2020 (2) TMI 1350 - AT - Income Tax

Provisions for pension - CIT(A) confirming the disallowance made by AO in respect to assessee s claim of deduction of provision - HELD THAT - Provision for pension is not towards contribution to any fund, but it is payable to the employees directly. Also, Sr. no. xi of the aforesaid instruction states that contingent liability cannot constitute deductible expenditure. As elaborated provision towards pension is not a contingent liability. It is an ascertained liability and has been provided for in the books of account on a scientific basis, as per the actuarial valuation. Further, it would also be contrary to the judgement of the Supreme Court in the case of Metal Box Co. of India 1968 (8) TMI 53 - SUPREME COURT wherein observed that contingent liabilities properly discounted were to be allowed as a deduction. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee is allowable and hence, allowed. This issue of assessee s appeal is allowed. Disallowance on account of provision for other employee benefit - AO disallowed these provisions on the basis that this provision represents accumulated liability of earlier years which cannot match with current year s revenue and the same is contingent in nature AND since there are specific provisions dealing with contributions to employee welfare funds, the same cannot be allowed under section 37(1) of the Act and the provisions of section 43B of the Act are applicable - HELD THAT - provision for leave can be discharged in two manners i.e. one by availing the leave and other by way of encashment. In so far as availment of leave is concerned, the salary paid to the employee is known as leave with pay and it does not amounts to salary paid in lieu of leave and, hence, the provisions of section 43B(f) of the Act to that extent do not apply. Leave fare concession/Leave travel concession is in respect of actual payment made to the employees for the travel cost incurred by them on availment of the leave entitled to employees. The same is not towards any leave encashment, and hence it cannot be considered as a sum payable in lieu of any leave to which alone section 43B(f) of the Act applies - provision in respect of unavailed casual leave and sick leave is not encashable and, hence, is not covered by section 43B(f) of the Act. Provision made is for an ascertained liability based on an actuarial valuation and is to be allowed as a deduction under section 37(1) of the Act while computing the total income. It is provided towards an ascertained liability, based on actuarial valuation, on a scientific basis and is not contingent in nature. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee is allowable and hence, allowed. Disallowance of provision for privilege leave encashment - HELD THAT - Calcutta High Court in the case of Exide Industries 2007 (6) TMI 175 - CALCUTTA HIGH COURT has held section 43B(f) of the Act to be struck down the validity of section 43B(f) being arbitrary and unreasonable. However, subsequently, the Supreme Court has granted a stay of the operation of the aforesaid judgment of the Calcutta High Court. Without prejudice to the argument that provision for privilege leave encashment doesn t fall under the ambit of 43B(f) of the Act, it was claimed that the AO may be directed to give effect to the aforesaid claim as and when the Supreme Court decides this issue in the case of Exide Industries Ltd, in accordance with the Supreme Court s ruling. We direct the AO accordingly on this issue. This issue of assessee s appeal is set aside and allowed for statistical purposes. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Issue of disallowance under section 14A of the Act read with Rule 8D(2)(ii) of the Rules in regard to interest, is covered in the case of HDFC Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT wherein it is clearly held that no disallowance can be made in the relation to interest expenses as assessee s own non-interest bearing funds far exceed the investment as details are noted above and hence, this issue of the Revenue s appeal is dismissed. Disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of the Rules, the administrative expenses the investment made in subsidiaries / strategic investment while computing disallowance is decided against the assessee in view of the decision in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT - it is to clarify that those strategic investment which have not yielded any exempt income during the year are to be excluded for the purpose of computing average value of investment. Even otherwise, now the law is settled that the investment which are giving exempt income during the year are to be considered for the purpose of disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of the Rules, i.e. the administrative expenses for the purpose of computing average value of investment. We direct the AO accordingly. Depreciation on leased assets - HELD THAT - Assessee enters into lease agreements with various parties whereby assets were granted on lease to them. During the year under consideration, it has not entered into any new lease transactions. The assessee has claimed income-tax depreciation on the leased assets under section 32 of the Act since these assets are owned by the assessee. In the earlier years, certain lease agreements were considered as finance transaction and hence, depreciation was disallowed on these assets in the earlier years. In the year under consideration, the AO has disallowed the depreciation in respect of leased assets, where