2013 (1) TMI 785 - AT - Income Tax

Deduction u/s. 36(1)(viii) - Assessee, govt company claimed deduction in respect of special reserves created in the balance-sheet, as it is a financial corporation which is engaged in providing long-term finance for development of infrastructure facilities - Claim was rejected on the ground that it is neither a financial corporation nor a public-company. - HELD THAT - In Sec. 36(1)(viii) financial corporation is defined to include a public company and a Government company . Any entity incorporated under a statute carrying on the business of financing would come under the definition of financial corporation. The definition is not an exhaustive definition and the term financial corporation has been defined in an inclusive manner so as to include a Govt. company and a public company . Even otherwise the assessee is a Govt. company since the Central Govt. holds more than 51% of the share capital of the bank and as defined in Sec. 617 of the Companies Act. Relying upon the own case, UNION BANK OF INDIA VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX 2012 (6) TMI 500 - ITAT MUMBAI , matter was remitted back to AO to verify and examine the deduction, which has been transferred to the special reserves subject to the prescribed percentage of profits derived from providing long-term finance for the approved purposes mentioned in section 36(1)(viii). Matter restored back. Deduction on Notional gain on Derivatives - Assessee submitted that trading derivatives held by the bank constitute its stock in trade and according to the accepted basis, valuation of closing stock it should be valued at cost or market price, whichever is lower. Therefore, while the loss arising on account of revaluation of trading derivatives must be allowable as deduction. CIT rejected the contention as assessee didn't follow RBI guidelines for recognizing profit and loss. HELD THAT - Assessee is entitled to claim loss on revaluation of trading derivatives. The notional unrealized gain cannot be charged to tax. It is settled principle of law as laid down by Hon'ble Apex Court in the case of CHAINRUP SAMPATRAM VERSUS COMMISSIONER OF INCOME-TAX, WEST BENGAL 1953 (10) TMI 2 - SUPREME COURT , that while anticipated loss is taken into account in valuing closing stock, the anticipated profit in the shape of appreciated value of the closing stock is not brought into account. No prudent businessmen or trader will show increased profit on unrealised gain. Findings of the CIT(A) were reversed and it was held that the assessee is entitled to claim loss on revaluation of trading derivatives Decision in favour of assessee. Applicability of sec. 115JB on Banks - Assessee, a banking company's accounts are being prepared as per Schedule III of Banking Regulation Act and not as per Schedule VI of the Companies Act. It was contended that in the earlier years provisions of s.115JB of IT Act were applicable on it. - HELD THAT - Relying on the judgement of KRUNG THAI BANK PCL VERSUS JOINT DIRECTOR OF INCOME TAX - INTERNATIONAL TAXATION, MUMBAI 2010 (9) TMI 18 - ITAT, MUMBAI , it was held that provisions of section 115JB are not applicable in the case of the assessee. Decision against Assessee. Prior Period Expenses - Assessee claimed some amount as prior year expenses, it was submitted that the liability to pay said expenses arose only during the year, and hence cannot be considered as prior period expenses. HELD THAT - Incurring of expenses is a continuous process and there cannot be cut-off date at any point of time to be classified as prior period expenses. Decision in the case of TOYO ENGG. INDIA LIMITED. VERSUS JOINT COMMISSIONER OF INCOME-TAX. 2005 (9) TMI 237 - ITAT BOMBAY-J , relied upon and the contention of the assessee was upheld that it has branches all over the country, where incurring of expenses is a continuous process and there cannot be cut-off date at any point of time to be classified as prior period expenses liable to be disallowed. Decision in Favour of Assessee. Bad and Doubtful Debts u/s. 36(1)(viia) - AO restricted the deduction in respect of provision for bad and doubtful debts. Assessee claimed entire eligible amount as per the sec. 36(1)(viia) should be allowed as deduction instead of restricting it to the amount of provisions made in the books of account. - HELD THAT - Provisions of section 36(1)(viia) are very clear which provides that in respect of any provision made for bad and doubtful debts an amount not exceeding 7.5% of the total income and an amount not exceeding 10% of the aggregate average advances of the rural branches of such bank shall be allowed as deduction. Once a provision for bad and doubtful debts are made by the scheduled bank having rural Branches, the assessee is entitled to a deduction, which is quantified not with reference to the amount provided for in the account but with respect to certain percentage of the total income and also certain percentage of aggregated advances. Decision in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of expenditure u/s. 14A read with Rule 8D.
2. Disallowance of claim u/s. 36(1)(viii).
3. Taxation of unrealized gain on revaluation of trading derivatives.
4. Applicability of provisions of section 115JB.
5. Allowance of prior period expenses.
6. Deduction for bad debt written off.
7. Allowance of loss on revaluation of investment.
8. Deduction u/s. 36(1)(viia) for provision made for doubtful debts.

