TMI Blog2016 (4) TMI 1392X X X X Extracts X X X X X X X X Extracts X X X X ..... emption u/s. 10(15)(iv)(h) - assessee had claimed entire interest received on tax free securities exempt u/s. 10(15)(iv)(h) - as per assessee expression income meant net income i. e. receipt minus expenditure - HELD THAT:- AO had allowed expenditure to the extent of ₹ 25. 43 crores and had disallowed expenditure of ₹ 45. 51crores on proportionate basis, that the FAA directed the assessee to furnish details to prove that borrowed funds were not used for making investment yielding exempt income, that the assessee had admitted that it was not possible to co-relate the investment with own funds, the assessee had claimed that its own funds including reserves and surpluses were about ₹ 30, 000 crores for the year under consideration. The AO had applied the provisions of section 14A of the Act. In our opinion law relating to allowing expenditure with regard to exempt income has evolved since the appeal was decided by the FAA for the year under consideration. The AO/FAA did not have the benefit of the cases dealing with the provisions of section 14A, while making the assessment /deciding the appeal. Matter needs further verification/investigation. Therefore, in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd decided against the assessee by the Tribunal in own case [ 2013 (8) TMI 520 - ITAT MUMBAI] - When the allowable claim has been accepted by the AO under the provision of section 36(1)(viia) then merely the provision made on the basis of RBI guidelines does not become allowable for deduction in contravention of the provision of section 36(1)(viia). It is pertinent to note that when the claim of deduction specifically provided u/s 36(1)(viia) then the same cannot be allowed by applying any other provision. - Decided against assessee. Contribution to SBI Retired Employees Medical Fund - Addition u/s 40A - HELD THAT:- Tribunal was of the opinion that provisions of section 40A(9) should not make any harm to the expenditure incurred bonafide, that the contribution by the assessee bank was not disputed by the AO, stating that the same was not bonafide, that the funds were not controlled by the assessee banks, that the bonafide contribution made by the assessee as an employer was not hit by section 9 of section 40A of the Act. In the case under consideration, there is no doubt about genuineness of payment nor it is the case of the AO or FAA that Trust was not bonafide or the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessed Income(Rs. ) Dt. of orders of CIT(A) 1997-98 28. 11. 1997 2086, 56, 04, 580/- 27. 03. 2000 2433, 18, 77, 427/- 24. 3. 2005 1998-99 30. 11. 1998 2816, 41, 01, 920/- 14. 02. 2001 3558, 87, 03, 620/- 28. 3. 2005 3823/Mum/05(97-98): 2. First Ground of appeal is about guest house expenses, amounting to ₹ 1. 19 crores. During the course of hearing before us, the Authorised Representative(AR)fairly conceded that identical issue has been decided by the Tribunal against the assessee in the earlier years. We find that while deciding the appeal for the AY 1996-97 the Tribunal has held as under : 7. Ground No. 3 is regarding guest house expenses. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. We find that an identical issue has been considered and decided by this Tribunal in assessee s own case for the assessment year 1991- 92 vide order dated 19. 5. 2008 in para 21 as under: 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, in part. 3. Third Ground is about disallowance of ₹ 26, 44, 876/- in respect of payment for scientific research. During the assessment proceedings, the AO found that payment of ₹ 26, 44, 876/- had been made out of a fund established by the assessee for scientific research assistance, that the fund was set up out of surplus fund in earlier years, that the payment was not out of the income of the year under consideration. Following the earlier years order the AO disallowed the claim. 3.1. Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority(FAA). After considering the submission of the assessee and the assess ment order he held that his predecessor disallowed the claim made by the assessee while deciding the appeal for AY 1996-97. Following the order of his predecessor for the earlier year he upheld the order of the AO. 3.2. During the course of hearing before us, the AR agreed that assessee had not challenged the order for the year 1996-97 before the Tribunal. As the assessee had accepted the order of the FAA for the earlier year, we are of the opinion that there is no need to disturb the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with the own funds. The FAA after considering the submission of the assessee held that onus was on the assessee to show that the borrowed funds had not been utilised or that expenses had not been incurred in relation to exempt income, that the accounts of the business were maintained by it, it was the duty of the assessee to provide necessary details, that it would be reasonable to assume that investment in tax free securities/bonds etc. had been made out of assessee s own funds as well as from borrowed funds, that the method adopted by the AO to work out the allocable expenditure was quite reasonable. Finally, he held that the AO was justified in allowing exemption for interest income of ₹ 70. 95 crores on net basis. 