TMI Blog2002 (7) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... sue of bad debts written off. At the outset it was submitted by Shri A Raghavendra Rao, C.A. appearing before us at the time of hearing on behalf of the appellant-assessee, that the assessee does not intend to press this ground of appeal. The learned Departmental Representative had no objection to the prayer of the assessee. Hence, the aforesaid ground is dismissed as not pressed. 4. The second issue raised by the assessee is in relation to the disallowance under s. 37(2A) of the Act pertaining to entertainment expenditure. The AO made the disallowance in relation to reimbursement made towards the membership fees and payments to clubs. The first appellate authority allowed the claim of the assessee with respect to the expenditure incurred towards membership of the employees in the bankers' club and with respect to the balance, the addition was sustained. Presently the assessee is aggrieved by the order of the CIT(A) in restricting the allowable expenditure only to the extent of membership fees to the clubs paid while ignoring the balance of expenditure in toto. It is submitted by the learned counsel that the first appellate authority had merely relied upon the order of the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in relation to the provision for bad and doubtful debts. The first appellate authority has dismissed the said ground on the plea that the computation under s. 115J has been adopted by the AO from that made in the intimation under s. 143(1)(a). 9. At the outset, we find that the computation of income under s. 115J as returned by the assessee has been tinkered with the Department initially while processing the return under s. 143(1)(a). Subsequently in the proceedings under s. 143(3), the same addition has been made. It is now well settled that the proceedings under s. 143(1)(a) and 143(3) are independent of each other. Presently, we are dealing with the appeal arising out of the order of assessment made by the AO under s. 143(3) of the Act. While it is true that the computation of income under s. 115J adopted by the AO in the impugned proceedings is akin to computation made under s. 143(1)(a) but the assessee has the right to agitate the same in the present proceedings. Therefore, the action of the CIT(A) in not going into the merits of the issue by simply foreclosing the matter by holding that the same is adopted from the order under s. 143(1)(a) is devoid of any legal suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 244A in accordance with law. 13. The appeal of the assessee is treated as partly allowed. ITA 197/Bang/1997; Asst. yr. 1991-92 14. The first ground taken by the assessee in this appeal is against the action of the CIT(A) in not allowing the bad debts written off. Briefly the facts are that the assessee had claimed in its return of income deduction under s. 36(1)(vii) of Rs. 9,82,625 representing bad debts written off in its books of account. Simultaneously, the assessee had also claimed deduction of Rs. 1,15,47,946 under s. 36(1)(viia) representing provision for bad and doubtful debts. The AO noticed that the assessee had claimed the deduction under s. 36(1)(vii) without adjusting it against the provision made under s. 36(1)(viia). The AO by relying on the proviso to s. 36(1)(vii) held that it is to be adjusted against the provisions made under s. 36(1)(viia) and, therefore, disallowed the same. The claim of the assessee for deduction under s. 36(1)(viia) was also rejected by the AO on the plea that no details were available with respect to the advances, whether the same were from rural branches or not. With regard to the assessee's claim under s. 36(1)(viia), the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder s. 36(1)(vii) of such amounts as would exceed the 5 per cent provision for bad and doubtful debts made in pursuance to s. 36(1)(viia). According to the learned Departmental Representative, the former is under s. 36(1)(vii) and the latter is allowed under s. 36(1)(viia) of the IT Act. 17. We have heard the rival submissions, perused the materials on record and proceed to dispose of the issue in the following lines. As the dispute revolves around the provisions of s. 36(1)(vii) and 36(1)(viia), it would be appropriate and necessary to look into the provisions before we proceed to adjudicate on the matter. The relevant provisions read as under: Sec. 36(1)(vii).—Subject to the provisions of sub-s. (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of a bank to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause: 36(1)(viia).—in respect of any prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, whatever is claimed by the assessee under s. 36(1)(vii) are merely the debts for which no provisions have been made and are actually written off as irrecoverable and are therefore, outside the purview of s. 36(1)(viia). The entire controversy revolves around the fact as to whether the provisions of s. 36(1)(vii) and 36(1)(viia) are overlapping or independent of each other. The rival counsel have relied upon apparently differing decisions of the Bangalore Benches of the Tribunal. However, before we go into that aspect, it shall be appropriate for us to deal with the scope and effect of the insertion of s. 36(1)(viia) by the legislature. Clause (viia) of sub-s. (1) of s. 36 was inserted by the Finance Act, 1979, with an objective to provide that a deduction shall be allowed in the cases of scheduled banks other than cooperative banks, in respect of provisions made by them for bad and doubtful debts in relation to the advances made by their rural branches. The deduction was, however, envisaged to be a specified percentage of the aggregate average advances made by the rural branches of the bank. In fact, the CBDT Circular No. 258, dt. 14th June, 1979, throws ample ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to advances made by rural or non-rural branches. 