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2007 (8) TMI 748 - AT - Income TaxDeduction u/s 36(1)(viia) - bad debts written off - Pro rata disallowance u/s 14A - Broken period interest paid on the purchase of securities - Applicability of s. 40A(9). Deduction u/s 36(1)(viia) - bad debts written off - HELD THAT - In the opinion of the AO, the proviso to s. 36(1)(vii) and s. 36(2)(v) clearly states that the assessee has to debit bad debts claimed during the year to the provision for bad and doubtful debts and deduction of bad debts u/s 36(1)(vii) of the Act is limited to the amount which exceeds the credit balance available in the provision for bad and doubtful debts u/s 36(1)(viia) of the Act. The AO asked the assessee to furnish the break-up of the bad debts pertaining to the rural branches as well as non-rural branches. The assessee filed the reply contending that the entire write off of bad debts pertains to the non-rural branches and provision for bad and doubtful debts relating to advances made on rural branches. Finally, the AO came to the conclusion that the provision for bad and doubtful debts relating to 10 per cent of the rural advances for the AY 2002-03 is to be allowed, but at the same time, the AO was of the opinion that total sum to be deducted from the total bad debts written off as per proviso to s. 36(1)(vii). In short, the AO made the disallowance in respect of the bad debts written off and provision for bad and doubtful debts. We find that this issue is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of South Indian Bank Ltd. 1999 (3) TMI 43 - KERALA HIGH COURT . Respectfully following the same as well as the decision of this Tribunal in assessee's own case, we hold that the CIT(A) has rightly deleted the addition made by the AO in respect of the bad debts written off. We, therefore, confirm the order of the CIT(A) on this issue. Pro rata disallowance u/s 14A - expenditure estimated to be incurred for earning tax-free income - HELD THAT - An identical issue had come for the consideration of this Tribunal in the case of Dhanlakshmi Bank Ltd. 2006 (7) TMI 524 - ITAT COCHIN held that; '' We are, therefore, of the opinion that in spite of the introduction of s. 14A, the principles laid down by the apex Court in the case of Rajasthan State Warehousing Corporation 2000 (2) TMI 5 - SUPREME COURT still hold good law and as there is no clear identity in respect of the funds applied by the assessee for making the investment for earning the tax-free income as well as taxable income and as assessee's business is indivisible one, the method adopted by the AO for making the disallowance is not a permissible method and AO was not justified in making the disallowance from the expenditure in respect of the interest attributable to investment on tax-free bonds and expenditure incurred for earning the dividend income. In our opinion, the same principles are applicable to the assessee's case. We, therefore, uphold the order of the CIT(A) on this issue. Addition in respect of the broken period interest paid on the purchase of securities - HELD THAT - An identical issue had come for the consideration before, in the case of Nedungadi Bank Ltd. 2002 (11) TMI 29 - KERALA HIGH COURT held as under '' Following the decision in CIT vs. South Indian Bank Ltd. 2002 (11) TMI 53 - KERALA HIGH COURT held that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of the total income of the bank under the head 'Profits and gains of business or profession'. Respectfully following the ratio in the above precedent, we hold that the CIT(A) has rightly deleted the addition in respect of broken period interest made by the AO. We, therefore, confirm the order of the CIT(A) on this issue. Applicability of s. 40A(9) - Disallowance on the contribution to medical benefit scheme - HELD THAT - On the perusal of the said scheme, it is seen that the fund is to be created with the contribution from the bank as well as pensioners and for administration of the funds, a managing committee was formed. As per the scheme, each member to the scheme and his/her respective spouse are the beneficiaries. It is further provided that the spouse of the member will continue to receive the benefit even after the death of the member. Certain ailments and diseases were specified which would be covered under the scheme and the maximum limit of reimbursement was restricted to Rs. 30,000. As per the terms of bipartite agreement between the associate bank management and the union, the assessee paid Rs. 50 lakhs as its contribution towards the formulation of the fund under the scheme. On a bare reading of the sec 40A(9), it is very clear that any sum paid by the assessee as an employer towards setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, etc. except to the extent provided by or under cls. (iv) and (v) of s. 36(1) or required by or under any other law for the time being in force is not an allowable expenditure. In the present case, the fund is not controlled by the assessee bank. In our opinion, the decision relied on by the Revenue of Hon'ble Andhra Pradesh High Court in the case of Raasi Cement Ltd. 2004 (12) TMI 55 - ANDHRA PRADESH HIGH COURT is not helpful. In our further considered opinion, the bona fide contribution made by the assessee as an employer to the fund set up as a part of the settlement between the assessee bank and its executive employees is not hit by sub-s. (9) of s. 40A. We, therefore, uphold the order of the CIT(A) on this issue. In the result, the Revenue's appeal is dismissed.