4.2. During the course of hearing before us, the AR stated that while deciding the appeals for AY 1996-97 the Tribunal had held that gross amount of interest was exempt u/s. 10(15)(iv), that the Tribunal had while dealing with the deduction u/s. 80M, held that 1% of the dividend had to be treated as income for earning dividend income in the orders passed for the AY. s. 1982-83 and 1983-84, that the method of allocation of interest expenditure was illogica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 crores). The assessee preferred an appeal before the FAA and stated that the Tribunal had, while deciding the appeal for the AY. s 1982-83 and 1983-84 held that 1% of the dividend shall be treated as expenditure incurred for earning dividend income. After considering the submission of the assessee and the asstessment order the FAA held that the Tribunal had in the earlier years held that only one percent of dividend income should be treated as expenditure incurred for earning dividend income. Following the order of the Tribunal, he held that in respect of dividend on shares, purchased prior to 31. 3. 96 the AO should allocate only 1% of dividend income as expenditure and compute the deduction u/s. 80M on the resultant net dividend income. As regards dividend earned on shares purchased on or after 1. 4. 96, he held that AO was justified in allocating proportionate expenses towards earning of dividend income. However, he stated that he was not in agreement with the method adopted by the AO for computing disallowance, that the interest and other expenses could not be estimated to be a percentage of dividend income, that the interest expense should be allocated on the basis of funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used for less than 180 days. The assets in question were originally acquired by Konkan Railway Corporation Ltd. and thereafter to arrange the funds the same were sold to the assessee Bank and taken back on lease for a period of 84 months against the lease rental payable at monthly instalment. The Assessing Officer held that the transaction is in the nature of loan or financial assistance provided to the Konkan Railway Corporation Ltd. (KRCL) by the assessee Bank. The transaction has been given the shape of lease transaction only in order to enable the bank to claim depreciation and reduce its taxable income. Accordingly, the AO held that the sale and lease back transaction is in the nature of financial transaction, therefore, the claim of depreciation was disallowed. On appeal, the CIT(A) confirm the action of the AO and held that the so-called lease agreement is only a finance lease on which the depreciation can be allowed to a person who vests the dominion over the property/asset, who is entitled to use it in his own right and using the same for the purpose of his business or profession. The CIT(A) has observed that in the present case the lessee retained the asset in its own d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot the real intention of the parties even reflected from the lease agreement. Some of the relevant clauses of the agreement are as under: 1.5 The Acquisition Cost of the equipment shall be the Invoice Value of the Equipment inclusive of levies on important of the Equipment, Customs Duty, Central Excise Duty, Sales Tax, Additional Tax, Surcharge on Sales Tax, Interest Tax, where applicable, Turnover Tax, where payable and all other costs and expenses, as the case may be such as Freight, Octroi, Entry Tax, Erection and Installation \Charges, Commissioning Charges, Testing Charges paid or payable in respect of the Equipment or value assessed by the valuers as per clause 2. 2. Below whichever is lower. In case the Lessee proposes to avail MODVAT on the specified Excise Duty paid in terms of the Central Excise Rules, 1944, of which due intimation will be given by the Lessee to the Lessor, the acquisition cost will not include Excise duty payable on the equipment. 1.6 The Lessee hereby takes on lease the Equipment for the Fixed period from the Commencement Date as hereinafter referred to subject to the terms, conditions, covenants and stipulations contained herein and in the Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Proposal and at the address as specified in Part II of the First Schedule hereto and not remove the same from the place so specified where it is installed without the consent in writing of the Lessor: 8. 3 notify the Lessor of any change in the Lessee s address and upon request by the Lessor promptly inform the Lessor of the whereabouts of the Equipment: 8. 4 not do or omit to do any act which may result in seizure and/or confiscation of the Equipment by the Central or State Government or Local Authority or any Public Officer or Authority under any law for the time being in force: 8. 5 not sell, assign, sub-let, pledge, mortgage, charge, encumber, or part with possession of or otherwise deal with the Equipment or any interest therein nor create or allow to be created any lien on the Equipment whether for repairs or otherwise and in the event of any breach of this sub-clause by the Lessee, the Lessor shall be entitled to call upon the Lessee to have the lien or charge or other encumbrance lifted at its cost and in the event of the Lessee failing to do so within a reasonable time, the Lessor shall be entitled (but shall not be bound) to pay to any third party such sum as is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to entitle the Lessor to obtain such relief. 