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2011 (6) TMI 774 - AT - Income TaxDisallowance u/s 014A - deduction of interest earned on tax free bonds/dividend income - HELD THAT - In the case in hand undisputedly the assessee s own funds and non- interest bearing funds are more than the investment in the tax free securities then there is no basis for deeming that the assessee has used the borrowed funds for investment in tax free securities. Accordingly on this factual aspect we do not find any merit in the contention of the ld DR. Further it is to be noted that it is not the case of investment in tax free securities every year; but the investment in the earlier years has been carried forward as it is evident from the particulars where the balance at the end of the year shows that the investment is appearing in all the earlier years. Therefore we do not find any error or illegibility in the order of the CIT(A) qua the issue of disallowance of interest u/s 14A. disallowance of administrative expenditure u/s 014A - 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 the total income can be attributable to the expenditure of special treasury department maintained by the assessee; but it seems the assessee has not filed the exact detail of the operating expenses. Therefore the CIT(A) is justified in restricting the said disallowance to 1%. Accordingly the ground raised by the revenue as well as the assessee in the respective appeal and cross objection are liable to be dismissed. deleting the disallowance of the claim for payment of broken period interest - this issue is covered in favour of the assessee and against the revenue by the decision of the Jurisdiction High Court in the case of American Express International Banking Corpn Ltd vs CIT 2002 (9) TMI 96 - BOMBAY HIGH COURT . disallowance of deduction claimed u/s 036(1)(viia) - the sub-clause (a) of clause (viia) of sub-section (1) of section 036 and proviso to said clause it is clear that under sub-clause (a) while computing the business income of a Scheduled Bank (not being a foreign bank) or a non Scheduled Bank deduction is allowable in respect of any provision for bad and doubtful debts to the extent of an aggregate amount not exceeding 7.5% of the total income and 10% of the aggregate average advances made by its rural branches. Thus the option under the proviso is only an alternative to sub-clause (a). Therefore the proviso does not provide a deduction in addition to deduction allowable under sub-clause (a) of clause (viia). disallowance is u/s 040(a)(ia) - that the income received or accrued to an individual being a Sikkimese on account of dividend or interest is exempted then no disallowance can be made u/s 040(a)(ia) for non deduction of TDS. We further find that for invoking the provisions of sec. 040(a)(ia) it is necessary precondition that tax is deductible at source under Chapter XIIB in relation to the payment of interest commission or brokerage and such tax has not been deducted or after deduction has not been paid before the due date. Therefore when the income of interest in the hands of the recipient is exempted then no tax is deductible under Chapter XVII-B and consequently no disallowance is called for u/s 040(a)(ia).
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Disallowance of administrative expenses under Section 14A. 3. Disallowance of broken period interest. 4. Disallowance of loss due to diminution in the value of current investments and amortization of premium on investments held to maturity. 5. Disallowance under Section 43B for payment of employer's contribution to PF beyond the due date. 6. Disallowance of loss on revaluation of current investments. 7. Disallowance of deduction claimed under Section 36(1)(viia). 8. Disallowance of proportionate deduction under Section 35D(1)(ii). 9. Disallowance under Section 40(a)(ia) for interest paid in the state of Sikkim without TDS deduction. Detailed Analysis: 1. Disallowance under Section 14A: The revenue's appeal questioned the CIT(A)'s decision to hold that no disallowance under Section 14A should be made concerning interest on borrowed funds to the extent of the availability of share capital and profit reserves. The Tribunal noted that the assessee's share capital, profit reserves, and surplus were more than the investment in tax-free securities. It was a business norm that investments were made from own funds rather than borrowed funds unless proven otherwise. The Tribunal upheld CIT(A)'s decision, stating that no expenditure was incurred directly or indirectly for earning exempt income, thus no disallowance was warranted. 2. Disallowance of Administrative Expenses under Section 14A: The revenue appealed against CIT(A)'s decision to restrict the disallowance of administrative expenses to 1% instead of 2% as determined by the AO. The Tribunal upheld CIT(A)'s decision, noting that the assessee maintained a treasury department for investment portfolios, including tax-free investments. Since exact details of operating expenses were not provided, an estimation was necessary, and 1% was deemed appropriate. 3. Disallowance of Broken Period Interest: The revenue challenged the deletion of the disallowance of broken period interest. The Tribunal upheld CIT(A)'s decision, which followed the jurisdictional High Court's ruling in American Express International Banking Corpn Ltd vs CIT, allowing the deduction of broken period interest expenditure relatable to interest income taxed on an accrual basis. 4. Disallowance of Loss Due to Diminution in Value of Current Investments and Amortization of Premium: The revenue's appeal against the deletion of disallowance for loss due to diminution in value and amortization of premium was dismissed. The Tribunal followed the precedent set by the Bombay High Court in CIT vs Bank of Baroda and the Supreme Court in United Commercial Bank vs CIT, allowing such deductions. 5. Disallowance under Section 43B for Employer's Contribution to PF: The revenue's appeal against the deletion of disallowance under Section 43B for late payment of employer's contribution to PF was dismissed. The Tribunal noted that payments were made before the due date of filing the return, aligning with the Supreme Court's decision in CIT v Alom Extrusions Ltd. 6. Disallowance of Loss on Revaluation of Current Investments: The revenue's appeal for AY 2005-06 against the deletion of disallowance for loss on revaluation of current investments was dismissed. The Tribunal upheld CIT(A)'s consistent decision in favor of the assessee for previous years, supported by the jurisdictional High Court's ruling. 7. Disallowance of Deduction Claimed under Section 36(1)(viia): The assessee's cross-objection against the disallowance of deduction under Section 36(1)(viia) was dismissed. The Tribunal confirmed CIT(A)'s interpretation that the proviso to this section provides an option, not an additional deduction to the one allowed under sub-clause (a). 8. Disallowance of Proportionate Deduction under Section 35D(1)(ii): The assessee's cross-objection against the disallowance of expenses for increasing authorized share capital under Section 35D(1)(ii) was dismissed. The Tribunal noted that the issue was not pressed before CIT(A) and followed Supreme Court precedents disallowing such expenses. 9. Disallowance under Section 40(a)(ia) for Interest Paid in Sikkim: The assessee's appeal against the disallowance under Section 40(a)(ia) for interest paid in Sikkim without TDS deduction was allowed. The Tribunal noted that under Section 10(26AAA), interest income for Sikkimese individuals is exempt, thus no TDS was required, and no disallowance under Section 40(a)(ia) was warranted. Conclusion: The appeals of the revenue and cross-objections of the assessee were dismissed, while the assessee's appeal for AY 2005-06 was partly allowed. The Tribunal upheld the CIT(A)'s decisions on various disallowances and deductions, following legal precedents and statutory provisions.
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