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2012 (9) TMI 697 - AT - Income TaxDisallowance of frauds loss - assessee a Banking company - Held that - As per the contract between the investors and the broker, the broker was required to deliver the securities to the investors contracted for. During the year out of 27 syndication deals 12 deals could not be completed and remained outstanding. In all these cases the contract notes were issued to the investors by the broker. The assessee had only acted as a facilitator between the investor and the broker. In all these cases the broking firm failed to deliver securities after taking funds from the investors. As the assessee is in the business of Merchant banking activities and the expenditure has been incurred during the course of business and also a fact that the assessee was not legally liable to make the payment and compensate the investors but the assessee had compensated the investors, in these circumstances it cannot be said that the expenditure is not relating to the assessee s business only for the reason that it was legally not liable to pay. Thus it can be considered to have been made as a matter of business expediency. The payment was made by the assessee to keep up the reputation of the assessee bank, to avoid long protracted litigation, to continue the business relationship with the PSUs and their employees, to increase the business in the long run, promoting its business and in the interest of business the compensation payments were made. Thus it can be said that the amount of compensation of ₹ 15.62 crores is an expenditure has been incurred wholly and exclusively for the purpose of assessee s business - As far as the payment of penalty of ₹ 5 lacs pursuant to the order of RBI is concerned, relying on the decision of Apex Court in the Maddi Vankataraman (1997 (12) TMI 3 - SUPREME COURT) held that expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction u/s 37 and in view of the fact that the penalty was levied for violation of Banking Regulation Act, the same cannot be allowed as deduction - partly in favour of assessee. Deduction in respect of professional fees paid for implementation of Visa Module and FM support to base 24 switches & upgradation of ATMs - allowed depreciation at the applicable rates - Held that - On perusing the Assessment order it has stated that the assessee is allowed depreciation at the applicable rates depending upon the date put to use. In view of these facts the AO is directed to verify the records and grant depreciation on the additions made, if not already allowed - in favour of assessee for statistical purposes. Disallowance u/s. 14A - Held that - As during the year the assessee has earned interest of ₹ 17.45 crore on tax free bond and debentures as against which the assessee had suo moto disallowed ₹ 5.53 crore being the interest expenses u/s 14A as against which the AO has worked out the disallowance of ₹ 32.76 crore. After giving the credit of disallowance of ₹ 5.53 crore made by the Assessee, the AO disallowed ₹ 27.23 crore u/s 14A. As on 31st March 2003, the interest free funds available with the assessee was to the tune of ₹ 3404 crore (comprising of share capital of ₹ 230 crore, Reserves of ₹ 689 crores and interest free demand deposits of ₹ 2485 crores) as against which the tax free investments were to the tune of ₹ 589 crore. Thus the interest free funds were far in excess of the investments - as the assessee has suo moto disallowed ₹ 5.53 crore u/s 14A no further disallowance over and above than what has been disallowed by the Assessee is called for - in favour of assessee. Disallowance of deduction of bad and doubtful debts u/s. 36(1)(vii) - Held that - As decided in assessee s own case that while working out the deduction u/s 36(1)(vii), the opening credit balance i.e balance brought forward as on 1st April of the relevant accounting period needs to be reduced - Since the issue in the present appeal is identical to that of AY 2001- 02 similar view is to be taken and accordingly direct the AO to examine the matter and allow the claim in accordance with the order of the tribunal - in favour of assessee for statistical purposes. Disallowance of Compensation for non occupation of the premises - Held that - The assessee had contracted with landlord to take a premise on lease for opening its branch though no formal agreement with the landlord was entered into & before the construction was completed the assessee was of the view that the overbridge will cause hindrance to conduct the business and services accordingly it decided to terminate the understanding with the assessee compensated the landlord by making a payment of ₹ 6 lacs in full and final settlement of all its claims. Thus from the facts it is clear that the transaction in respect of which the compensation was paid arose during the course of business and was for the purpose of business. The expense has been incurred by the assessee to protect its interest and in lieu of the claims that could have been raised by the landlord - in favour of assessee. Disallowance of fees paid to KPMG and traveling expenses - no prior permission was received from RBI before incurring such expenses - Held that - As the submissions and case laws relied by the assessee CIT (A) has given a finding that the expenses are of revenue nature and were incurred for the expansion of existing business and accordingly deleted the addition made by the AO and the Revenue has not controverted the findings of CIT(A) nor has brought on record any material to the contrary - in favour of assessee. Disallowance of computer cabling expenses - Held that - CIT(A) has given a finding that the expenses on shifting of telephone line from one leased premise to another does not result into any new advantage to the assessee and the lease is liable to termination in case of default of assessee. No reason to interefere in the order of CIT(A) arises - in favour of assessee. Disallowance of professional services - Held that - Considering the assessee s submission that that the payments are in the nature of annual subscription, service charges and for expenses similar to AMC charges & analyzing the vouchers of the expenses CIT(A) deleted the disallowance except of ₹ 34.35 lacs paid to FSSPL and as Revenue has neither been in a position to controvert the findings of CIT (A) nor has brought any material to the contrary - in favour of assessee.