Issues Involved:
1. Deduction of bad debts written off. 2. Pro-rata disallowance under Section 14A. 3. Deduction of broken period interest paid on the purchase of securities. 4. Deduction of contribution to the Retired Employees Medical Benefit Scheme. Issue-wise Analysis: 1. Deduction of Bad Debts Written Off: The primary issue was whether the CIT(Appeals) was justified in directing the Assessing Officer (AO) to allow the entire bad debts written off without limiting the deduction to the amount exceeding the credit balance in the provision for bad and doubtful debts account. The assessee bank claimed a deduction of Rs. 100,17,62,010/- as bad debts written off and an additional Rs. 35,47,29,345/- under Section 36(1)(viia) for the provision for bad and doubtful debts. The AO contended that the assessee was claiming a double deduction under Sections 36(1)(vii) and 36(1)(viia). The AO disallowed Rs. 19,51,13,004/- from the total bad debts written off. The CIT(Appeals) allowed the entire claim, relying on previous Tribunal decisions and the Jurisdictional High Court's rulings. The Tribunal upheld the CIT(Appeals)'s decision, confirming the allowance of the entire bad debts written off. 2. Pro-rata Disallowance Under Section 14A: The next issue was whether the CIT(Appeals) was justified in deleting the addition of Rs. 44,33,575/- made by the AO under Section 14A for expenditure related to tax-free income. The AO estimated the expenditure at 5% of the total tax-free income, relying on the Bombay High Court's decision in CIT v. Scindia Investment Pvt. Ltd. The CIT(Appeals) deleted the addition, relying on the Delhi ITAT's decision in Maruti Udyog Ltd. The Tribunal upheld the CIT(Appeals)'s decision, noting that the assessee's business was indivisible, and no clear method for disallowance was prescribed under Section 14A(2). Thus, the entire expenditure was allowable. 3. Deduction of Broken Period Interest Paid on the Purchase of Securities: The issue was whether the CIT(Appeals) was justified in deleting the addition of Rs. 27,52,58,302/- made by the AO as broken period interest paid on the purchase of securities. The AO made the addition as a protective measure, pending the Department's SLP against the Jurisdictional High Court's decision in favor of the assessee. The CIT(Appeals) deleted the addition, relying on previous decisions of the Jurisdictional High Court and the Bombay High Court. The Tribunal confirmed the CIT(Appeals)'s order, allowing the deduction of broken period interest. 4. Deduction of Contribution to the Retired Employees Medical Benefit Scheme: The final issue was whether the CIT(Appeals) was justified in deleting the addition of Rs. 50 lakhs made by the AO for the assessee's contribution to the Retired Employees Medical Benefit Scheme. The AO disallowed the contribution under Section 40A(9), contending it was not allowable. The CIT(Appeals) allowed the deduction, relying on the ITAT Hyderabad Bench's decision in Rasi Cements Ltd. and the Jurisdictional High Court's decision in Travancore Cements Ltd. The Tribunal upheld the CIT(Appeals)'s decision, noting that the contribution was part of a settlement with the officers' union and was not hit by Section 40A(9). The Tribunal emphasized the bonafide nature of the contribution and the lack of control by the assessee bank over the fund. In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(Appeals)'s decisions on all issues.
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