2017 (11) TMI 1812 - AT - Income Tax

Addition of provision for wage revision - AO disallowed the provision on the ground that it was only an estimated increase and no agreement for the increase was entered into by the assessee during the year - HELD THAT - We find that the assessee had made provisions for the services rendered by the employees.There is no doubt that the assessee had to make payment once the negotiations were over.Thus, it was not an unascertained liability.So, confirming the order of the FAA, we decide the issue in favour of the assessee. Income of foreign branches - DTAA provisions - HELD THAT - Article 7 stated that if enterprise of one State carries on business in another State through permanent establishment then the State where the business is carried out would levy tax on the profits attributable to the permanent establishment. On analysis of these provisions the learned CIT(A) found that Article 7 of the different DTAA.s are specific provision while Articles 23 24 and 25 are general provisions. The coordinate Bench in the case of the assessee in the earlier year s case held As a result he also found that the issue already decided by the Tribunal in assessee s own case for the earlier years have to be followed. We do not find any infirmity in the above finding of the CIT(A). Therefore consistent with the earlier finding of the Tribunal in assessee s own case for the earlier years case we do not see any merit in the ground taken by the Revenue Benefit u/s.36(1) (viii) applied only to Financial Corporations/Public Sector Co. Banking Co./Co-operative Bank/ Housing Finance Co.etc. - whether AO had adopted right method of allocation of expenses in arriving at the profits from eligible business - HELD THAT - In AY 2007-08 2016 (7) TMI 834 - ITAT MUMBAI the assessee is contesting the disallowance of claim made u/s 36(1)(viii) of the Act. We notice that this issue has been decided in favour of the assessee by the co-ordinate bench of Tribunal in AY 2006-07. The tax authorities had rejected the claim by holding that the provisions of sec. 36(1)(viii) shall be applicable only to financial Corporations . The Tribunal has held that the banks will also be covered by the inclusive definition given for the expression financial Corporations in sec. 36(1)(viii) of the Act. Consistent with the view taken therein we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim. Disallowance made u/s.14 A - HELD THAT - We notice that the Tribunal has restricted the disallowance to 1% of the exempt income in AY 2006-07 and earlier years. Consistent with the view taken therein we direct the AO to restrict the disallowance to 1% of the exempt income in AY 2007-08 since the provisions of Rule 8D are not applicable to this year. In respect of AY 2008-09 the assessee is raising new contentions before us viz. the investments are held as stock in trade interest free funds available with it are in far excess of the investments etc. The Ld D.R submitted that the claim of the assessee that it is holding all its investments as stock in trade is farfetched one since the assessee is required to hold certain funds as pure investments. We notice that this aspect of the submissions require verification at the end of the AO. Accordingly we set aside the orders passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of fresh explanations that may be furnished by the assessee by duly considering various case laws relied upon by the assessee. Deduction of amount written off under Agricultural Debt Relief and Waiver Scheme (ADRWS) - HELD THAT - We find that Government of India had formulated a scheme of waiver of loans that the assessee s waived the loans of the farmers either partially or fully that later on due to technical reasons government did not pay the waived amounts to the bank that it wrote off the disputed amounts in its books of accounts.The departmental authorities have not doubted that the loan waiver was not a part of the business activity of the assessee. It is also a fact that the assessee had written of the disputed amounts in its P L account.Even if the written off amount is not considered allowable as per the provisions of section 37, then same will have to be allowed u/s. 28 of the Act as Trading Loss.Considering all we decide the third ground of appeal in favour of the assessee. Exclusion of income from house property at Kenya - DTAA entered into by India and Kenya - HELD THAT - AO and the FAA had treated the business income and house property income as one source of income for tax purposes.But, the DTAA contains two different Articles.Business income is governed by Article 7 and Article 6 deals with house property income. Secondly any notification or circular cannot alter the nature of income that has been specifically included in DTAA.s. Even amendment in a section of the Act would not affect the provisions of tax treaties, unless same are not rectified by both the signatories of the treaty.So, we hold that house property income had to taxed as per Article 6 of the DTAA and as per that Article income from Kenyan house property could not be taxed in India. Reversing the order of the FAA. Disallowance of loss on sale of assets to Asset Reconstruction Company of India Ltd.(ARCIL) - HELD THAT - We find the assessee had sold NPA.s to ARCIL, that as per the RBI instructions it did not claim the loss in the profit and loss account that the claim was made before the Department authorities that it had suffered a loss on sale of NPA.s, that the AO and the FAA held that the assessee had not suffered real loss i.e. it was notional loss only.There is no doubt about selling of assets to ARCIL, that ARRIL is not a fake or bogus entity, that the sale has not been doubted by the AO/FAA, that the entry in the books of accounts have been made as per the instructions of the RBI.In our opinion following of RBI instruction by a banking company cannot be basis for denying or allowing any claim.It is said that the entries in the books of accounts are not conclusive proof of taxability of any income.What has to be seen is the substance of the transaction.Considering the fact that the assessee had suffered loss while carrying out normal business activity i.e.selling its assets. Therefore, we hold that there was no justification for disallowing the loss suffered in the transaction. Applicability of provisions of section 115 JB - HELD THAT - As relying on assessee s own case the provisions of sec. 115JB shall not be applicable for both the years under consideration

