2015 (11) TMI 1519 - AT - Income Tax

Reopening of assessment - Held that - The assessee, in its return of income, has claimed depreciation on ATMs and UPS @ 60% by classifying them under the computers block as against allowable depreciation of 15%. This was not examined at the time of the scrutiny assessment under section 143(3) of the Act dated 31.12.2007. Thus, there is an underassessment of taxable incomes, within the meaning of section 147 of the Act. As no details were called for by the Assessing Officer or filed by the assessee on this issue, no finding either positive or negative was arrived at during the course of the original assessment proceedings, there is no question of change of opinion as contended by the assessee. Therefore, the reopening of assessment is not amounting to any change of opinion. Thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue and accordingly, we dismiss the ground raised by the assessee. Disallowance of excess depreciation claimed on ATMs and UPS - Held that - Respectfully following the decision of the Delhi Benches of the Tribunal in the case of DCIT v. Global Trust Bank Limited (2011 (4) TMI 1380 - ITAT DELHI), we set aside the order passed by the ld. CIT(A) on this issue and direct the Assessing Officer to allow depreciation @ 60% to ATMs. UPS attached to the computers are part of computer systems and eligible for depreciation @ 60% Claim of deduction under section 36(1)(viia) - Held that - Allowable deduction u/s. 36(1)(viia) of the Act is @ 10% of the total average aggregate advances made by the rural branches and not on the incremental average aggregate advances, as contemplated by the Assessing Officer. See Lakshmi Vilas Bank 2010 (12) TMI 1204 - ITAT CHENNAI Claim of brought forward unabsorbed depreciation losses to be set off against the income of current assessment year - Held that - the unabsorbed depreciation losses carried forward to eight assessment years immediately succeeding the assessment year in which the depreciation allowance was computed is not in dispute 1994-95 to 1998-99 . However, the finding of the ld. CIT(A) that for the current year 2007-08, the brought forward unabsorbed depreciation losses is eligible is found to be incorrect since the reckoning of eight years period end by 2006-07 and therefore, for the assessment 2007-08, which is current assessment year, the assessee is not eligible for claiming the depreciation loss. - Decided in favour of revenue Disallowance of bad debts written off technical Write-off under section 36(1)(vii) Held that - Section 41(4) of 1961 Act, inter alia, lays down that, where a deduction has been allowed in respect of a bad debt or a part thereof under Section 36(1)(vii) of 1961 Act, then, if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to be profits and gains of business and, accordingly, chargeable to income tax as the income of the previous year in which it is recovered. In the circumstances, we are of the view that the Assessing Officer is sufficiently empowered to tax such subsequent repayments under Section 41(4) of 1961 Act and, consequently, there is no merit in the contention that, if the assessee succeeds, then it would result in escapement of income from assessment.See Vijaya Bank v. CIT 2010 (4) TMI 46 - SUPREME COURT - Decided in favour of assessee. Inclusion of income of foreign branches at Singapore and Colombo with the income chargeable to tax in India - Held that - The income of the assessee at Singapore and Colombo would be included in the return of income of the assessee in India and whatever taxes paid by the branches in foreign countries, credit of such taxes shall only be given. Accordingly, the ground raised by the assessee is dismissed. Disallowance u/s 14A - Held that - In the case of Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT ) states that application of provisions of 14A are Constitutionally valid and provisions of section 14A are still applicable for earlier assessment years and the Assessing Officer is duty bound to determine expenditure by adopting a reasonable basis or method. Accordingly, we set aside the order of the ld. CIT(A) on this issue and direct the Assessing Officer to disallow only 2% of gross dividend received towards expenditure for earning such dividend income. Thus, the ground raised by the assessee is partly allowed for statistical purposes. Disallowance u/s 35D - Held that - Amendment had been brought about to extend the benefit of deduction under section 35D of the Act to the service sector also. Banks cannot fall under the definition of industrial units . If the assessees like banks were to fall under the definition of Industrial units , there would not have been any necessity for amending the Act to include service sector. Since the amendment extending the benefit to service sector and made effective only from the assessment year 2009-10 and, the banks are coming