depreciation was disallowed in earlier years. The CIT(A) upheld the disallowance made by the AO following the earlier years. It was fairly agreed that this issue is decided against the assessee in its own case - Decided against assessee. Deduction claimed u/s 36(1)(vii) - Bad Debts written off (other than in respect of rural advances) - HELD THAT - In case CIT vs. Vatika Township (P.) Ltd. 2014 (9) TMI 576 - SUPREME COURT wherein it was held that one established rule for interpretation of legislation is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. In the present case, the legislature stipulated a fixed date i.e. 01.04.2014 while inserting Explanation 2 to section 36(1)(vii) of the Act. In view of the above, we are of the view that assessee is entitled to deduction under section 36(1)(vii) of the Act being the amount of bad debts written off (other than in respect of rural advances). This issue of assessee appeal is allowed. Disallowing deduction claimed by assessee on account of reducing depreciation/ taxing appreciation in the value of securities held as Available For Sale(AFS) and Held For Trading(HFT) category - HELD THAT - The Department brought to tax the profit on such forward exchange contracts and stated that one method for valuation of the entire stock of securities should be followed. This resulted in a situation of taxing appreciation of stock, which goes against the general and settled principle of non-taxation of notional income, as laid by the Supreme Court in the case of Sanjeev Wollen Mills 2005 (11) TMI 26 - SUPREME COURT - Hence, we are of the view that this disallowance of depreciation/ reducing of depreciation on appreciation in the value of securities held as available for sale and held for trading category are allowable. We direct the AO accordingly. Deduction claimed by assessee under section 36(1)(viia) of the Act being the amount of standard assets - HELD THAT - We are of the view that the assessee is eligible for claim of deduction u/s 36(1)(viia) of the Act on standard assets and this issue is covered by Tribunal s decision in assessee s own case for AY 2006-07 2016 (10) TMI 164 - ITAT MUMBAI . Hence, we allow this issue of assessee s appeal. Taxation of interest on non-performing assets (NPAs) - CIT(A) confirming the action of the Assessing Officer in making an addition in respect of interest on sticky advances that had been classified as NPAs by the Bank in terms of RBI guidelines - HELD THAT - This issue is squarely covered by the decision of Hon ble Bombay High Court in the case of American Express Bank Ltd 2012 (11) TMI 499 - ITAT MUMBAI wherein it is held that there is no credit entry in the books of the account in respect of the interest on such NPAs, no addition can be made - where the AO has not contested that the policy adopted by the assessee is not in accordance with RBI guidelines, the incidence of taxation of interest on bad and doubtful debts will be either when the same is credited to the profit and loss account for the year or in the year in which it is actually received. Mere crediting of the interest to a reserve cannot be said to be an incidence by which the said interest could be charged to tax. Hence, we delete the addition of interest income and allow this issue of assessee s appeal. Addition of interest on non-performing Investments(NPIs) - HELD THAT - In view of the above decision of Hon ble Delhi High Court in the case of Vasisth Chay Vyapar Ltd. 2010 (11) TMI 88 - DELHI HIGH COURT , which was affirmed by Hon ble Supreme Court 2018 (3) TMI 56 - SUPREME COURT the facts and circumstances are exactly identical in the present case before us and hence, respectfully following the same, we delete the addition of interest income from non-performing Investments made by the AO. This issue of assessee s appeal is allowed. Recovery of bad-debts written off in earlier years - CIT(A) confirming the action of AO in not allowing claim of the Bank in respect of non-taxability of recovery of Bad Debts written off in earlier years - HELD THAT - Principally the assessee is entitled for claim of deduction under section 36(1)(viia) of the Act, which has rightly been claimed. The assessee has not made claim under section 36(1)(vii) of the Act in this regard. Hence, we allow the claim of assessee but the matter is restored back to the file the AO for verification purposes. This issue of assessee s appeal is allowed for statistical purposes. Non-taxability of income from foreign branches - CIT(A) confirming the action of AO in not allowing claim of the Bank in respect of non-taxability of income from foreign branches - HELD THAT - This issue is squarely covered by the decision of Bank of India 2017 (11) TMI 1812 - ITAT MUMBAI wherein the co-ordinate Bench held that income attributable to foreign branches being permanent establishment outside India cannot be taxed in India, having regard to the mandate given in Article 7(1) of the DTAA. This view has been affirmed by Hon ble Bombay High Court. Since, the issue is squarely covered by the decision of Hon ble Bombay High Court in the case of Bank of India 2015 (1) TMI 1418 - BOMBAY HIGH COURT respectfully following the same, we allow this issue in favour of assessee. Claim of deduction on account of write-off of bad debts under section 36(1)(vii) in terms of the decision of Vijaya Bank Vs. CIT 2010 (4) TMI 46 - SUPREME COURT - HELD THAT - The assessee has debited provision for bad and doubtful debts to the profit and loss account and also reduced the same from loans and advances in the Balance Sheet, and