2013 (8) TMI 520 - AT - Income Tax

Deferred Payment Guarantee Commission chargeable to tax - Assessee is a banking company - The assessee is following the mercantile system of accounting and there from, income is eligible to tax upon accrual - The assessee receives the commission for the entire period of the debt repayment that it guarantees at the time when the guarantee agreement is entered into Held that - The right to receive commission for the un-expired period of the guarantee became perfected and crystallized only with the expiry of the unexpired period - Accordingly, the right to receive commission for the unexpired period of the guarantee became perfected and crystallized only with the expiry of the unexpired period and income from deferred guarantee commission did not accrue or arose in the relevant Assessment year, relying upon the decision of the Hon ble Supreme Court in the case of Madras Industrial Corpn. 1997 (4) TMI 5 - SUPREME Court , which decides the case in favor of Assessee. Disallowance of Staff welfare expenses Held that - Tribunal in the earlier A.Y. rejected the claim of the assessee for want of details whereas in the present case the assessee has submitted these details, hence, the decision of the Tribunal in that year is not applicable - Both the Revenue Authorities have treated this expenditure as opposed to the public policy, however, in our view the same cannot be a valid reason for disallowing the expenditure because this aspect does not come within the provisions of I.T. Act, 1961 - It is a matter of corporate policy where policies of this type are framed after due consultation with employees/officers association, hence, it cannot be treated as arbitrary. Further, the officers of the bank do not get any bonus whereas the employees get bonus which can also be treated as arbitrary in the similar manner, if the contentions of the Revenue are accepted - Expenditure incurred by the assessee is allowable as revenue expenditure. Double disallowance of profit tax of Frankfurt office Held that - Proper verification is required regarding fact pointed out by the assessee that the provision for profit tax at Frankfurt branch was also part of the provision for foreign tax for all foreign branches of ₹ 32,38,34,950/- and thus there is double disallowance of ₹ 1,40,78,488/- being the profit tax paid by the assessee in respect of Frankfurt Branch. According the AO is directed to verify the point whether there is a double disallowance in this regard and decide the same as per law. Depreciation on lease assets given to Konkan Railway Corporation Ltd - sale and lease back - Finance lease or operating lease - As per the lease agreement the assessee has entered into an operating lease of the asset in question - Asset in question is the railway track which is already owned by the lessee Konkan Railway Corporation Ltd. (KRCL) but because of the requirement of funds the KRCL decided to raise the funds by making the arrangement of sale and lease back of the asset Held that - Real object as far as KRCL is concerned for entering into the transaction of sale and lease back is to raise/arrange the funds. The two transaction of sale of the asset in question to the assessee bank and lease back cannot be separated as there was no choice with either of the party to restrict the transaction of sale alone independently because it was neither possible nor permissible to sell out the asset in question by the Konkan Railway Corporation being the integral part of their railway system which is the very basis of the existence of the KRCL - Sale transaction in question is merely on paper and to facilitate the financial arrangement by the assessee to the KRCL without involving any real intention of transfer of the asset in question. In the case in hand the lease is for fix period of 84 months during which the assessee would recover the full value of lease asset with finance cost being interest as agreed between the parties - The risk and reward of ownership of the asset vested with the lessee and therefore for all practical purposes the ownership of the asset was vested with the lessee and not with the assessee - Assessee would recover the investment (cost of asset) with interest and not the asset in question - As per the lease agreement is only for securing the financial interest of the assessee and not intended to really take the asset in its possession on the expiry of lease term or on the termination of the lease agreement - Therefore all the features and attributes of finance lease as discussed by the Special Bench in case of IndusInd Bank 2012 (3) TMI 212 - ITAT MUMBAI do exist in the case of the assessee Also, as per RBI Circular No. FSCBC 18/24- 01-001/93-94 dated 14.02.1994 which inter alia deals with equipment leasing do not find any scope for argument that the instant lease agreement be treated as that of operating lease the transaction in question is finance lease and not operating lease. - Therefore, no depreciation on asset will be allowed Rental income from the lease will not be considered as income of the assessee for the income tax purpose and only the finance interest portion will be considered as income of the Assessee. Depreciation on matured securities Held that - Diminution in the value of securities which had matured and become due for redemption during the year but were not redeemed - There may be some delay on the part of the companies or the State Governments in paying the redemption amount. But, whenever the payment would be made it cannot be expected to be less than the face value - Any liability de futuro is not an ascertained liability in praesenti and cannot be allowed as deduction under the Income-tax Act as held in the case of Indian Molasses Co. Pvt. Ltd. vs. CIT 1959 (5) TMI 5 - SUPREME Court and Standard Mills Co. Ltd. Vs.CIT 1997 (3) TMI 64 - BOMBAY High Court . Hence, no such ad hoc deduction could be allowed against the amount receivable on redemption of securities which had matured and become due for payment before the close of the accounting year Decided against the Assessee. Taxability of recovery of interest credited to Interest Suspense Account - Held that - the amount recovered during the year out of the interests credited to the suspense account in the earlier year would be taxable. - Decided against the assessee. Loss of revaluation of permanent category investment Held that - As per Hon ble Kerala High Court in the case of Malabar Co-operative Central Bank Ltd. 1973 (10) TMI 23 - KERALA High Court , the banking institution as a part of business activity will have to have ready resources to meet its liability the extent of which could never be foreseen - Security capital employed is a part of normal course of business of a bank and the money which was not lend to the borrower but was invested in the form of deposits in another bank cannot be said to have become ceased to be part of stock in trade of bank - Investment in question very much represented stock in trade of the baking business of the assessee and the loss on the revaluation thereof is allowable as deduction Decided in favor of Assessee.