under service sector, the benefit can be extended from the assessment year 2009-10 only to the extent of setting up of a new unit for five successive years. Accordingly, we set aside the order passed by the ld. CIT(A) and remit the matter back to the Assessing Officer to examine whether the assessee has set up a new unit or not and if so, he is directed to allow the benefit from 2009-10 onwards Disallowance of provision made for claims against the bank - Held that - As the assessee has not furnished any details about the nature of expenses. If any expense is required to be allowed, it is for the assessee to prove the nature of the expenditure and its relation to its business. In the present case, the assessee has not able to prove the nature of the expenses. Therefore, we are of the opinion that the ground raised by the assessee is liable to be dismissed. MAT applicability - Provisions of section 115JB of the Act could not be applied on the assessee Taxability of interest on securities on due basis - Held that - As per the terms of securities issued by the Government, the proceeds at maturity along with interest shall be paid to the persons who are holding the securities on the date of redemption. The holder of the security cannot encash the security prematurely before the date of redemption like bank deposits. A fixed bank deposit can be redeemed even before the maturity date and the depositor may get a portion of the interest accrued on the deposit till the date of surrender. In such cases, the interest is generated on accrual basis. But in the case of a Government security, it is not possible to encash it prior to the due date. A holder of the security may be able to sell it to another person; but there is no provision for premature encashment. Encashment can be made only on the due date. When the principal amount involved, in the instrument itself is redeemable only on due date, there is no reason to hold that the interest element would be generated on accrual basis. The interest, also goes along with the principal amount in the case of securities. The fall out of the above position is that in the case of a Government security, the interest could be recognized only on due date and not on accrual basis. This fundamental character of a Government instrument itself is sufficient to justify the method of interest income recognition by the assessee-bank. - Decided against revenue Loss on account of revaluation of forward foreign exchange contracts - Held that - Loss wrongly been treated as speculative in nature. The loss claimed by the assessee on evaluation of un-matured forward foreign exchange contract taken to cover the current assets on the last date of the accounting period i.e. before the date of maturity of the forward contract, is allowable, as deduction Provision made for wage arrears to staff - Held that - It cannot be said that since the Bipartite agreement was signed only on 27.04.2010, the wage revision will be effected from the date of signing of the agreement. The ld. CIT(A) has observed that the assessee has made a provision in books based on reasonable estimate in accordance with mercantile system of accounting followed by it. The actual payment of this sum has been made during June, 2010 on signing the agreement. Though the agreement was signed on a later date, there definitely existed a liability on the part of the assessee to provide for it in its books. Therefore, by following the decision of the Coordinate Bench of the Tribunal in the case of Neyveli Lignite Corporation v. ACIT 2004 (8) TMI 364 - ITAT MADRAS-B , the ld. CIT(A) has correctly directed the Assessing Officer to allow the claim of the assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment.
2. Disallowance of excess depreciation claimed on ATMs and UPS.
3. Deduction under section 36(1)(viia) of the Act.
4. Set off of brought forward unabsorbed depreciation losses.
5. Disallowance of bad debts written off.
6. Broken period interest paid on purchase of securities.
7. Disallowance of provision for market risk and non-performing investments.
8. Disallowance under Rule 8D r.w.s. 14A.
9. Applicability of book profits under section 115JB.
10. Depreciation on assets taken over from Bank of Thanjavur.
11. Inclusion of income of foreign branches.
12. Depreciation on securities.
13. Taxability of interest on securities on due basis.
14. Loss on revaluation of forward contracts.
15. Provision for wage arrears.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:
The Tribunal upheld the validity of reopening the assessment under section 147 of the Act. It was noted that the Assessing Officer had reasons to believe that income had escaped assessment due to the excessive depreciation claimed on ATMs and UPS. The Tribunal found no infirmity in the reassessment order as the issue of depreciation on ATMs and UPS was not examined during the original assessment.

