case an submissions of the assessee. The AO has treated the lease premium paid by the assessee as capital expenditure and decision relating to that of the A.O. has been confirmed by me in earlier ground and similarly confirmed by my predecessor in the appeal for AY. 03-04 and, therefore, the lease premium has been held as capital expenditure and therefore acquisition of capital asset. Accordingly, stamp duty paid is part of the acquisition of land on lease which has been held as capital expenditure. Therefore, the expenses on stamp-duty are also held as capital expenditure. The assessee has relied on the decision of Hon'ble Bombay High Court in the case of Richardson Hindustan Ltd (supra) but in that case the Hon'ble High Court has held the lease as business and revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so far as the assessee is concerned, it has taken the premises on lease. In terms of lease deed it is required to pay certain amount per month as rent to the lessor and certain other amount as commission to the estate agent during the period of lease for use of the premises. In the circumstances, we find force in Shri Dastur's submission that though described as commission the exact nature of payment is more like rent. Assuming that the payment is in the nature of commission or brokerage even then it would have to be allowed as deduction as held by this Court in the decisions relied on by Shri Dastur. 19. In view of the above, decision of Hon ble Bombay High Court wherein it is held that expenditure incurred by the assessee by way of stamp duty etc., in connection with lease agreement was covered by its own decision in the case of CIT vs. Cinceita (P.) Ltd. (1982) 137 ITR 652 (Bom), respectfully, following the same we allow the appeal of the assessee on this issue. 20. The next issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of expenditure relatable to exempt income under section 14A of the Act. For this assessee has rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early given under Rule 8D which is not applicable for the year under consideration. Further the securities are maintained by the assessee as stock in trade and the income arising from the sale and purchase of securities is taxable as business income of the assessee, therefore, the expenditure if any incurred on account of administrative expenses for maintaining these securities the whole of the said expenditure cannot be attributed to the dividend income when the income arising from the sale and purchase of the securities is taxable. Accordingly only a reasonable estimate has to be made for disallowance of expenditure u/s 14A in respect of earning of dividend income and tax free interest. The Coordinate Bench of this Tribunal in the case of DCIT Vs. HDFC Bank Ltd. (supra) in para 7.1 and 7.2 has considered an identical issue as under:- 7.1 In the case in hand, the CIT(A) considered the facts and pointed out that the assessee is maintaining the treasury department which looks after the day to day investment portfolio of the bank including tax free investments. Having regard to the said factual proposition, the administrative expenses relatable to the income not forming part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of profit in foreign branches. The AR submitted that complete and comprehensive submissions made before the CIT(A), who after considering the submissions, allowed the assessee s appeal. The AR, thus pointed out the relevant portion of the written submissions also placed before us. The respondent had excluded the income from foreign branches based on Double Tax Avoidance Agreement entered into between the Govt. of India and the Govt. of the respective countries. The AO had granted relief only in respect of branches at Singapore and Japan and in respect of the other branches denied the benefit to the appellant. The CIT (A) allowed the claim of the respondent based on the decision of Hon ble ITAT in appellant s own case. The respondent submits that this issue has been decided in favour of the assessee by Supreme Court of India in CIT Vs PV.AL.Kulandagan Chettiar, reported in 267 ITR 654 which upheld the decision of ITAT Chennai in the case of PV.AL.Kulandagan Chettiar Vs ITO (3 ITD 426). The ITAT had held that So the argument that the agreement must be so interpreted as to retain the taxation powers with the Government of India in order to prevent fiscal evasion has only to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al provisions. The coordinate Bench in the case of the assessee, in the earlier year s case held, As a result he also found that the issue already decided by the Tribunal in assessee s own case for the earlier years have to be followed. We do not find any infirmity in the above finding of the CIT(A). Therefore consistent with the earlier finding of the Tribunal in assessee s own case for the earlier years case, we do not see any merit in the ground taken by the Revenue . The AR submitted that in the instant case also, the view should be taken in the assessee s favour. Even Hon ble Bombay High Court also confirmed the decision of Tribunal in Income Tax Appeal No. 1630/Mum/2012 vide order dated 07-01-2015, wherein Hon ble High Court has dismissed the Revenues contention by observing in Para 4 as under: - 4. With the assistance of Mr. Suresh Kumar and Sanjiv Shah, we have perused the memo of Appeal. The Assessing Officer was satisfied that the benefit of the Double Taxation Avoidance Agreement is admissible provided the proof is produced in relation to payment of taxes by the Assessee abroad. In other words, if the Assessee has permanent establishment abroad, then, the As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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