TMI Blog2014 (5) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... ear, that the CIT(A) has directed the AO to verify the claim of the assessee regarding taxes paid in the year in respect of earlier years and allow them as per law - there is no question to verify and deduction should be allowed in assessment year itself – Decided against Assessee. Disallowance of expenses u/s 14A of the Act - Expenses incurred in relation to exempt income – Estimation on ad hoc basis – Held that:- The CIT(A) has accepted the fact that the assessee has purchased the securities by using its own fund - there is no interest expenditure in respect of these securities – for disallowance of administrative expenses u/s 14A, CIT(A) has directed the AO to compute the disallowance at 0.5% of the average investment earning tax free income - 0.5% of the average investment is clearly given under Rule 8D which is not applicable for the year under consideration - 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 - the expenditure if any incurred on account of administrative expenses for maintaining these securities the whole of the said expenditure cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in disallowing the bad debts written off of Rs.320,31,17,547 and the Honourable Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT (A)] has erred in restricting the claim of bad debts to Rs.217,43,96,387. The learned ACIT be directed to allow the entire bad debts claim of Rs.320,31,17,547 and reduce the total Income accordingly. 02. On the facts and in the circumstances of the case and in law, the learned ACIT has erred in disallowing fees paid to Master Card International of Rs.111 lakhs and the Honourable CIT (A) has erred in upholding the decision of the ACIT and disallowing the claim of Rs.111 lakhs. The learned ACIT be directed to allow deduction of Rs.111 lakhs and reduce the total Income accordingly. 03. On the facts and in the circumstances of the case and in law, the learned ACIT has erred in disallowing expenses of Rs.7,51,78,000 u/s. 14A being expenses incurred in relation to exempt income and Honourable CIT(A) has erred in disallowing expenditure u/s. 14A by estimating the same on ad hoc basis of 0.5% of average investments. The learned ACIT be directed not to disallow any expenses u/s 14A of the Act and reduce the total incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has relied upon the decision of Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT (343 ITR 270) = 2012-TIOL-16-SC-IT-LB. He has also relied upon the decision dated 07/09/2012 of Hyderabad Bench of this Tribunal in the case of State Bank of Hyderabad Vs. DCIT in ITA No. 578 and 579/HYD/2010 = 2013-TIOL-102-ITAT-HYD. 2.3 On the other hand, the Ld. DR has submitted that the restriction provided under the proviso to section 36(1)(vii) is applicable in respect of entire bad debts written off by the assessee irrespective of rural branch or non-rural branch. In support of his contention he has referred Explanation 2 inserted by the Finance Act 2013 and submitted that it has been clarified by the Explanation that for the purpose of proviso to clause (vii) of sub-section 1, the account referred to shall be only one account in respect of provisions for bad and doubtful debt under clause (viia) and such account shall relate to all types of advances including advance made by the rural branches. Thus the Ld. Dr has submitted that the claim of bad debts written off u/s 36(1)(vii) is allowable only after reduction of the amount in the provisions for bad and doubtful deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of account of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s. 36(1)(viia) as it would frustrate 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 Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered and decided against the assessee by the decision of this Tribunal in assessee s own case for A.Y. 2000-01 vide order dated 5.5.2012 in para 23 and 24 as under:- 23. We have heard ld representatives of parties and considered the orders of authorities below. On perusal of order of ld CIT(A), it is observed that assessee claimed deduction in revised return of income for payment of fee to Master Card/Visa International amounting to Rs.45,25,000 and Rs.50,93,000 for assessment years 1996-97 and 1997-98, respectively which were disallowed by invoking provisions of section 40(a)(i) of the Act stating that no tax was deducted at source while making the payments outside India. On behalf of assessee, it was contended that Visa International has paid full tax on 15.7.1999, hence, the assessee bank is entitled to claim deduction, which was disallowed earlier, in the year of payment of taxes. It was contended that deduction of Rs.96,18,000 be allowed during the assessment year under consideration. Assessee placed reliance on the CBDT Instruction No.F.No.275/201/95-IT dt.29.1.1997, which clarified that no payment for TDS should be enforced after the tax deductor has satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance at 0.5% of average investment earning tax free income by applying the decision in the case of Godrej Boyce Manufacturing Co. Ltd. (328 ITR 81). 