2017 (11) TMI 1839 - AT - Income Tax

Exemption u/s 10(23G) - claim to be restricted to the net income derived on account of financing of infrastructure sector and not the gross receipt - AO while computing deduction u/s 10(23G) has presumed that the entire investment for infrastructure was out of borrowed funds - HELD THAT - Assessing Officer while computing deduction u/s 10(23G) has presumed that the entire investment for infrastructure was out of borrowed funds which according to us is not correct. In our view, only those expenditure directly relatable to the earning of exempt income can be reduced / set off for computing net income under section 10(32G). We have noted, identical issue came up for consideration before the Co ordinate Bench in assessee s own case for the assessment year 1997 98 and 2000 01. As consistent with the view taken by the Tribunal in preceding assessment year 2016 (4) TMI 648 - ITAT MUMBAI , we are inclined to restore the matter back to the file of the AO for deciding afresh keeping in view the directions of the Tribunal reproduced herein above. At this stage, we must observe, though, the learned Departmental Representative had submitted before us that the issue relating to part disallowance of administrative expenditure was not considered earlier by the Commissioner (Appeals) and the Tribunal, however, we do not agree with the same. We have noted that in the preceding assessment year, the assessee itself has disallowed 1% out of the administrative expenditure while computing net exempt income under section 10(23G) of the Act. Accordingly, ground no.1 raised by the Revenue corresponding to ground no.2 raised by the assessee are allowed for statistical purposes. Allocation of interest and other expenditure for earning tax free interest income under section 10(15) - HELD THAT - As per facts and material on record, surplus interest free funds available with the assessee far exceeds the investment made in tax free interest income yielding assets, therefore, no disallowance of interest expenditure can be made in view of the decision of the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities and Power Ltd., 2009 (1) TMI 4 - BOMBAY HIGH COURT and CIT v/s HDFC Bank Ltd., 2014 (8) TMI 119 - BOMBAY HIGH COURT . As far as disallowance of administrative expenses is concerned, it is the contention of the assessee that in the preceding assessment year, it has voluntarily disallowed 1% of the administrative expenditure attributable to earning of exempt income. However, we have noted, in assessment year 2001 02, the Tribunal while deciding the issue in Revenue s appeal being 2016 (4) TMI 648 - ITAT MUMBAI , has restored the issue to the Assessing Officer for considering afresh. In view of the aforesaid, we are inclined to restore the issue to the file of the Assessing Officer for deciding afresh keeping in view the directions of the Tribunal in the preceding assessment year. Thus, ground no.2, raised by the Revenue corresponding to ground no.3, raised by the assessee are allowed for statistical purposes. Allowability of assessee s claim of depreciation on leased assets - HELD THAT - Issue is covered in favour of the assessee by the decision of the Tribunal in assessee s own case for preceding assessment year as submitted in the paper book. As could be seen from the material on record, in the impugned assessment year, there is no new lease transaction. The assessee has claimed depreciation on its own fixed assets and depreciation claimed on leased assets were continuing from past lease transactions. Notably, in assessment year 1997 98, the Tribunal while deciding the issue in had allowed assessee s claim of depreciation. Addition of non cash right back made u/s 41(4) - HELD THAT - Issue in assessee's own case for preceding year 2017 (1) TMI 1676 - ITAT MUMBAI and 2016 (4) TMI 648 - ITAT MUMBAI restored the issue to the Assessing Officer for considering afresh keeping in view the directions of the Tribunal in the preceding assessment year. Disallowance of expenditure incurred for earning dividend income - main contention of the assessee against disallowance of interest expenditure is, investment in dividend earning assets were made out of surplus interest free funds available with the assessee - HELD THAT - We find substantial merit in the aforesaid submissions of AR. If surplus interest free funds are available with the assessee to take care of the investments made in shares giving rise to dividend income, no disallowance of interest expenditure can be made in view of the decision of the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . As far as managerial / administrative expenditure are concerned, we have noted, in the assessment year 1997 98, the assessee had furnished a working of disallowance of expenditure to be made for earning exempt income wherein, it has quantified the disallowance for administrative expenditure at 1% of the gross exempt income. Notably, in assessment year 2000 01, the Tribunal while deciding identical issue has restored the matter back to the file of the Assessing Officer Addition on account of bad debt written off - addition u/s 36(1) - HELD THAT - We find merit in the submissions of the learned Authorised Representative that after amendment to section 36(1)(vii) from 1st April 1989, once the assessee writes off the bad debt as irrecoverable in its accounts it will satisfy the condition of the said provisions and the assessee is no more required to establish that the debt has actually become irrecoverable. Hon'ble Supreme Court in TRF Ltd. v/s CIT, 2010 (2) TMI 211 - SUPREME COURT has expressed this view. Further, in case of Vijaya Bank Ltd. v/s CIT, 2010 (4) TMI 46 - SUPREME COURT held that mere debit to the Profit Loss account is not sufficient to claim write off as the assessee has to simultaneously reduce the amount from loans and advances or debtors on assets side of the Balance Sheet to claim right off - we direct the Assessing Officer to