Summary

Issues Involved:
1. Disallowance of broken period interest.
2. Addition under the head "Deferred Payment Guarantee Commission".
3. Disallowance under section 37(4) related to guest house expenses.
4. Disallowance of 50% of entertainment expenses.
5. Disallowance of staff welfare expenses.
6. Denial of deduction for interest charged under sections 234B, 220(2), and 215.
7. Double disallowance of profit tax of Frankfurt office.
8. Disallowance of depreciation on assets leased to Konkan Railway Corporation Ltd.
9. Exclusion of interest recovered during the year out of interest credited to "Interest Suspense A/c" in earlier years.
10. Taxability of interest on securities on an accrual basis instead of a due basis.
11. Deduction under section 36(1)(viia) of the Income Tax Act for provision for bad and doubtful debts.

Detailed Analysis:

1. Disallowance of Broken Period Interest:
The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 1991-92 and the Bombay High Court's decision in the case of American Express International Bank. The Tribunal held that the judgment in Vijaya Bank's case did not apply as the department had taxed the amount under section 28. It was concluded that the department should have taxed interest for Broken Period Interest Received and allowed deduction for Broken Period Interest Paid. Hence, this ground was decided in favor of the assessee.

2. Deferred Payment Guarantee Commission:
The Tribunal noted that the issue had been previously decided in favor of the assessee for the assessment year 1984-85, with reference to the Calcutta High Court's decision in the case of Bank of Tokyo and the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. The Assessing Officer, in the consequential order, had accepted the assessee's claim. Therefore, the Tribunal decided this issue in favor of the assessee.

3. Guest House Expenses:
The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Britannia Industries Ltd. Vs CIT, which had decided against the assessee. Thus, the Tribunal decided this issue against the assessee.

4. Disallowance of 50% of Entertainment Expenses:
The Tribunal directed the Assessing Officer to recalculate the disallowance, referencing its earlier decision for the assessment year 1984-85, where it was held that 25% of such expenses attributable to employees were not in the nature of entertainment expenses.

5. Staff Welfare Expenses:
The Tribunal allowed the claim of the assessee, referencing its own decision for the assessment year 1992-93, where it was held that the expenditure incurred for reserving seats in schools for officers' children was allowable as staff welfare expenses.

6. Denial of Deduction for Interest Charged:
The Tribunal dismissed this ground, stating that interest payment under sections 234B, 220(2), and 215 is not an admissible claim under sections 36 or 37 of the Income Tax Act. The interest paid due to delay in payment of tax does not relate to earning business income.

7. Double Disallowance of Profit Tax of Frankfurt Office:
The Tribunal directed the Assessing Officer to verify the claim of double disallowance and decide the issue as per law.

8. Depreciation on Lease Assets Given to Konkan Railway Corporation Ltd.:
The Tribunal upheld the CIT(A)'s decision, stating that the transaction was a finance lease and not an operating lease. The Tribunal referenced the Special Bench decision in IndusInd Bank Ltd. Vs ACIT and the Supreme Court's decision in ICDS Ltd. Vs CIT.

9. Interest Credited to "Interest Suspense Account":
The Tribunal noted that the issue of taxing the amount credited to the Interest Suspense Account had been decided in favor of the assessee in earlier years. Therefore, the amount recovered during the year would be taxable, making this ground infructuous.

10. Interest on Securities:
The Tribunal decided this issue in favor of the assessee, referencing its earlier decisions and the decision of the Kerala High Court in CIT Vs Federal Bank Ltd., which supported the assessee's case that interest on securities is taxable on a due basis.

11. Provision for Doubtful Debts:
The Tribunal upheld the CIT(A)'s decision, stating that the allowable claim under section 36(1)(viia) had been accepted by the Assessing Officer. The provision made on the basis of RBI guidelines does not become allowable for deduction in contravention of the provisions of section 36(1)(viia).

Additional Grounds:
The Tribunal admitted the additional grounds raised by the assessee and remitted them to the Assessing Officer for examination and adjudication as per law. The Tribunal upheld the CIT(A)'s decision regarding depreciation on matured securities and allowed the claim for loss on revaluation of permanent category investments, referencing its earlier decision for the assessment year 1995-96.

Conclusion:
The appeal was partly allowed, with certain issues decided in favor of the assessee and others against the assessee. The Tribunal provided directions for recalculations and verifications where necessary.