21. Now, coming to the language of the proviso to s. 36(1)(vii) which is relied upon by the AO. The said proviso reads as under: Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part there of exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. The true import and meaning of the said proviso can be understood by way of an example. Instances can be visualised of a particular advance made by the rural branch of a bank, which have become bad and is claimed as deduction under s. 36(1)(vii), having been actually written off in the books of account. Now the said amount may also qualify for being comprised in the amount of provision made for bad and doubtful debts pertaining to rural branches, as it is specifically provided for in s. 36(1)(viia). Clearly it would be a case of allowing double deduction for the same amount. It is exactly such a situation which is sought to be prevented by the proviso to s. 36(1)(vii). That is the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, till the end of the previous year relevant to the assessment year under appeal, the title of the aforesaid properties had not been registered. Therefore, the depreciation was denied to the assessee. The first appellate authority by following the decision of the Hon'ble High Court of Karnataka in CIT vs. Bharat Gold Mines Ltd. (1991) 96 CTR (Kar) 188 : (1991) 192 ITR 639 (Kar) upheld the contention of the AO. The rival counsel agreed at the time of hearing that the aforesaid issue has finally been settled by the decisions of the Hon'ble Supreme Court in the case of CIT vs. Poddar Cements (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC) and Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1 : (1999) 239 ITR 775 (SC). Respectfully following the same, we allow this ground of appeal of the assessee. 26. The next ground preferred by the assessee is in relation to claim of interest under s. 244A of the IT Act, 1961. At the time of hearing, it was submitted by the learned counsel for the assessee that the AO has already granted this interest while passing the order under s. 154, dt. 3rd Sept., 1995. Hence, this ground of appeal is dismissed. ITA 198/Bang/1996; Asst. yr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tates that only such bad debts as are in excess of the above provision can be allowed as deduction under s. 36(1)(vii), he made adjustments to the extent of disallowing the bad debts of Rs. 38,28,836 as above. Aggrieved by the order of the AO, the matter was carried in appeal before the CIT(A). The CIT(A) upheld the prima facie adjustment made in pursuance to s. 143(1)(a) r/w s. 154(1)(b) of the Act. Hence, the appeal of the assessee before us. 31. The controversy in the present appeal revolves around as to whether the impugned adjustment as narrated above would have been made as a part of the prima facie adjustments as envisaged in accordance with the first proviso to s. 143(1)(a) of the Act. The adjustments permitted to be carried out in pursuance to the provisions of the first proviso to s. 143(1)(a) are now judicially well settled. The adjustments that are envisaged under the first proviso of s. 143(1)(a) are only that which go to correct the errors apparent on the face of the record alone and even this is permissible only on the basis of the information accompanying the return. It is held by the Madhya Pradesh High Court in the case of Kamal Textiles Ors. vs. ITO (1991) 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as taxable under the head 'Profits and gains from business' in the cases of such assessees as before us. With this background, a similar issue in the assessee's own case had come up for hearing before the Tribunal in earlier years. The Tribunal in its order dt. 11th Oct., 2000, in ITA Nos. 1698 1722/Bang/1992 and CO.29/Bang/1993, has decided the issue in favour of the assessee. The Tribunal had concluded the issue in the following manner : It may be mentioned in this connection that even though the above cases decided by the Hon'ble High Courts were with respect to the chargeability of interest on securities under the erstwhile provisions of s. 18, the principle enunciated therein would still be applicable on the concept of accrual of income in the context of s. 145 to which reference has been made earlier. In fact, the decision of the ITAT, Jaipur Bench in the case of State Bank of Bikaner Jaipur is directly on the issue relating to chargeability of accrued interest after the omission of ss. 18 to 21 w.e.f. 1st April, 1989. In this it has been pointed out that in spite of the omission of ss.18 to 21, the charging s. 4 relating to charge of income-tax and s. 5 relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the entries in the books of account of the bank cannot be disbelieved to draw an adverse conclusion against the bank because sufficient evidence has not been brought on record to establish that these deposits represent the unaccounted income of the bank. For these reasons, and also for the detailed reasoning given by the CIT(A) in paras 6 and 7 of the impugned order, which we fully and strongly endorse, we uphold the order of the CIT(A) on this point in directing the AO to delete the addition." Following the same, the facts of this issue being identical to those before the Tribunal in the earlier assessment year, this ground of the Revenue is dismissed. 