allow assessee s claim in respect of debts which are actually written off by applying the principle laid down in the decisions referred to above. Further, the Assessing Officer is also required to examine whether there is any claim of write off of bad debt in the nature of mere provisions, hence, not allowable in terms of section 36(1)(vii) - even if the assessee s claim of write off in respect of a particular debt having become bad is allowed in the impugned assessment year, the Revenue is protected under section 41(4) of the Act to bring the amount to tax in case such debt is recovered by the assessee in any subsequent assessment year. With the aforesaid observation, we restore the issue to the file of the Assessing Officer for adjudicating afresh Addition made to annual letting value towards notional interest - HELD THAT - Undisputedly, the addition made to the annual letting value towards interest chargeable on security deposit is purely on notional basis. Notably, while deciding identical issue in assessee s own case 2016 (4) TMI 648 - ITAT MUMBAI held that AO has not made any enquiry on the issue whether the rent received by the assessee is at actual market rate or not. Therefore, without bringing any evidence on record to demonstrate that the rent received by the assessee is not actual market rate the Assessing Officer cannot add notional interest on the interest free security deposit by treating it as part of the rent received. In this context, we rely upon the ratio laid down by the Hon'ble Jurisdictional High Court in Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT . Addition on account of software expenditure - revenue or capital expenditure - HELD THAT - AO allowed software maintenance expenditure of ₹ 56,48,58,160, incurred for corporate office, whereas, he disallowed similar expenditure of ₹ 226,33,999 incurred for branches. The claim of the assessee that such expenditure incurred for branches are towards maintenance of software and not for acquiring any new software remains uncontroverted. Moreover, when the Assessing Officer has allowed similar expenditure incurred for corporate office, there is no reason why such expenditure incurred for branches should be disallowed. Addition on account of club membership fees - allowable revenue expenditure u/s 37 - HELD THAT - Hon'ble Supreme Court in United Glass Manufacturing Co. ltd., 2012 (9) TMI 914 - Supreme Court has held that club membership fees for employees are to be treated as business expenditure of a company under section 37 of the Act. We must also observe that in the decisions referred to by Commissioner (Appeals) similar view has been expressed. That being the case, we do not find any reason to interfere with the order of the learned Commissioner (Appeals) on this issue. Allowance of claim of deduction u/s 36(1)(viia) - HELD THAT - Assessee is a Scheduled Bank and its accounts are maintained in conformity with the Generally Accepted Accounting Principle (GAAP) in India and the guidelines issued by the RBI from time to time. Further, it is evident from the annual report of the assessee that acquisition of assets including performing and non performing asset are as per the prescribed guidelines of RBI. That being the case, there is no reason for the Assessing Officer to presume that the assessee is not qualified to exercise option under the first proviso. Further, as per the second proviso to section 36(1)(viia) of the Act for the assessment year commencing on/or after 1st April 2003 and ending before 1st April 2005, the deduction allowable in terms of proviso 1 to section 36(1)(viia) of the Act is 10% instead of 5%. In view of the above, we do not find any infirmity in the order of the learned Commissioner (Appeals) on this issued MAT applicability on banking companies - computation of book profit u/s 115JB - HELD THAT - Before the first appellate authority the assessee justified the book profit computed by it. The learned Commissioner (Appeals) after considering the submissions of the assessee directed the Assessing Officer to compute the book profit as worked out by the assessee subject to the modification to be made on account of relief granted to the assessee towards expenditure disallowable under section 14A of the Act. Admittedly, the assessee has not challenged the aforesaid decision of the learned Commissioner (Appeals). DR has also not advanced any substantive argument to defer from the view expressed by the Commissioner (Appeals). In any case of the matter, as per the decision of the Co ordinate Bench in Krung Thai Bank v/s JDIT, 2010 (9) TMI 18 - ITAT, MUMBAI , and subsequent decisions of different Benches of the Tribunal, provisions of section 115JB AND 115J of the Act are not applicable to banking companies. Exemption under section 10(23G) - HELD THAT - A reading of CBDT circular no.762 dated 18th February 1998, makes it clear that even a company which is directly not carrying out development of infrastructure facilities would also be eligible for exemption if invests in shares or providing long term finance to an enterprise engaged in the business of providing infrastructure would be treated as infrastructure capital company. Undisputedly, the assessee has fulfilled the aforesaid condition as it has made investments or has advanced loans to companies engaged in the business of infrastructure development. Therefore, the assessee is eligible for claiming exemption under section 10(23G) of the Act. The decision of the Tribunal, Amritsar Bench, in case of Jammu Kashmit Bank 2008 (2) TMI 533 - ITAT AMRITSAR , is also applicable to the facts of the present case. Moreover, in the preceding assessment years, the Revenue has never questioned assessee s eligibility to claim exemption under section 10(23G) of the Act. There being no material difference in fact, a departure cannot be made in the impugned assessment year for disallowing assessee s claim under section 10(23G) of the Act by questioning its eligibility.