only the net amount of loans and advances is indicated. The details are filed by assessee before AO as well CIT(A) are now available - as argued that as both the aforementioned conditions are duly satisfied, therefore, the assessee is entitled to a deduction for write off of bad debts under section 36(1)(vii) of the Act in accordance with the Supreme Court judgement in the case of Vijaya Bank (Supra). Further, we noted that this issue has been remanded back to the AO for fresh examination and adjudication by the Tribunal in the assessee s own case - we are of the view that this issue needs to be set aside to the file of the AO and AO will decide the issue after examining the facts afresh. Addition of interest on securities on accrual basis as the assessee is following mercantile system of accounting - AO has taxed such interest which has neither accrued nor become due as on 31st March 2018 - HELD THAT - The right to receive interest on securities arises on due date only, which falls after the accounting year and, accordingly, it cannot be taxed in the accounting year itself. Hence, we decide this issue in favour of assessee. Interest for Broken period BPI - AO had disallowed BPI claim deduction on the ground that this goes against the theory of real income as well as matching concept which are fundamental to the accounting - HELD THAT - BPI refers to interest on Government and other approved securities relatable to the period from last due date (upto which interest was paid) till the date of purchase or sale. Thus, when the assessee purchases a security, it pays a price which is calculated having regard to two components, viz., the market price of security plus BPI to the seller. In this case, the assessee treats the BPI paid as expenditure. Similarly, when the assessee sells a security, such interest is treated as income of the assessee. We noted that this ground of appeal is covered in favour of the assessee by the order of the Tribunal in its own case for the AYs 1991-92 to 1994-95 which was followed by the Tribunal in subsequent AYs. Provision for other long term employee benefits holding contingent in nature - HELD THAT - said provision is an ascertained liability, determined based on reasonable certainty and hence, clearly allowable. Reliance in this regard is placed on the decision in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT wherein it is held that the liability is not a contingent one if the liability has been incurred during the accounting year and an estimate with reasonable certainty can be made, even if the liability is to be discharged at a future date. We accordingly, dismiss this issue of revenue s appeal. Provision for wage revision - HELD THAT - As in the case of Bank of Baroda 2015 (12) TMI 1283 - ITAT MUMBAI held that the date of effective commencement of the agreement is relevant and not the date of signing of the agreement or date of approval by DRE. The Mumbai Tribunal allowed the claim of the assessee for the assessment year 2008-09 on the basis that the wage revision was certain and could have been reasonably estimated. We may mention that Bank of Baroda is also a part of the same Bipartite settlement as in the present case of the assessee. Hence, we are of the view that CIT(A) has rightly allowed the claim of assessee. Disallowing the staff welfare expenses - HELD THAT - The payment for reservation of seats was done by the assessee for its employees under the assessee s Staff Welfare Scheme and hence, should be allowed as normal business expenditure. This issue is also covered by the decision in the case of Mahindra and Mahindra Ltd. vs. CIT 2003 (1) TMI 71 - BOMBAY HIGH COURT , wherein it was held that payment made to schools where children of its employees studied were incurred predominantly for staff welfare and consequently, is an allowable business expenditure. Hence, this issue of Revenue s appeal is dismissed. Depreciation provided for investments classified under the HTM category to be allowed. Discount on issue of Employee Stock Option - HELD THAT - Discount on Employee Stock Purchase Scheme is an allowable deduction under section 37(1) in view of the Special Bench decision of the Bangalore Tribunal in the case of Biocon Ltd. v/s. DCIT 2013 (8) TMI 629 - ITAT BANGALORE . As this issue is squarely covered in favour of assessee and against Revenue, we find no infirmity in the order of CIT(A). This issue of Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Disallowance of provision for pension.
2. Disallowance of provision for other employee benefits.
3. Disallowance of provision for privilege leave encashment.
4. Disallowance under section 14A.
5. Disallowance of depreciation on leased assets.
6. Disallowance of bad debts written off.
7. Depreciation on securities.
8. Deduction under section 36(1)(viia) for standard assets.
9. Taxation of interest on non-performing assets (NPAs).
10. Taxation of interest on non-performing investments (NPIs).
11. Non-taxability of recovery of bad debts written off in earlier years.
12. Non-taxability of income from foreign branches.
13. Deduction on account of write-off of bad debts under section 36(1)(vii).
14. Addition of interest on securities on accrual basis.
15. Addition of interest for broken period.
16. Disallowance of provision for other long-term employee benefits.
17. Disallowance of provision for wage revision.
18. Disallowance of staff welfare expenses.
19. Disallowance of depreciation for investments classified under HTM category.
20. Disallowance of discount on issue of Employee Stock Option.