8. 9 The Lessee irrevocably agrees that if due to incremental taxes whether on account of the impact of the sales tax legislation in the various States as applicable or on account of customs duty or excise duties or any other related and consequential taxes or charges levied or leviable on this transaction now or hereafter as also due to any increase in the purchase price of the Equipment covered by this Agreement on account of purchase tax and/or any other tax or imposition or due to tax on the right to use goods as may be applicable to the Equipment the Acquisition Cost of the Equipment stands increased, then the Lessor reserves the right to increase the Lease rentals proportionate thereto and on such notification by the Lessor to the Lessee, the Lease Rentals shall correspondingly stand increased from the date specified by the Lessor in such notification. 12. Events of Default: An event of default shall occur hereunder, if the Lessee- 12. 4 without the Lessor s consent, sells, transfers, or attempts to sell or pledge, parts with possession or sub-lets or charges or encumbers or creates any lien on the Equipment or any i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Lessee hereby agrees that it shall not hold the lessor for any damage done responsible for and to make good at its expense all damage caused to the land or buildings by such removal. 15. Sale of Equipment on termination of the Agreement: Upon the termination of this Agreement unless the Lessee has elected to renew the lease for a further fixed period or secondary period the Lessor shall as the absolute owner of the Equipment be at liberty to sell any or all of the Equipment at a public or private sale or otherwise dispose of, hold, use, operates, lease to others or keep idle such Equipment, all free and clear of any rights of the lessee and without any duty to account to the Lessee for such action or inaction or with respect to any proceeds thereto and if such Equipment is sold the price obtained upon such sale shall not be questioned or challenged by the Lessee more shall the Lessee question or dispute the exercise or non-exercise by the Lessor of any one or more of the rights and remedies as set out in Clause 13 hereinabove. 16. Assignment: 16. 1 The Lessor may hypothecate the Equipment owned by it and leased out hereunder in favour of any bank, Financial Institu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of asset which could not be separated from the railway network or remove the asset from the place of its existence being part of the railway network. Further apart from the lessee the asset cannot be transferred or assigned to anybody else as it is not possible to use only a particular stretch of railway track without connecting or being a part of the entire network. Thus, the terms and conditions as heavily relied upon Ld. AR would not help the case of the assessee to establish that the asset in question could actually be taken in possession by the assessee. Therefore, the assessee cannot exercise the real and actual ownership over the asset keeping in view the facts and circumstances and nature of the asset in question. The Special Bench of this Tribunal in case of IndusInd Bank Ltd. (supra) by following the decision of Hon ble Supreme Court in case of Asea Brown Boveri Ltd. Vs Industrial Finance Corporation of India (IFCI) 154 Taxman 512 as well decision in case of Association of Lease and Financing Service Company Vs Union of India (supra) has enumerated various features which make distinction between operating lease and finance lease in para 5. 20 as under: 5. 20 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost over the period of first lease. Full payout lease is peculiar to finance lease. On the other hand, a non payout lease is one where the lessor is not interested in recovering his principal investment plus interest from one lessee only because he may lease out the same asset over and over again. Though no single lease recovers the principal amount plus interest component of the lessor but all the leases taken together make it a full payout. That is why the non payout lease is peculiar to operating lease. 22. The Special Bench then analysed the various factors of distinction between operating lease and finance lease in para 5. 21-5. 23 as under: 5. 21 From the above points of distinction between operating lease and finance lease, the salient features of operating lease have become glaring. Now let us ascertain as to whether the above clauses, claimed by the id. AR as amply proving it to be a case of operating lease agreement, do in fact prove it so. IA an earlier para we have observed that this lease agreement fully satisfies all the characteristics of finance lease. The position which, therefore, emerges is that some clauses of the agreement tend to give impression of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut a finance lease. 