4.2 Before us, the Ld. AR of the assessee has submitted that all the securities from which tax free income has been earned constitute stock in trade and, therefore, earning of income there from is only incidental to which provisions of section 14A cannot be applied. He has relied upon the decision of Hon ble Karnataka High Court in the case of CCI Ltd. Vs. Commissioner of Income Tax (206 Taxman 563) as well as the decision of this Tribunal in the case of DCIT Vs. India Advantage Securities Ltd. in ITA No. 6711/Mum/2011. The Ld. AR has submitted that though the CIT(A) has accepted the contention of the assessee that the entire investment in tax free securities has come out of own fund, however, the AO was directed to disallow 0.5% of average investment yielding tax free income which is provided under Rule 8D. Since Rule 8D is not applicable for the year under consideration, therefore, the formula adopted by the CIT(A) is not justified. Alternatively the Ld. AR has submitted that the disallowance for earning the divident income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exact detail of the operating expenses and therefore, no option was left but to estimate the disallowance. 7.2 Even otherwise, the overall administration of the bank looks after all the department including the treasury department; therefore, in the absence of the exact expenditure incurred in relation to the activity relating to tax free investment and earning the income not forming part of the total income, in our considered opinion, the CIT(A) is justified in restricting the said disallowance to 1%. Accordingly, we do not find any reason to interfere with the order of the ld CIT(A) on this issue of disallowance of administrative expenditure u/s 14A. Accordingly, the ground raised by the revenue as well as the assessee in the respective appeal and cross objection are liable to be dismissed. 4.5 Accordingly, we are of the considered view that 1% of the exempt income will be a reasonable disallowance on account of administrative expenses u/s 14A. 5. Ground No. 4 is regarding disallowance of liquidated damages. The assessee received a sum of Rs. 2,98,746/- being liquidated damages on account of delay in delivery of equipments and claimed as capital receipt. The AO tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing into existence of the profit-making apparatus, rather than a receipt in the course of profit-earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit-earning source, not in the ordinary course of their business, in our opinion, was a capital receipt in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (i) and (ii) extracted in Para 1 (supra) and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt. 5.5 The Hon ble Supreme Court has held that the aforesaid amount received by the assessee towards compensation for sterilization of the profit-earning source and not in the ordinary course of its business. Accordingly, it was a capital receipt in the hands of the assessee. In the case in hand, though the liquidated damage w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (2) of sec 211 are required every P L accounts of the Companies shall be prepared as per the requirement of Part II of Schedule VI. However, the proviso to sub. Sec (2) of sec. 211 of the Companies Act creates an exemption of applicability of sub. Sec. (2) inter-alia in respect of Insurance companies or banking companies or any other companies engaged in generation and supply of electricity for which a form of profit and loss account has been specified in or under the Act governing such class of company. Even if an Insurance Company does not disclose any matter in the Balance Sheet and P L account because the same is not required to be disclosed by the Insurance Act shall not be treated un-discloser of a true and fair view of the state of affairs of the company as the said condition has been relaxed by sub.sec 5 of sec 211 of the Companies Act . 9.1 It is to be noted that in order to align the provisions of the I T Act with the Companies Act, an amendment has been brought into the statute by the Finance Act 2012 whereby sec 115JB has been amended w.e.f 2013 and therefore, prior to 1.4.2013, the provisions of sec. 115JB cannot be applied in case of Insurance, banki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, the assessee cannot be forced to prepare the accounts when it is not possible. Therefore, we are in agreement with the contentions of the assessee in as much as the accounting policies followed in the electricity accounts if followed for the preparation of Companies Act account will not disclose true and fair view and will not be in accordance with part II and III of Schedule V of the Companies Act. The ratio of the decisions of the Hon ble Supreme Court and the ratio of the decision of the Tribunal discussed above are in support of the contentions of the assessee. We further found that the issue of applicability of sec. 115J came before the Tribunal for AY 88-89. Taking into consideration the preparation of accounts under the Electricity Act and other contentions the assessee including the decisions of the Supreme Court in the case of B.C. Srinivasa Setty (supra), the Tribunal has held that the provisions of sec. 115J are not attracted on the facts of the present case. 29 As discussed above, the assessee is following the accounting policies under the Electricity Supply act and prepared its accounts in view of those very policies. Following those very po ..... X X X X Extracts X X X X X X X X Extracts X X X X
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