Detailed Analysis:

1. Disallowance of Provision for Pension:
The assessee claimed a deduction for a provision of ?3724 crores towards pension benefits based on actuarial valuation under AS-15. The AO disallowed the claim, arguing that it was contingent and not allowable under Section 37(1) but under specific provisions of Sections 36(1)(iv), 36(1)(v), 40A(7), and 40A(9). The CIT(A) upheld the AO's decision. However, the Tribunal allowed the assessee’s appeal, citing that the liability was ascertained and not contingent, following the Supreme Court's decision in Bharat Earth Movers v. CIT.

2. Disallowance of Provision for Other Employee Benefits:
The assessee claimed a deduction for ?532.70 crores towards other employee benefits, including leave travel, sick leave, and casual leave. The AO disallowed these provisions, considering them contingent. The CIT(A) allowed part of the claim but disallowed provisions for leave travel, sick leave, and casual leave under Section 43B(f). The Tribunal allowed the assessee’s appeal, holding that these provisions were ascertained liabilities based on actuarial valuation and not contingent.

3. Disallowance of Provision for Privilege Leave Encashment:
The assessee claimed a deduction of ?88 crores for privilege leave encashment. The AO disallowed the claim under Section 43B(f). The Tribunal set aside the issue to the AO, directing to allow the claim if the Supreme Court decides in favor of the assessee in the case of Exide Industries Ltd.

4. Disallowance under Section 14A:
The AO disallowed ?394.73 crores under Section 14A read with Rule 8D. The CIT(A) restricted the disallowance, excluding investments held as stock-in-trade and strategic investments. The Tribunal remanded the issue back to the AO to recompute the disallowance, excluding investments not yielding exempt income during the year.

5. Disallowance of Depreciation on Leased Assets:
The AO disallowed ?18.72 crores claimed as depreciation on leased assets, considering the lease transactions as finance transactions. The CIT(A) upheld the disallowance. The Tribunal dismissed the assessee's appeal, following the earlier years' decisions.

