2013 (3) TMI 307 - AT - Income Tax

Disallowance of proportionate expenditure on exempted income u/s.14A r.w.r. 8D - Held that - The Assessment Year on appeal is 2007-08 and hence the provision of Rule 8D will not be applicable as held in the case of Godrej & Boyce Mfg Co Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT). Therefore, set aside the issue of disallowance of income u/s 14A to the files of AO to make reasonable estimate of expenditure which are attributable to earning of exempt income and disallow the same u/s14A - in favour of assessee by way of remand. Disallowance u/s.36(1)(viia) in respect of advances from their Rural Branches - The assessee had claimed 10% of the aggregate average rural branches advance and have also claimed provision and doubtful debts @ 7.5% of the total income under sec 36(1)(viia) - Held that - As decided in TRF Ltd (2010 (2) TMI 211 - SUPREME COURT), Vijaya bank Ltd (2010 (4) TMI 46 - SUPREME COURT) and Catholic Syrian Bank Ltd (2012 (2) TMI 262 - SUPREME COURT OF INDIA) that any debt written off as irrecoverable should be allowed as deduction. If the provision for bad debts debited to the P&L is netted against the current assets the provisions is an allowable deduction even if individual accounts of the debtors are not wtitten off. Thus the bank would be entitled to both the deductions, one under Clause (vii) on the basis of actual write off and another on the basis of clause (viia) in respect of mere provision but to prevent to double deduction, proviso to clause (vii) was inserted which says that in respect of bad debts arising out of rural advances the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus deduction u/s 36(1)(viia) is to be allowed only on the amount of provision made for bad and doubtful debts subject to the maximum on the basis of rural advances/ income prescribed under that section - Thus set aside the issue to the file of the AO to decide the issue in the light of the above decisions. Applicability of provision of Sec.115JB to the assessee bank - assessee contented that being a bank, the provisions of companies act will not apply to it and hence will not be liable to tax u/s.115JB - Held that - Prior to AY 2013-14, provisions of sec 115JB will not apply to companies to which proviso to sec 211(2) of the companies Act, 1956 applies. The Assessee being a company to which proviso to sec 211(2) of the Companies Act 1956 applies, will not be liable to be taxed under sec 115JB. As in Krung Thai Bank Vs. JCIT (2010 (9) TMI 18 - ITAT, MUMBAI) that provision of Sec.115JB cannot be applied to the banking company. Thus the claim of the assessee that provision of Sec.115JB will not be applicable to the Assessee Bank and set aside the assessment made u/s 115JB on the Assessee company - in favour of assessee. Disallowance of broken period interest - appellant s contention that the securities constituted stock in trade - Held that - As decided American Express International Banking Corporation Vs. CIT 2002 (9) TMI 96 - BOMBAY HIGH COURT the broken period interest is an allowable deduction - against revenue.

Issues Involved:
1. Disallowance of proportionate expenditure on exempted income under Section 14A.
2. Disallowance of Rs.276.39 crores claimed under Section 36(1)(viia) for rural branch advances.
3. Applicability of Section 115JB to the assessee bank.
4. Disallowance of broken period interest of Rs.58.51 crores.
5. Deletion of disallowances on account of bad and doubtful debts and bad debts written off.

Detailed Analysis:

1. Disallowance of Proportionate Expenditure on Exempted Income under Section 14A:
The assessee contested the disallowance of Rs.5.83 crores as proportionate expenditure on exempted income under Section 14A. The AO initially disallowed the amount based on the earnings of exempted income. The CIT(A) directed the AO to rework the disallowance under IT Rule 8D. However, the Tribunal noted that Rule 8D is not applicable for the assessment year 2007-08, as per the Mumbai High Court decision in Godrej & Boyce Mfg Co Ltd. The Tribunal set aside the issue to the AO to make a reasonable estimate of the expenditure attributable to earning exempt income and disallow the same under Section 14A.

2. Disallowance of Rs.276.39 Crores Claimed under Section 36(1)(viia) for Rural Branch Advances:
The assessee claimed Rs.276.39 crores under Section 36(1)(viia) for advances from rural branches. The AO restricted the claim to Rs.46 crores, the actual provision made in the books. The CIT(A) upheld this restriction. On further appeal, the Tribunal referred to the Supreme Court decisions in TRF Ltd, Vijaya Bank Ltd, and Catholic Syrian Bank Ltd, which clarified that deductions under Section 36(1)(vii) and Section 36(1)(viia) are distinct and independent. The Tribunal set aside the issue to the AO to decide in light of these Supreme Court decisions.

3. Applicability of Section 115JB to the Assessee Bank:
The assessee argued that Section 115JB does not apply to banks as they prepare financial statements under the Banking Regulation Act, not the Companies Act. The Tribunal noted that prior to AY 2013-14, Section 115JB did not apply to companies covered under the proviso to Section 211(2) of the Companies Act, which includes banking companies. Thus, the Tribunal upheld the assessee's claim and set aside the assessment under Section 115JB.

4. Disallowance of Broken Period Interest of Rs.58.51 Crores:
The AO disallowed the broken period interest of Rs.58.51 crores paid by the assessee on the purchase of government securities, arguing that securities held to maturity did not form part of the stock. The CIT(A) allowed the claim, treating the securities as stock in trade. The Tribunal upheld the CIT(A)'s decision, referencing multiple judicial precedents, including the Mumbai High Court and Kerala High Court, which allowed broken period interest as a deductible expense.

5. Deletion of Disallowances on Account of Bad and Doubtful Debts and Bad Debts Written Off:
The revenue challenged the CIT(A)'s deletion of disallowances related to bad and doubtful debts and bad debts written off. The Tribunal reiterated its earlier decision in the assessee's appeal, confirming that banks are entitled to deductions under both Section 36(1)(vii) and Section 36(1)(viia), with the proviso to Section 36(1)(vii) preventing double deduction. The Tribunal set aside the issue to the AO for reconsideration in light of the Supreme Court decisions mentioned earlier.

Conclusion:
Both the assessee's and the revenue's appeals were partly allowed for statistical purposes. The Tribunal provided clear directions for the AO to re-examine the issues based on established judicial principles and Supreme Court rulings.

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