23. In the case in hand the lease is for fix period of 84 months during which the assessee would recover the full value of lease asset with finance cost being interest as agreed between the parties. All the costs regarding loss and obsolences, repairs, maintenance, insurance etc. are to be born by the lessee. Thus the risk and reward of ownership of the asset vested with the lessee and therefore for all practical purposes the ownership of the asset was vested with the lessee and not with the assessee. The terms of the agreement are designed in a manner so that in any eventuality the assessee would recover the investment (cost of asset) with interest and not the asset in question. As discussed in the foregoing paras the title over the asset as per the lease agreement is only for securing the financial interest of the assessee and not intended to really take the asset in its possession on the expiry of lease term or on the termination of the lease agreement. Therefore all the features and attributes of finance lease as discussed by the Special Bench in case of IndusInd Bank do exist in the case of the assessee. 24. Apart from the terms and conditions as st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; (i) undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) which are also relevant read as under:- (v) Banks undertaking equipment leasing departmentally should follow prudential accounting standards. The entire lease rental should not be taken to the bank s income account. it would be recognized that lease rentals comprise two elements a finance charge (i. e. interest charge) and a charge towards recovery of the cost of the asset. The interest component alone should be taken to the income account. The component representing the replacement cost of the asset should be carried to the balance sheet in the form of a provision for depreciation. (vi) As a prudent measure, full depreciation should be provided for during the primary lease period of the asset. The period of lease should not normally exceed five years. In exceptional cases, lease period not exceeding 7 years may be fixed in respect of lease transactions covering assets of ₹ 1 crore and above, as the recovery of cost may not be possible in a period of 5 years. 5. 25 On perusal of the above paras of the above circular it becomes patent that the equipment leasing activity should be treated by banks on par with loans and advances . The further contents of pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the capital recovery embedded in the lease rental should not be charged to tax. This issue has been discussed in para 2. 30 of the assessment order. Acceding to the assessee s request, the Assessing Officer excluded the portion of capital recoveries from the rental income. Thus it can be observed that the action of the A. O. is fully in consonance with the RBI Circular which states that in case of equipment leasing the entire lease rental should not be treated as bank s income but only that component of such lease rental which represents finance charges i. e. interest should be recognized as income alone. 5. 27 We, therefore, approve the view taken by the authorities below in coming to the conclusion that the lease agreement under consideration is that of finance lease and not operating lease. 26. As it is clear from the circular that the banks undertaking equipment leasing departmentally should follow prudential accounting system and only the interest charge component should be recognised as income and the recovery of cost of asset should be carried to balance sheet on the form of provision of depreciation. Therefore under the circular the transaction of equipment lease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. During the assessment proceedings the AO did not allow deduction of ₹ 35. 03 crores u/s. 43 of the Act. Before the FAA the assessee contended that it had informed the AO that the unreaslised interest on non-performing asset was not taxable as per the sec. 43D of the Act, that and as per the RBI Guidelines unrealized interest of earlier years relating to NPAs could not be considered as income, that it had debited P L account with ₹ 35, 03, 36, 189/- being the unrealized interest of the earlier years of NPAs. After considering the submission of the assessee the FAA held that the contention of the assessee was contrary to the provisions of the Act, that there was no provision in Sec. 43D for reversal of entries of interest credited or for claiming deduction in subsequent years, that it was entitled for any relief. 7. 1. Before us, the AR stated that the amount in question had already been disallowed in the past, that there cannot be disallowance of the same amount in two years. He relied upon the case of American Express Bank Ltd. (55SOT136). The DR stated that section 43D was a charging section, that the order of the FAA was in accordance with the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no dispute regarding the claim allowed by the AO is proper as per the provisions of section 36(1)(viia). When the allowable claim has been accepted by the AO under the provision of section 36(1)(viia) then merely the provision made on the basis of RBI guidelines does not become allowable for deduction in contravention of the provision of section 36(1)(viia). It is pertinent to note that when the claim of deduction specifically provided u/s 36(1)(viia) then the same cannot be allowed by applying any other provision. Accordingly, we do not find any merit or substance in the claim of the assessee. Hence dismissed. Respectfully following the above order of the tribunal, we decide Ground No. 8 against the assessee . 