2008 (1) TMI 935 - AT - Income Tax

Summary

Issues:
1. Treatment of interest accrued on Government Securities under mercantile system of accounting.
2. Applicability of section 14A for disallowance.
3. Disallowance under section 36(1)(viia).
4. Treatment of loss from capital assets as revenue expenditure under section 37(1).
5. Disallowance of bad and doubtful debts under section 36.
6. Claim of deduction under section 36(1)(viii) for a banking company.

Interest Accrued on Government Securities:
The appeal addressed the treatment of interest accrued on Government Securities under the mercantile system of accounting. The ITAT upheld the CIT(A)'s decision to treat the interest as income on a due basis, citing previous decisions and the Karnataka High Court's ruling in CIT v. Canara Bank [1992] 195 ITR 661. The ITAT found the CIT(A)'s order sustainable in law, dismissing the revenue's ground.

Applicability of Section 14A:
Regarding the disallowance under section 14A, the ITAT affirmed the CIT(A)'s decision that the provision of section 14A could not be applied in the case, leading to the deletion of the disallowance. The Tribunal's previous rulings supported this decision, and the ITAT deemed the CIT(A)'s order justified in law.

Disallowance under Section 36(1)(viia):
The issue of disallowance under section 36(1)(viia) was raised, with the ITAT supporting the CIT(A)'s decision to delete the disallowance. Previous Tribunal decisions for the same assessee upheld that the disallowance was not justified, leading the ITAT to find the CIT(A)'s order sustainable in law.

Treatment of Loss from Capital Assets:
Regarding the treatment of a loss from capital assets as revenue expenditure under section 37(1), the ITAT found in favor of the assessee, as the issue had been previously decided in favor of the assessee for earlier assessment years. The ITAT saw no reason to interfere with the CIT(A)'s order on this matter.

Disallowance of Bad and Doubtful Debts:
The ITAT addressed the disallowance of bad and doubtful debts under the newly introduced proviso below clause (vii) of sub-section (1) of section 36. Relying on previous Tribunal decisions and the Kerala High Court's ruling in South Indian Bank Ltd. v. CIT [2003] 262 ITR 579, the ITAT upheld the CIT(A)'s decision to delete the addition, holding the issue against the revenue.

Claim of Deduction under Section 36(1)(viii):
The final issue concerned the claim of deduction under section 36(1)(viii) for a banking company. The ITAT disagreed with the CIT(A)'s decision, stating that the assessee bank could not be treated as a financial institution for the purpose of the special deduction under section 36(1)(viii). The ITAT set aside the CIT(A)'s order, restoring the addition of the claimed amount.

In conclusion, the appeal filed by the revenue was partly allowed, with various issues being decided in favor of both the revenue and the assessee based on legal interpretations and previous rulings.