2016 (3) TMI 1087 - AT - Income Tax

Disallowance made under section 14A - Held that - As rightly submitted by the ld. counsel for the assessee relying on the several decisions of the Tribunal, the similar disallowance made under section 14A has been restricted by the Tribunal to 1% of the exempt income by treating the same to be fair and reasonable. In the present case, the disallowance offered by the assessee under section 14A is more than 1% of the exempt income and this being the undisputed position, we hold that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A over and above the disallowance offered by the assessee at more than 1% of the exempt income is not sustainable - Decided in favour of assessee Disallowance of deduction under section 36(1)(viii) - Held that - Respectfully following the decision of Union Bank of India 2012 (6) TMI 500 - ITAT MUMBAI we hold that the assessee in the present case is entitled for deduction under section 36(1)(viii) and accordingly direct the Assessing Officer to allow the claim of the assessee for deduction under section 36(1)(viii) after verifying the quantum thereof in accordance with law. - Decided in favour of assessee Restricting the claim of the assessee for deduction under section 36(1)(viia) of the Act for provision for bad and doubtful debts - Held that - It is observed that a similar issue has been decided in favour of the revenue and against the assessee in the case of State Bank of Patiala-vs.- CIT 2004 (5) TMI 12 - PUNJAB AND HARYANA High Court wherein it was held that the deduction allowable under section 36(1)(viia) is in respect of the provision made and, therefore, making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under section 36(1)(vii). Since there is no other decision of any High Court taking a different view on this issue has been brought to our notice, we respectfully follow the decision of the Hon ble Punjab & Haryana High Court and uphold the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on account of deduction under section 36(1)(viia).- Decided in favour of assessee MAT applicability - Held that - The provision of section 115JB is not applicable in the case of the assesese and accordingly delete the additions made by the Assessing Officer and confirmed by the ld. CIT(Appeals) while computing the book profit of the assessee by applying the said provision as section 115JB is not applicable to the Bank as it is not required to prepare its profit & loss account in accordance with Schedule 6B(i) of the Companies Act, 1956 but it prepares its Profit & Loss Account as per the Banking Regulation Act, 1949. - Decided in favour of assessee Addition on account of provision for salary arrears - Held that - Hon ble Supreme Court in the case of Bharat Earth Movers Limited vs.- CIT reported in 2000 (8) TMI 4 - SUPREME Court , wherein it was held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, although the liability may have to be quantified and discharged at a future date. It was held that what should be certain is the incurring of the liability which should be capable of being estimated with reasonable certainty though the actual quantification may not be p9ossible. It was held that if these requirements are satisfied, the liability is not a contingent one but it is a liability in presenti. In our opinion, the ratio of these judicial pronouncements is clearly applicable to the facts of the present case and respectfully following the same, we uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for deduction on account of provision for salary arrears. - Decided in favour of assessee Disallowance of assessee s claim for bad debts written off under section 36(1)(vii) - CIT(A) deleted the addition - Held that - In the case of Catholic Syrian Bank Limited reported 2002 (8) TMI 266 - ITAT COCHIN also confirmed by SC 2012 (2) TMI 262 - SUPREME COURT OF INDIA held that the debts actually written off, which do not actually arise out of the rural advances, are not affected by the proviso to section 36(1)(vii) and deduction on account of only those bad debts written off, which arises out of rural advances is to be limited in accordance with the said proviso. - Decided in favour of assessee Addition on account of the amount transferred from Contingency Account - General to the credit of Profit & Loss Account - Held that - Assessing Officer as well as the ld. CIT(Appeals) have proceeded on the presumption that these amounts might have been debited by the assessee to the Profit & Loss Account in the earlier years. He has urged that an opportunity may, therefore, be given to the assessee to establish that the said amounts had not been claimed by it as deduction in any of the earlier years and the provisions of section 41(1) thus are not applicable. Although the ld. D.R. has strongly opposed to this request of the ld. counsel for the assessee, we consider it fair and reasonable and in the interest of justice to accede to the said request. Accordingly, the impugned order of the ld. CIT(Appeals) on this issue is set aside and the matter is restored to the file of the Assessing Officer for the limited purpose of giving the assessee an opportunity to establish its case that no deduction on account of the amounts in question was claimed by it while computing the total income of any of the earlier years