Summary

Issues Involved:
1. Disallowance of expenditure attributable to earning exempt income under section 10(23G) of the Income-tax Act, 1961.
2. Allocation of interest and other expenditure for earning tax-free interest income under section 10(15) of the Act.
3. Allowability of depreciation on leased assets.
4. Addition of non-cash right back under section 41(4) of the Act.
5. Disallowance of expenditure incurred for earning dividend income.
6. Addition made on account of bad debt written-off.
7. Addition to annual letting value towards notional interest.
8. Disallowance of software expenditure.
9. Disallowance of club membership fees.
10. Deduction under section 36(1)(viia) of the Act.
11. Computation of book profit under section 115JB of the Act.
12. Levy of interest under section 234B and 234D of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Attributable to Earning Exempt Income under Section 10(23G):
The assessee, a banking company, claimed exemption under section 10(23G) for income derived from infrastructure financing. The Assessing Officer restricted the exemption to net income, not gross receipts, by allocating administrative and interest expenditure proportionately. The Commissioner (Appeals) directed the Assessing Officer to compute the exemption by considering only the interest expenditure directly related to borrowed funds. The Tribunal restored the matter to the Assessing Officer for fresh consideration, consistent with the Tribunal's directions in earlier years.

2. Allocation of Interest and Other Expenditure for Earning Tax-Free Interest Income under Section 10(15):
The Assessing Officer reduced the net exempt income by allocating interest and administrative expenses. The Commissioner (Appeals) directed a detailed method to allocate expenses proportionately. The Tribunal upheld that no interest disallowance should be made if investments were from interest-free funds, following the jurisdictional High Court's decisions. The matter was restored to the Assessing Officer for fresh consideration.

3. Allowability of Depreciation on Leased Assets:
The Assessing Officer disallowed depreciation on leased assets, treating the transactions as financing. The Commissioner (Appeals) allowed the claim, following earlier Tribunal decisions and CBDT Circulars. The Tribunal upheld the Commissioner (Appeals)'s order, noting the issue was covered in favor of the assessee by earlier Tribunal decisions.

4. Addition of Non-Cash Right Back under Section 41(4):
The Assessing Officer added back the difference between cash right back and total bad debts written back. The Commissioner (Appeals) deleted the addition, following earlier decisions in favor of the assessee. The Tribunal restored the issue to the Assessing Officer for fresh consideration, consistent with earlier Tribunal directions.

5. Disallowance of Expenditure Incurred for Earning Dividend Income:
The Assessing Officer disallowed interest and administrative expenses proportionate to the dividend income. The Commissioner (Appeals) directed a method to allocate expenses proportionately. The Tribunal restored the issue to the Assessing Officer, directing verification of facts and following earlier Tribunal directions.

6. Addition Made on Account of Bad Debt Written-Off:
The Assessing Officer disallowed the bad debt claim, questioning its actual irrecoverability. The Commissioner (Appeals) allowed the claim, following judicial precedents that writing off in books suffices. The Tribunal restored the issue to the Assessing Officer, directing examination of whether the write-off was a mere provision or actual.

7. Addition to Annual Letting Value Towards Notional Interest:
The Assessing Officer added notional interest on security deposits to the annual letting value. The Commissioner (Appeals) deleted the addition, following earlier decisions. The Tribunal upheld the Commissioner (Appeals)'s order, noting the addition was purely notional and unsupported by evidence of below-market rent.

8. Disallowance of Software Expenditure:
The Assessing Officer disallowed software expenditure for branches, treating it as capital expenditure. The Commissioner (Appeals) allowed the claim, noting similar expenditure for the corporate office was allowed. The Tribunal upheld the Commissioner (Appeals)'s order, finding no reason for differential treatment.

9. Disallowance of Club Membership Fees:
The Assessing Officer disallowed club membership fees as capital expenditure. The Commissioner (Appeals) allowed the claim, following earlier Tribunal decisions. The Tribunal upheld the Commissioner (Appeals)'s order, noting the Supreme Court's decision treating such fees as business expenditure.

10. Deduction under Section 36(1)(viia):
The Assessing Officer restricted the deduction, questioning the assessee's qualification and evidence. The Commissioner (Appeals) directed allowance as per the first proviso to section 36(1)(viia). The Tribunal upheld the Commissioner (Appeals)'s order, noting the assessee's compliance with RBI guidelines and the statutory provisions.

11. Computation of Book Profit under Section 115JB:
The Assessing Officer enhanced the book profit by adding provisions. The Commissioner (Appeals) directed computation as per the assessee's working, subject to modifications for disallowable expenditure. The Tribunal upheld the Commissioner (Appeals)'s order, noting the non-applicability of sections 115JB and 115J to banking companies.

12. Levy of Interest under Sections 234B and 234D:
Both parties agreed the issue was consequential. The Tribunal directed the Assessing Officer to give consequential effect while recomputing the income, following the Tribunal's findings and statutory provisions.

Conclusion:
The appeals were partly allowed for statistical purposes, with several issues restored to the Assessing Officer for fresh consideration, consistent with earlier Tribunal directions. The Tribunal upheld the Commissioner (Appeals)'s orders on several issues, following judicial precedents and statutory provisions.