2012 (6) TMI 500 - AT - Income Tax

Applicability of section 36(1)(viii) to banks - financial corporation - public company and a Government Company - held that - . The assessee is a financial corporation within the meaning of Sec. 36(1)(viii) since it is Govt. company. However the deduction available under this section will be restricted to the amount transferred to Special reserve subject to the limit of prescribed percentage of profits derived from providing long term finance for the approved purposes mentioned in sec 36(1)(viii). Disallowance of expenditure for non-deduction of TDS at Sikkim - Held that - if the income is not taxable under the Indian Income tax Act, the payer is not under any obligation to deduct tax and the payment cannot be disallowed for non-deduction of Tax. disallowance on account of non-deduction/ payment of TDS deleted Applicability of the provisions of sec. 115JB - appellant is not a company under Companies Act but is only deemed to be a company as per the provisions of sec. 11 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 - provisions of sec. 115JB do not apply to the assessee, and, as such, the AO was in error in concluding that income had escaped assessment in the hands of the assessee Prior period expenses - expenditure disallowed as in the nature of rent, municipal taxes etc, where usually the amounts are paid after detailed negotiations and receipt of demand of the arrears amount from the parties. - held that - even though they are treated technically as prior period expenses, it relates to a continuous flow of expenditure. Therefore, there is no justification in disallowing the expenditure, otherwise normally eligible for deduction Taxability of reversal of unrealized interest - assessee had been following similar method of accounting and the same had been accepted by the department in the earlier years. Therefore, the non-recognition of income for the year under consideration in respect of non-performing assets cannot be accepted. assessee s appeal allowed Allowability of non-rural bad debts written off - credit balance in the provision for bad and doubtful debts allowed u/s. 36(1)(viiia) exceeds the bad debts written off - The provision of section 36(1)(viia) does not apply to bad debts written off to advances made by non-rural branches. Bad debts written off by advances made by non-rural branches should be allowed in full without any restrictions or limitations. provisions of sec. 36(1)(viia) does not apply to bad debts written off to advances made by non rural branches Change in method of valuation of such securities held as stock-in-trade, by no stretch of imagination, can be said to be not bona fide. - In fact, ignoring the loss would result in distortion of the real income of the assessee during the year under appeal. The representative of the assessee also confirmed that the changed method of valuation of securities has consistently been followed in all subsequent years. We, therefore, approve the change in the method of valuation of securities held as stock-in-trade. appeal filed by the assessee is partly allowed for statistical purpose and the appeal filed by the Revenue is dismissed.

Issues Involved:
1. Depreciation on leased assets.
2. Disallowance under Section 14A of the Income Tax Act.
3. Deduction under Section 36(1)(viii) of the Income Tax Act.
4. Disallowance of expenditure for non-deduction of TDS at Sikkim.
5. Applicability of the provisions of Section 115JB.
6. Disallowance under Section 14A in computing book profits.
7. Prior period expenses.
8. Reversal of interest.
9. Bad debts written off.
10. Depreciation on investments.

Detailed Analysis:

1. Depreciation on Leased Assets:
The Tribunal dismissed the assessee's appeal on this issue, citing previous decisions in the assessee's own case for earlier assessment years. It was consistently held that the transactions were essentially loan or finance transactions and not genuine lease transactions, thus disallowing the claim for 100% depreciation on leased assets.

2. Disallowance under Section 14A:
The Tribunal noted that the applicability of Section 14A was upheld by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT. The matter was remitted back to the Assessing Officer (AO) to determine the quantum of disallowance on a 'reasonable basis' after providing the assessee an opportunity to be heard.

3. Deduction under Section 36(1)(viii):
The Tribunal allowed the assessee's appeal, holding that the definition of 'financial corporation' under Section 36(1)(viii) is inclusive and not exhaustive. The assessee, being a government company engaged in providing long-term finance for specified purposes, was eligible for the deduction. The matter was remitted back to the AO to determine the deduction amount subject to the prescribed limits.

4. Disallowance of Expenditure for Non-Deduction of TDS at Sikkim:
The Tribunal deleted the disallowance, citing the Supreme Court decision in GE India Technology Centre (P) Ltd v CIT, which held that if the income is not taxable under the Indian Income Tax Act, the payer is not obligated to deduct tax. The Tribunal noted that the Income Tax Act's applicability to Sikkim was not clear, and the assessee had relied on communications from Sikkim authorities indicating non-applicability.

5. Applicability of the Provisions of Section 115JB:
The Tribunal reversed the CIT(A)'s decision, holding that the provisions of Section 115JB do not apply to the assessee, as it is not a company under the Companies Act but deemed to be a company under the Banking Companies Act. The Tribunal followed the Jurisdictional High Court's decision in Kurung Thai Bank (PCL).

6. Disallowance under Section 14A in Computing Book Profits:
This ground was dismissed as consequential, following the dismissal of the ground related to the applicability of Section 115JB.

7. Prior Period Expenses:
The Tribunal dismissed the Revenue's appeal, agreeing with the CIT(A) that the nature of the expenses (rent, municipal taxes, etc.) and the bank's nationalized status justified the claim that the liability arose in the relevant assessment year. The Tribunal followed the Jurisdictional Court's decision in Toyo Engg. India Ltd. v. Joint CIT.

8. Reversal of Interest:
The Tribunal allowed the assessee's appeal, citing previous decisions in the assessee's own case, which held that the non-recognition of income in respect of non-performing assets, following RBI guidelines, was justified. The addition of Rs. 6,12,80,937 was deleted.

9. Bad Debts Written Off:
The Tribunal dismissed the Revenue's appeal, holding that the provisions of Section 36(1)(viia) do not apply to bad debts written off for advances made by non-rural branches. The Tribunal followed its earlier decisions and directed the AO accordingly.

10. Depreciation on Investments:
The Tribunal dismissed the Revenue's appeal, following its earlier decisions in the assessee's own case, which held that securities held by banks as part of their circulating capital should be valued at cost or market value, whichever is lower. The Tribunal approved the change in the method of valuation of securities and directed the AO to verify and allow the loss.

Conclusion:
The Tribunal's consolidated order addressed multiple issues across various assessment years, providing detailed reasoning and following precedents in the assessee's own cases and relevant judicial decisions. The appeals were partly allowed for statistical purposes, and the Revenue's appeals were dismissed.

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