Detailed Analysis:

1. Disallowance of expenditure u/s. 14A read with Rule 8D:
The assessee's appeal contested the disallowance of expenditure under section 14A read with Rule 8D. The Assessing Officer (AO) had disallowed Rs. 12,88,06,598/- based on Rule 8D, which the CIT(A) upheld. The Tribunal noted that Rule 8D was not applicable for A.Y. 2007-08 as per the Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd. The matter was remanded to the AO to determine a reasonable basis for disallowance, allowing the assessee to provide necessary details.

2. Disallowance of claim u/s. 36(1)(viii):
The assessee claimed a deduction of Rs. 150 crores under section 36(1)(viii), which the AO and CIT(A) disallowed, stating the assessee was neither a financial corporation nor a public company. The Tribunal referenced earlier Tribunal decisions favoring the assessee, recognizing it as a financial corporation eligible for the deduction. The matter was remitted to the AO to verify the special reserves and profits, allowing the claim subject to these verifications.

3. Taxation of unrealized gain on revaluation of trading derivatives:
The AO taxed the notional gain on trading derivatives, rejecting the assessee's claim that such derivatives should be valued at cost or market price, whichever is lower. The CIT(A) upheld this view. However, the Tribunal reversed this decision, citing Supreme Court rulings and earlier Tribunal decisions, recognizing the assessee's consistent practice of valuing derivatives at cost or market price. The Tribunal allowed the assessee's claim for loss on revaluation.

4. Applicability of provisions of section 115JB:
The assessee argued that section 115JB did not apply as it prepared accounts per the Banking Regulation Act, not the Companies Act. Both the AO and CIT(A) rejected this, but the Tribunal upheld the assessee's stance, referencing earlier Tribunal decisions and similar cases. Thus, the Tribunal ruled that section 115JB was not applicable to the assessee.

5. Allowance of prior period expenses:
The AO disallowed Rs. 1,98,189/- of prior period expenses, which the CIT(A) allowed, citing similar facts from previous years. The Tribunal upheld the CIT(A)'s decision, noting consistent Tribunal rulings allowing such expenses due to the continuous nature of the assessee's nationwide operations.

6. Deduction for bad debt written off:
The AO disallowed the deduction for bad debts of Rs. 2,85,84,98,629/-, arguing that the provision for rural debts exceeded the write-off amount. The CIT(A) allowed the deduction, referencing earlier Tribunal decisions and Supreme Court rulings. The Tribunal confirmed this, citing the Catholic Syrian Bank and Karnataka Bank Ltd. cases, which distinguished between provisions for bad debts and actual write-offs.

7. Allowance of loss on revaluation of investment:
The AO disallowed the loss on revaluation of investments, arguing inconsistency in the assessee's accounting methods. The CIT(A) allowed the loss, referencing earlier Tribunal decisions and Supreme Court rulings in UCO Bank's case. The Tribunal upheld this, confirming the assessee's consistent practice of valuing investments at cost or market price, whichever is lower.

8. Deduction u/s. 36(1)(viia) for provision made for doubtful debts:
The AO restricted the deduction to the provision made in the books, while the CIT(A) allowed the full eligible amount under section 36(1)(viia). The Tribunal upheld the CIT(A)'s decision, emphasizing the clear statutory provision allowing deduction based on a percentage of total income and rural advances, not just the provision in the books.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, while the revenue's appeal was dismissed. The Tribunal's decisions were based on consistent legal precedents and statutory interpretations, ensuring the assessee's claims were evaluated fairly and in accordance with established legal principles.