Issues Involved:
1. Disallowance of fraud loss amounting to Rs. 15.46 crores. 2. Deduction in respect of professional fees paid to Financial Software and System Pvt. Ltd. (FSSPL) and NCR Corporation. 3. Disallowance under section 14A. 4. Deduction under section 36(1)(vii). 5. Interest under section 234B. 6. Compensation of Rs. 6 lakhs paid for non-occupation of premises. 7. Fees of Rs. 26.25 lakhs paid to KPMG and travelling expenses of Rs. 5.58 lakhs. 8. Payment of service charges of Rs. 25.84 lakhs and computer cabling expenses of Rs. 1.50 lakhs. 9. Considering Rs. 4.07 crores paid as professional services as revenue expenditure. Detailed Analysis: 1. Disallowance of Fraud Loss Amounting to Rs. 15.46 Crores: The assessee, a banking company, claimed a loss of Rs. 15.56 crores as "loss on account of frauds" due to non-delivery of securities by Home Trade Ltd. The A.O. disallowed this amount, stating it was not incidental to the business of banking and was in violation of section 6(1) of the Banking Regulation Act, 1949. The CIT (A) upheld the A.O.'s decision, emphasizing that the transactions were not permissible under banking regulations and the expenditure was not incidental to banking business. The Tribunal, however, allowed the deduction, stating that the payment was made out of commercial expediency to maintain the bank's reputation and avoid litigation. 2. Deduction in Respect of Professional Fees Paid to FSSPL and NCR Corporation: The A.O. disallowed Rs. 34.35 lakhs paid to FSSPL and Rs. 25.84 lakhs paid to NCR Corporation, treating them as capital expenditures. The CIT (A) upheld the A.O.'s decision. The Tribunal directed the A.O. to verify the records and grant depreciation on these expenses if not already allowed. 3. Disallowance under Section 14A: The A.O. disallowed Rs. 27.23 crores under section 14A, stating that borrowed funds were used for tax-free investments. The CIT (A) reduced this disallowance to Rs. 7.23 crores. The Tribunal found that the assessee had sufficient interest-free funds and no further disallowance over the suo moto disallowance of Rs. 5.53 crores was warranted. The Tribunal also found no basis for disallowance of administrative expenses as the A.O. had not provided any findings on this aspect. 4. Deduction under Section 36(1)(vii): The A.O. disallowed Rs. 60.04 crores, following the order for AY 2001-02. The CIT (A) confirmed the disallowance of Rs. 6.60 crores. The Tribunal directed the A.O. to examine the matter and allow the claim in accordance with the Tribunal's order and CBDT instructions, allowing the appeal for statistical purposes. 5. Interest under Section 234B: This issue was deemed consequential and not adjudicated separately. 6. Compensation of Rs. 6 Lakhs Paid for Non-Occupation of Premises: The A.O. disallowed the compensation, stating there was no formal lease agreement. The CIT (A) deleted the addition, stating the expense was incurred to protect the bank's business interests. The Tribunal upheld the CIT (A)'s decision, emphasizing the commercial expediency of the expenditure. 7. Fees of Rs. 26.25 Lakhs Paid to KPMG and Travelling Expenses of Rs. 5.58 Lakhs: The A.O. disallowed these expenses, stating no RBI permission was obtained. The CIT (A) deleted the addition, finding the expenses were for revenue purposes and incurred for business expansion. The Tribunal upheld the CIT (A)'s decision. 8. Payment of Service Charges of Rs. 25.84 Lakhs and Computer Cabling Expenses of Rs. 1.50 Lakhs: The A.O. treated these expenses as capital expenditures. The CIT (A) upheld the disallowance of Rs. 25.84 lakhs but allowed depreciation. The Tribunal upheld the CIT (A)'s decision regarding the cabling expenses, finding them to be revenue in nature. 9. Considering Rs. 4.07 Crores Paid as Professional Services as Revenue Expenditure: The A.O. disallowed these payments, treating them as capital expenditures. The CIT (A) found most expenses to be revenue in nature except Rs. 34.35 lakhs paid to FSSPL. The Tribunal upheld the CIT (A)'s decision, finding no material to the contrary from the Revenue. Conclusion: The Tribunal provided a detailed analysis and upheld the CIT (A)'s decisions on most grounds, allowing the appeal of the assessee partly and dismissing the appeal of the Revenue.
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