36. The third issue in this appeal relates to the disallowance of Rs. 35,10,145 under s. 43B of the IT Act, pertaining to interest payable to IDBI. Briefly the facts are that the aforesaid outstanding amount of interest payable to IDBI pertained to the periods December, 1989, and January to March, 1990. As the dues were not paid before the close of the accounting year as also before the due date for filing of the return i.e., 31st Dec., 1990, the said amounts were, therefore, added back. According to the assessee's repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financial corporation or a state industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing; or...... shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in s. 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum referred to in cl. (a) or cl. (c) or cl. (d) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-s. (1) of s. 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return: Explanation 2: For the purposes of cl. (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble High Court of Andhra Pradesh in Gopikrishna Granites India Ltd. vs. Dy. CIT (2001) 170 CTR (AP) 603 : (2001) 251 ITR 337 (AP) as also the decision of the Hon'ble Kerala High Court in CIT vs. Sitaram Textiles Ltd. (2000) 164 CTR (Ker) 252 : (2000) 113 Taxman 241 (Ker). 39. In the end, we conclude by holding that the Revenue has to succeed on this ground. 40. The fourth ground in this appeal relates to the addition of Rs. 2,41,44,998, representing interest on sticky loans. The AO by following the decision of the Hon'ble Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC) brought such interest to tax. The first appellate authority has deleted the said addition by following his own order for the earlier assessment years of 1985-86 and 1989-90 in the assessee's own case. 41. We find that similar issue has been adjudicated upon by the Tribunal in the case of the assessee in its order dt. 11th Oct., 2000, pertaining to the asst. yrs. 1985-86 and 1989-90. The Tribunal in the aforesaid order, set aside the issue for reconsideration by the AO. More specifically, the observations of the Tribunal in para 4 in ITA 1697/B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e understood as a capital expenditure. He placed reliance on the decisions of the Hon'ble Supreme Court in Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC) in support of his submissions. 46. On the other hand, Shri Raghavendra Rao, the learned counsel for the assessee, narrated the facts relating to the impugned expenditure in detail. According to him, the appellant was a bank which has been carrying out the banking activities since many decades. According to him, the Securities and Exchange Board of India (SEBI) was constituted by the Government of India in the year 1988. Thereafter the SEBI made it mandatory for all the then existing and prospective merchant bankers to register with SEBI in case they wished to carry on the business of merchant banking. This registration was required under the Rules and Regulations framed by SEBI before an entity could act as a merchant banker. The learned counsel submitted that the assessee bank has been in the business of merchant banking even before the relevant notification of the SEBI was made a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial pronouncements on the concept of capital expenditure. Generally speaking capital expenditure is accepted as akin to the concept of securing something, whether tangible or intangible, so that it could be of lasting or enduring benefit to the assessee. In contradistinction the revenue expenditure is akin to the concept of operational cost and is intended for the furtherance of the objects of the assessee's business. 49. If the purpose of the expenditure is the acquisition of an asset or a right which is of a permanent character, such an expenditure should rightly be held as a capital expenditure. But where the assessee has an existing right to carry on its business and in the course of carrying out of such business, it is later required under law to make an expenditure for continuing such business, it is to be understood as having been incurred on revenue account, provided of course, such expenditure does not result in the acquisition of a capital asset. The decision of the apex Court in Bikaner Gypsums Ltd. vs. CIT (1990) 89 CTR (SC) 176 : (1991) 187 ITR 39 (SC), throws light in this regard. The apex Court had opined that where an assessee carrying on an existing busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpense of SEBI fee is in fact directly on to the already existing business activity, while the benefit of enduring nature can only remotely be taken as purely incidental. Hence, in our considered view, the decision of the Hon'ble apex Court in Punjab State Industrial Dev. Corpn. Ltd. does not help the case of the Revenue. Similarly, the decision of the Hon'ble apex Court in Brooke Bond India Ltd. also does not come to the aid of the Revenue, as the reasoning which weighed with the Court was on similar lines as in Punjab State Industrial Dev. Corpn. Ltd., albeit the only difference being the nature of expense under consideration. 53. This appeal of the Revenue is accordingly disposed of. ITA No. 173/Bang/1996; Asst. yr. 1992-93—Revenue's appeal 54. The only ground taken up by the Revenue in this appeal relates to addition of Rs. 55,000 on account of alleged fictitious deposits and interest thereon, made by the AO. A similar issue has been adjudicated upon by us in paras 30 and 31 in the Revenue's appeal for the asst. yr. 1990-91. Following the same, this ground of the Revenue is dismissed. 55. In the result, four appeals of the assessee and three appeals of the Revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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