Summary

Issues Involved:
1. Deletion of the addition of provision for wage revision.
2. Allowing depreciation on leased assets.
3. Exclusion of income of foreign branches.
4. Deduction under Section 36(1)(viii) of the Act.
5. Disallowance under Section 14A of the Act.
6. Restriction of deduction under Section 36(1)(viia).
7. Deduction of amount written off under Agricultural Debt Relief and Waiver Scheme (ADRWS).
8. Disallowance of lease premium.
9. Exclusion of income from house property at Kenya.
10. Disallowance of loss on sale of assets to Asset Reconstruction Company of India Ltd. (ARCIL).
11. Applicability of provisions of Section 115JB of the Act.

Issue-wise Analysis:

1. Deletion of the Addition of Provision for Wage Revision:
The AO disallowed a provision of Rs. 186.85 crores for wage arrears, claiming it was an estimated increase without a formal agreement. The First Appellate Authority (FAA) ruled in favor of the assessee, stating the provision was for services already rendered, and the liability had crystallized. The Tribunal confirmed this, noting the provision was not unascertained, thus deciding in favor of the assessee.

2. Allowing Depreciation on Leased Assets:
The issue of depreciation on leased assets was decided against the AO by the Tribunal for AY 2008-09. Representatives from both sides agreed, leading to the dismissal of this ground.

3. Exclusion of Income of Foreign Branches:
The Tribunal had previously ruled in the assessee's favor, allowing the exclusion of income from foreign branches based on the Double Tax Avoidance Agreement (DTAA). This decision was consistent with earlier rulings and the Supreme Court's decision in CIT Vs PV.AL.Kulandagan Chettiar. The Tribunal upheld this view, confirming the exclusion of foreign branch income from taxable income in India.

4. Deduction under Section 36(1)(viii) of the Act:
The AO restricted the deduction under Section 36(1)(viii) to Rs. 133 crores against the claimed Rs. 150 crores. The FAA upheld this. However, the Tribunal noted that the issue had been decided in favor of the assessee in earlier years, recognizing banks under the inclusive definition of "financial corporations." The Tribunal directed the AO to allow the claim, deciding in favor of the assessee.

5. Disallowance under Section 14A of the Act:
The AO's disallowance under Section 14A was upheld by the FAA. The Tribunal, referencing earlier decisions, directed the AO to restrict the disallowance to 1% of the exempt income for AY 2007-08 and to re-examine the issue for AY 2008-09. The Tribunal partially allowed the ground.

6. Restriction of Deduction under Section 36(1)(viia):
The FAA upheld the AO's restriction on the deduction of bad debts. The Tribunal, referencing the Supreme Court's decision in Catholic Syrian Bank Ltd. v. CIT and earlier Tribunal decisions, directed the AO to allow the claim, deciding in favor of the assessee.

7. Deduction of Amount Written Off under ADRWS:
The AO disallowed Rs. 9.45 crores claimed under ADRWS, stating the amount should be recovered from farmers. The FAA upheld this. The Tribunal, referencing the nature of the business loss and the case of State Bank of India, decided in favor of the assessee, allowing the deduction.

8. Disallowance of Lease Premium:
The Tribunal, referencing earlier decisions, upheld the disallowance of lease premium, consistent with the decision in JCIT Vs. Mukund Ltd. This ground was decided against the assessee.

9. Exclusion of Income from House Property at Kenya:
The AO included Rs. 75.06 lakhs from foreign branches in the house property income, which the FAA upheld. The Tribunal, referencing Article 6 of the India-Kenya DTAA, ruled that house property income from Kenya could not be taxed in India, reversing the FAA's order and deciding in favor of the assessee.

10. Disallowance of Loss on Sale of Assets to ARCIL:
The AO disallowed the loss claimed on the sale of NPAs to ARCIL, which the FAA upheld. The Tribunal, noting the sale was part of normal business activity and following RBI instructions, reversed the FAA's order, allowing the loss claimed by the assessee.

11. Applicability of Provisions of Section 115JB of the Act:
The Tribunal had previously ruled that Section 115JB was not applicable to the assessee, a decision consistent with earlier years. The Tribunal upheld this view, deciding in favor of the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal of the AO was dismissed. The Tribunal's decisions were largely in favor of the assessee, except for the disallowance of the lease premium. The order was pronounced on 08th November 2017.