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2014 (7) TMI 1185 - AT - Income TaxDisallowance under section 14A - Held that - We find that similar issue had come up for consideration before the Tribunal in assessee s own case for the assessment year 2003 04 and 2004 05, wherein the Tribunal has set aside the issue of disallowance under section 14A, back to the file of the Assessing Officer after observing and holding that there is a drastic change in the disallowance calculated by the assessee bank under the head disallowance made for earning exempt income. We further find that vital factors like availability of share capital / reserve & profits, holding of securities as stock in trade or investment, to decide the issue of proportionate disallowance have not been considered by the AO/ FAA. In our opinion, in the interest of justice matter has to be restored back to the file of the A.O. for fresh adjudication Disallowance of bad debt written off in relation to non rural branches - Held that - We hold that the provisions of ss. 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under cl. (viia), will be covered under the main part of s. 36(1)(vii), while the proviso will operate in cases under cl. (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under cl. (viia). The proviso to s. 36(1)(vii) will relate to cases covered under s. 36(1) (viia) and has to be read with s. 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under s. 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under s. 36(2). We hold that the assessee s claim for bad debt is to be allowed in terms of observations made by the Hon ble Supreme Court in Vijaya Bank vs. CIT & Anr. 2010 (4) TMI 46 - SUPREME COURT subject to satisfaction of requirements contemplated u/s 36(2) wherein held that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. Exclusion of income earned by the foreign branches - Held that - The income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxes have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given. - Decided against assessee Allowance of business expenditure - Held that - The assessee has claimed actual expenditure incurred on staff welfare to maintain cordial relationship. These expenses cannot be said to be of personal in nature and consistently it has been allowed by the appellate authorities. Thus, following the rule of consistency and also the fact that these expenses are incurred in the normal course of business to maintain healthy relationship with the employees, the same is to be treated as allowable business expenditure under section 37(1) - Decided in favour of assessee
Issues Involved:
1. Disallowance under section 14A. 2. Disallowance of bad debt written off in relation to non-rural branches. 3. Exclusion of income earned by the foreign branches. 4. Disallowance of staff welfare expenses. Issue-wise Detailed Analysis: i) Disallowance under section 14A: In the assessment year 2005-06, the assessee challenged the disallowance of Rs. 238.53 crores under section 14A against the exempt income of Rs. 182.33 crores. The Assessing Officer noted that the assessee earned exempt income from various sources and had estimated the expenditure for disallowance at Rs. 15,63,982. However, the AO worked out the disallowance at Rs. 2,38,53,21,733, as the capital was pooled and it was not possible to identify specific investments. The Commissioner (Appeals) upheld the AO's disallowance, deeming it reasonable despite rule 8D not being applicable. The Tribunal restored the issue to the AO for fresh adjudication without applying rule 8D, consistent with past decisions, directing the AO to work out a reasonable basis for disallowance. This decision was applied similarly for the assessment years 2006-07 and 2007-08. ii) Disallowance of bad debt written off in relation to non-rural branches: For the assessment years 2005-06, 2006-07, and 2007-08, the assessee claimed bad debt of Rs. 4,77,49,69,612 under section 36(1)(vii). The AO allowed only Rs. 106,60,38,651, disallowing Rs. 3,70,89,30,961, reasoning that the assessee did not meet the conditions of sections 36(1)(vii), 36(1)(viia), and 36(2)(v). The Commissioner (Appeals) enhanced the disallowance by Rs. 57,78,15,503, rejecting the assessee's argument for separate deductions under sections 36(1)(vii) and 36(1)(viia). The Tribunal, referencing the Supreme Court's decision in Catholic Syrian Bank Ltd. v/s CIT, ruled that sections 36(1)(vii) and 36(1)(viia) are independent provisions and directed the AO to allow the assessee's claim for bad debts subject to the requirements of section 36(2). iii) Exclusion of income earned by the foreign branches: The assessee contended that income from its foreign branches, taxed in the source country, should be excluded from the income filed in India, citing the Supreme Court decision in CIT v/s PVAL Kulandagan Chettiar. This issue was not raised before the AO or Commissioner (Appeals) for the assessment years 2005-06 and 2006-07 but was adjudicated in 2007-08. The Tribunal, considering the notification dated 29th August 2008 and the Tribunal's decision in Essar Oil Ltd. v/s ACIT, concluded that the phrase "may be taxed" does not preclude India from taxing the income of foreign branches. Thus, the income of the branches must be included in the return filed in India, with credit given for taxes paid abroad. The ground was dismissed for the assessment years 2005-06 and 2006-07 and allowed for 2007-08. iv) Disallowance of staff welfare expenses: The AO disallowed Rs. 14,78,23,918 claimed as staff welfare expenses, arguing these were not incurred wholly and exclusively for business. The Commissioner (Appeals) allowed the expenses, treating them as business expenditure under section 37(1), consistent with past decisions. The Tribunal upheld this view, recognizing the expenses as necessary for maintaining a healthy relationship with employees and allowable under section 37(1). Conclusion: - Assessee's appeals for disallowance under section 14A were partly allowed for statistical purposes. - Assessee's claims for bad debts were allowed subject to section 36(2) requirements. - The exclusion of foreign branch income was dismissed for 2005-06 and 2006-07 but allowed for 2007-08. - The disallowance of staff welfare expenses was dismissed, allowing the expenses as business expenditure.
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