2. Disallowance of Excess Depreciation Claimed on ATMs and UPS:
The Tribunal allowed the assessee's claim for higher depreciation at 60% on ATMs, treating them as computers, citing the decision of the Delhi Tribunal in the case of DCIT v. Global Trust Bank Limited. However, the claim for higher depreciation on UPS was also allowed, following the decision of the Chennai Tribunal in the case of Indian Overseas Bank.

3. Deduction under Section 36(1)(viia) of the Act:
The Tribunal upheld the CIT(A)'s decision allowing the deduction under section 36(1)(viia) based on the average aggregate advances made by rural branches, rejecting the Assessing Officer's view that only incremental advances should be considered.

4. Set off of Brought Forward Unabsorbed Depreciation Losses:
The Tribunal allowed the set-off of brought forward unabsorbed depreciation losses from assessment years 1994-95 to 1998-99 against the income of the current assessment year, following the decision of the Gujarat High Court in the case of General Motors India (P) Ltd.

5. Disallowance of Bad Debts Written Off:
The Tribunal directed the Assessing Officer to verify whether the requirements of section 36(2) were satisfied and to allow the deduction for bad debts written off, following the Supreme Court decision in the case of Catholic Syrian Bank Ltd. v. CIT.

6. Broken Period Interest Paid on Purchase of Securities:
The Tribunal allowed the claim for broken period interest paid on the purchase of securities as revenue expenditure, following the decision of the Mumbai High Court in the case of American Express International Banking Corporation v. CIT.

7. Disallowance of Provision for Market Risk and Non-Performing Investments:
The Tribunal upheld the disallowance of provisions made for market risk and non-performing investments, as these were contingent liabilities and not allowable under the Income Tax Act.

8. Disallowance under Rule 8D r.w.s. 14A:
The Tribunal directed the Assessing Officer to disallow only 2% of the gross dividend received towards expenditure for earning such dividend income for assessment years prior to 2008-09. For assessment years 2008-09 onwards, the disallowance was to be made as per Rule 8D.

9. Applicability of Book Profits under Section 115JB:
The Tribunal held that the provisions of section 115JB did not apply to the assessee, a banking company, as it was not required to prepare its accounts as per Schedule VI of the Companies Act, 1956.

10. Depreciation on Assets Taken Over from Bank of Thanjavur:
The assessee's ground regarding depreciation on assets taken over from Bank of Thanjavur was dismissed as not pressed.

11. Inclusion of Income of Foreign Branches:
The Tribunal held that the income of the foreign branches at Singapore and Colombo should be included in the return of income filed in India, with credit for taxes paid in the source countries, following the decision of the Mumbai Tribunal in the case of Bank of Baroda v. ACIT.

12. Depreciation on Securities:
The Tribunal upheld the allowance of depreciation on securities shifted from "Available for Sale" to "Held to Maturity" category, following the decision of the Bangalore Tribunal in the case of State Bank of Mysore v. DCIT.

13. Taxability of Interest on Securities on Due Basis:
The Tribunal upheld the CIT(A)'s decision that interest on securities should be taxed on a due basis, following the decision of the Madras High Court in the cases of Tamilnadu Mercantile Bank Limited and City Union Bank Limited.

14. Loss on Revaluation of Forward Contracts:
The Tribunal upheld the CIT(A)'s decision that losses from derivative contracts involving foreign exchange were not speculative transactions and should be treated as regular business losses, following the decision of the Special Bench in the case of DCIT v. Bank of Bahrain and Kuwait.

15. Provision for Wage Arrears:
The Tribunal upheld the CIT(A)'s decision allowing the provision for wage arrears based on a reasonable estimate, following the decision of the Tribunal in the case of Neyveli Lignite Corporation v. ACIT.