6. Disallowance of Bad Debts Written Off:
The assessee claimed a deduction of ?1026.23 crores for bad debts written off. The AO disallowed the claim, applying the proviso to Section 36(1)(vii). The Tribunal allowed the assessee's appeal, following the Supreme Court's decision in The Catholic Syrian Bank Ltd. vs. CIT.

7. Depreciation on Securities:
The assessee claimed depreciation on securities held as Available for Sale (AFS) and Held for Trading (HFT) categories. The AO disallowed the claim. The Tribunal allowed the assessee's appeal, following the Bombay High Court's decision in Union Bank of India.

8. Deduction under Section 36(1)(viia) for Standard Assets:
The AO disallowed the provision for standard assets of ?566.96 crores. The Tribunal allowed the assessee's appeal, holding that the provision for standard assets is allowable under Section 36(1)(viia).

9. Taxation of Interest on Non-Performing Assets (NPAs):
The AO added ?11.37 crores as interest on NPAs. The Tribunal allowed the assessee's appeal, following the Bombay High Court's decision in American Express Bank Ltd. vs. Addl. CIT.

10. Taxation of Interest on Non-Performing Investments (NPIs):
The AO added ?12.97 crores as interest on NPIs. The Tribunal allowed the assessee's appeal, following the Supreme Court's decision in CIT vs. Vasisth Chay Vyapar Ltd.

11. Non-Taxability of Recovery of Bad Debts Written Off in Earlier Years:
The AO taxed the recovery of bad debts written off in earlier years. The Tribunal allowed the assessee's appeal, following the Bangalore Tribunal's decision in State Bank of Mysore vs. DCIT.

12. Non-Taxability of Income from Foreign Branches:
The assessee claimed non-taxability of income from foreign branches. The CIT(A) dismissed the claim. The Tribunal allowed the assessee's appeal, following the Bombay High Court's decision in Bank of India vs. ACIT.

13. Deduction on Account of Write-Off of Bad Debts under Section 36(1)(vii):
The assessee claimed a deduction for write-off of bad debts under Section 36(1)(vii). The Tribunal set aside the issue to the AO for fresh examination.

14. Addition of Interest on Securities on Accrual Basis:
The AO added ?3804.07 crores as interest on securities on an accrual basis. The Tribunal dismissed the Revenue's appeal, following the Bombay High Court's decision in DIT vs. Credit Suisse First Boston (Cyprus) Ltd.

15. Addition of Interest for Broken Period:
The AO disallowed ?2150.10 crores as broken period interest. The Tribunal dismissed the Revenue's appeal, following the Bombay High Court's decision in the assessee's own case.

16. Disallowance of Provision for Other Long-Term Employee Benefits:
The AO disallowed provisions for silver jubilee award, resettlement allowance, and retirement award. The Tribunal dismissed the Revenue's appeal, holding that these provisions are ascertained liabilities.

17. Disallowance of Provision for Wage Revision:
The AO disallowed ?575 crores for wage revision. The Tribunal dismissed the Revenue's appeal, following the Delhi High Court's decision in CIT vs. Bharat Heavy Electrical Limited.

18. Disallowance of Staff Welfare Expenses:
The AO disallowed ?32.51 lakhs for reservation of seats in schools for employees' children. The Tribunal dismissed the Revenue's appeal, following the Bombay High Court's decision in the assessee's own case.

19. Disallowance of Depreciation for Investments Classified under HTM Category:
The AO disallowed ?1020.21 crores for amortization of premium on HTM investments. The Tribunal dismissed the Revenue's appeal, following the Bombay High Court's decision in the assessee's own case.

20. Disallowance of Discount on Issue of Employee Stock Option:
The AO disallowed ?11 crores for Employee Stock Purchase Scheme. The Tribunal dismissed the Revenue's appeal, following the Bangalore Tribunal's decision in Biocon Ltd. vs. DCIT.

Conclusion:
The appeal of the assessee is partly allowed, and the appeal of the Revenue is dismissed as indicated.