9. Last Ground deals with disallowance of contribution to SBI Retired Employees Medical Fund. During the year under consideration the assessee had contributed ₹ 20 crores towards the fund. The AO found that the assessee had in the return of income mentioned that it was a welfare measure and should be allowed as a deduction from the computation of total income even though the assessee itself had added back the sum to its income for the year under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the assessee as an employer was not hit by section 9 of section 40A of the Act. In the case under consideration, there is no doubt about genuineness of payment nor it is the case of the AO or FAA that Trust was not bonafide or the expenditure was not incurred wholly and exclusively for the employees. Considering these facts of the case and following the judgment of State Bank of Travancore (supra), Ground No. 9 is decided in favour of the assessee. 10. The assessee had also raised additional grounds for the year under consideration. Considering the fact that they were purely of legal nature, same were admitted. Now, we would like to deal with them. First three Additional Grounds deal with write off bad debts u/s. 36 (1) (iii), Recovery of bad debts written off u/s. 41(4) and Income earned from foreign branches. During the course of hearing the AR relied upon the cases of Vijaya Bank(323ITR 166), State Bank of Mysore(33 SOT7)and Bank of India(ITA/2781/Mum/2011). He further stated that the Tribunal vide its Order 03. 01. 2014, in MA 371/M/14, in assessee s own case for 1996-97, had restored all the three issues back to the file of AO for fresh examination and adjudiucation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5470/M/2002 which reads as under :- 38. Additional Ground No. 4 is regarding depreciation on matured securities. The assessee has claimed a sum of ₹ 2, 23, 86, 418/- towards depreciation of investments. The AO disallowed the claim of the assessee and the CIT(A) has confirmed the action of the AO. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The CIT(A) has decided the issue in para 9 as under: 9. The ninth effective ground of appeal is against the disallowance of ₹ 2, 23, 86, 418/- being the provision for diminution in the value of securities which had matured and become due for redemption during the year but were not redeemed. It was contended before the A. O. that in some cases, the companies or the State Governments who had issued the relevant securities were not able to pay the amount due on redemption. The appellant treats these securities as nonperforming assets and a provision is made at a certain percentage for diminution in their value as in the case of other non-performing assets. There may be some delay on the part of the companies or the State Governments in paying the redemption amount. But, whenever the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments. The AR and the DR agreed that the issue is decided in favour of the assessee by the decision of the Tribunal in its own case for the assessment year 1995-96 (paras No. 6 to 10) or in assessment year 1996-97 (para No. 40): 40. Additional Ground No. 5 is regarding loss of revaluation of permanent category investment. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. At the outset we note that an identical issue has been considered and decided by this Tribunal is assessee s own case for the assessment year 1995-96 in para 10 as under: 10. After considering the rival submissions and perusing the relevant records, we find it difficult to agree with the stand of the Revenue Authorities that the loss claimed by the assessee on revaluation of the concerned investment cannot be allowed while computing the income of the assessee from banking business. As held by the Hon ble Kerala High Court in the case of Malabar Co-operative Central Bank Ltd. (supra), the banking institution as a part of business activity will have to have ready resources to meet its liability the extent of which could never be foreseen. It was held that even though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4 pertains to exemption u/s. 10(33) of the Act. The issue was sent back to the AO, by us, for fresh adjudication, in the appeal for the earlier AY. Considering the fact, that except for the amount involved, there is no difference in the facts, we are sending back the issue to the file of the AO for deciding the same afresh. Ground 4 is partly allowed in favour of the assessee. 17. Next Ground is about disallowance of ₹ 93. 75 crores under the head depreciation on leased assets. We find that we had decided the issue against the assessee, while deciding the appeal for the last AY. Accordingly Ground No. 5 stands decided against the assessee. 18. Ground No. 6 deals with disallowance of contribution towards SBI Retired Employees Medical Benefit Fund. Following our order for last year Ground No. 6 stands allowed. 19. Seventh Ground of appeal is about provision for bad and doubtful debts amounting to ₹ 13, 02, 24, 75, 974/-. We had decided the issue against the assesse, while deciding the appeal for AY 1997-98, following the same seventh ground of appeal stands dismissed. 20. Last Ground of appeal pertains to disallowance of provision in respect of foreign offic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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