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Deduction under section 36(1)(viii) of the Income Tax Act.
3. Deduction under section 36(1)(viia) for provision for bad and doubtful debts.
4. Applicability of section 115JB for computing book profit.
5. Deduction for provision for salary arrears.
6. Deduction for bad debts written off under section 36(1)(vii).
7. Addition of amounts transferred from "Contingency Account - General" to Profit & Loss Account under section 41(1).
8. Disallowance of public issue expenses.
9. Disallowance under section 14A read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act, 1961:
The assessee, a Government of India Undertaking engaged in Banking business, claimed dividend income and interest on tax-free bonds as exempt. The disallowance offered by the assessee was Rs. 50,14,233/-. The Assessing Officer made a disallowance of 5% of exempt income, which was confirmed by the CIT(A). The Tribunal held that disallowance under section 14A should be restricted to 1% of the exempt income, which was more than what the assessee had offered. Thus, the disallowance over and above 1% was deleted, and the assessee's appeal was allowed.

2. Deduction under section 36(1)(viii) of the Income Tax Act:
The assessee claimed a deduction under section 36(1)(viii) for reserve created from profits earned out of long-term finance. The Assessing Officer disallowed this, stating the assessee was not a Financial Corporation. The CIT(A) confirmed this disallowance. However, the Tribunal, following the decision in Union Bank of India vs. ACIT, held that the assessee, being a Government company engaged in providing long-term finance, was entitled to the deduction. The matter was remitted back to the Assessing Officer for verification of the quantum of deduction.

3. Deduction under section 36(1)(viia) for provision for bad and doubtful debts:
The assessee claimed a deduction of Rs. 2,31,42,83,800/- under section 36(1)(viia). The Assessing Officer allowed only Rs. 40,00,00,000/- as the provision made in the books was only to that extent. The CIT(A) confirmed this disallowance. The Tribunal upheld the CIT(A)'s order, following the decision of the Punjab & Haryana High Court in State Bank of Patiala vs. CIT, which required the provision to be made in the books to claim the deduction.

4. Applicability of section 115JB for computing book profit:
The Tribunal held that the provisions of section 115JB were not applicable to the assessee-Bank, as it prepares its Profit & Loss Account as per the Banking Regulation Act, 1949, and not as per Schedule 6B(i) of the Companies Act, 1956. This was in line with the decisions of the Kerala High Court and the Mumbai Bench of ITAT. Consequently, the additions made under section 115JB were deleted.

5. Deduction for provision for salary arrears:
The assessee made a provision of Rs. 138.83 crores for salary arrears due to wage revision negotiations. The Assessing Officer disallowed this, treating it as an unascertained liability. The CIT(A) allowed the deduction, citing Accounting Standard 29 and the Supreme Court's decision in Rotork Controls India (P) Limited vs. CIT. The Tribunal upheld the CIT(A)'s order, noting that the liability had accrued and could be reasonably estimated.

6. Deduction for bad debts written off under section 36(1)(vii):
The assessee claimed a deduction of Rs. 75,00,00,000/- for bad debts written off. The Assessing Officer disallowed this, stating that the opening balance of provision for bad debts under section 36(1)(viia) was higher. The CIT(A) allowed the deduction, following the Tribunal's earlier decision and the Special Bench's decision in Catholic Syrian Bank Limited. The Tribunal upheld the CIT(A)'s order, following the Supreme Court's decision in Catholic Syrian Bank Limited.

7. Addition of amounts transferred from "Contingency Account - General" to Profit & Loss Account under section 41(1):
The Assessing Officer added Rs. 45.09 crores to the income, treating it as cessation of liability. The CIT(A) confirmed this addition. The Tribunal remitted the matter back to the Assessing Officer to verify if the amounts had been claimed as deductions in earlier years, giving the assessee an opportunity to establish its case.

8. Disallowance of public issue expenses:
The assessee did not press this ground during the hearing. Therefore, it was dismissed as not pressed.

9. Disallowance under section 14A read with Rule 8D of the Income Tax Rules:
For A.Y. 2006-07, the Tribunal noted that Rule 8D is applicable only from A.Y. 2008-09. The disallowance under section 14A should be made on a reasonable basis. Following the decision for A.Y. 2005-06, the Tribunal held that the disallowance offered by the assessee (more than 1% of the exempt income) was fair and reasonable, and deleted the further disallowance made by the Assessing Officer.

Conclusion:
The assessee's appeals for A.Y. 2005-06 and 2006-07 were partly allowed, and the Revenue's appeal for A.Y. 2005-06 was dismissed. The Tribunal provided detailed reasoning for each issue, ensuring adherence to legal precedents and accounting standards.