2018 (5) TMI 2167 - AT - Income Tax

Disallowance of deduction u/s 36(1)(viii) - special reserve created for income from eligible business of long term finance for industrial and agricultural development and for development of infrastructure facility for construction or purchase of residential house - HELD THAT - As following the consistent view of the Tribunal in assessee s own case for 2009 10. 2017 (11) TMI 1812 - ITAT MUMBAI we allow assessee s claim of deduction u/s 36(1)(viii) thereby deleting the addition made as 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. - Decided in favour of assessee. Disallowance u/s 14A r/w rule 8D - basic contention of the assessee is since the assessee being a Bank the shares and securities are held as stock in trade and it constitutes a business activity hence no disallowance under section 14A of the Act should be made - HELD THAT - Notably in assessment year 2009 10 2017 (11) TMI 1812 - ITAT MUMBAI while considering similar dispute relating to disallowance under section 14A the Tribunal in order has restored the issue to the Assessing Officer. It is also relevant to mention in the meanwhile the judgment of the Hon ble Supreme Court in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT has been delivered. It is to be noted that in the said decision the Hon ble Supreme Court has specifically dealt with the decision of the Hon ble Punjab Haryana High Court in case of State Bank of Patiala 2017 (2) TMI 125 - PUNJAB AND HARYANA HIGH COURT on identical issue. Undisputedly the aforesaid decision of the Hon ble Supreme Court having been delivered recently the Departmental Authorities while deciding the issue did not have the benefit of it. In view of the aforesaid we restore the issue to the file of the Assessing Officer for deciding afresh after considering the submissions made by the assessee and applying the ratio laid down by the Hon ble Supreme Court in case of Maxopp Investment Ltd. (supra) and specifically keeping in view the observations made in Para 39 and 40 of the said judgment. This ground is allowed for statistical purposes. Disallowance of deduction claimed u/s 36(1)(viia)in respect of provisions of bad and doubtful debts - HELD THAT - Deduction claimed by the assessee u/s 36(1)(viia) of the Act is not as per the provisions made in the books of account. A reading of the aforesaid provision makes it clear that the deduction allowable is in respect of the provision made for bad and doubtful debt not exceeding certain amount as provided under sub clause (a) of the said provision. That being the case assessee s claim that 10% of the aggregate average advances made by the Rural Branches and 7.5% of the total income has to be allowed as deduction irrespective of the provisions made in the books of account is not acceptable in view of the ratio laid down by the Hon ble Punjab Haryana High Court in State Bank of Patiala 2017 (2) TMI 125 - PUNJAB AND HARYANA HIGH COURT Accepting the without prejudice submissions made by assessee we hold that the deduction under section 36(1)(viia) of the Act to the extent of provision made and available in the books of account whether made in the current previous year or in the preceding previous years is allowable as held in Sarvodaya Sahakar Bank Ltd 2014 (5) TMI 1182 - ITAT AHMEDABAD - AO is directed to examine the facts and compute the deduction u/s 36(1)(viia) of the Act accordingly. This ground is partly allowed for statistical purposes. Disallowance of amortization of lease premium paid in respect of various lease hold properties - HELD THAT - As could be seen from the facts on record this is a recurring dispute between the assessee and the Department from the preceding assessment years. While deciding identical issue arising in assessee s own case for assessment year 2004 05 2017 (7) TMI 1289 - ITAT MUMBAI has sustained the disallowance by concurring with the view expressed by the Departmental Authorities. Ground raised is dismissed. Accrual of income - decision of the Departmental Authorities in including the profits of the foreign branches in the income of the assessee - HELD THAT - As could be seen the disputed issue relates to taxability of the income of the foreign branches in India. Notably while deciding identical issue arising in assessee s own case in assessment year 2009 10 2017 (11) TMI 1812 - ITAT MUMBAI followed its order passed in assessee s own case for assessment year 2004 05 and held if the Assessee has permanent establishment abroad then the Assessee would have to produce evidence regarding payment of taxes pertaining to the income of these establishments abroad. On production of such evidence the Assessee would be entitled to the benefit. That evidence was always available and as noted by the Commissioner of Income Tax (Appeals) and the Tribunal. In the circumstances the authorities did nothing but follow their earlier orders based on identical facts and circumstances. The finding of fact therefore cannot be termed as perverse or vitiated by any error of law apparent on the face of the record. The Appeal does not raise any substantial question of law. It is devoid of merits and is accordingly dismissed. Disallowance of broken period interest paid - AO noticing that the assessee has claimed deduction towards payment of broken period interest on purchase of securities by treating it as revenue expenditure called upon the assessee to justify its claim - HELD THAT - It is evident on record assessee s claim of broken period interest paid has been disallowed by the Assessing Officer on the reasoning that the assessee is not offering broken period interest on accrual basis. In our view the aforesaid reasoning of the Departmental Authorities do not stand to reason. If the assessee is consistently following an accounting method as per which the broken period interest is offered as income when it is received the broken interest paid while purchasing the securities cannot be disallowed merely on the reasoning that the assessee is not showing the broken period interest income on accrual basis. As could be seen in case of State Bank of India 2016 (8) TMI 963 - BOMBAY HIGH COURT after following the decision of the said Court in case of American Express International Corporation 2002 (9) TMI 96 - BOMBAY HIGH COURT has rejected Revenue s appeal against allowance of assessee s claim of deduction in respect of broken period interest paid. While doing so the Hon ble High Court has also upheld the decision of the Tribunal in holding that the broken period interest income has to be taxed on due basis instead of accrual basis. It is evident the aforesaid decision of the Hon ble Jurisdictional High Court was neither referred to nor examined by the Departmental Authorities while deciding the issue. In view of the aforesaid we restore the issue to the Assessing Officer for deciding afresh keeping in view the decisions of the Hon ble Jurisdictional High Court referred to above and only after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Disallowance on account of loss arising out of payment made to Lehman Brothers Special Financing Inc. - HELD THAT - Undisputedly the assessee has entered into forward contract with its customers in respect of derivative transactions. It is also a fact on record that LBSFI was taken as a counter party in order to hedge the forward contract entered with the customer. In fact Commissioner (Appeals) while dealing with the disputed issue has given a categorical finding that the payment made on arbitration award and incidental expenses are related to hedging agreement. Thus once the payment made by the assessee is treated to be towards hedging agreement it cannot be termed as speculative transaction. Explanation 1 to the proviso to section 43(5) of the Act excludes the transactions relating to trading in derivatives carried on by the Banks from the ambit of speculative transactions. AR has demonstrated before us that whenever there is profit from forward contracts assessee has offered it as business income and the Department has accepted it. If that is the case the loss from forward contract cannot be treated as speculation loss. In any case of the matter there is no dispute to the fact that the payment by the assessee to LBSFI is in pursuance to an award passed by a International Court of Arbitration therefore it is allowable as business expenditure. Thus looked at from any angle assessee s claim is allowable. Allowing credit for TDS of foreign branches - HELD THAT - As observed that as per section 91 of the Act if any person residing in India proves that in respect of his income which accrued or arose in the relevant previous year outside India and in respect of which he has paid tax in any country with which there is no double taxation avoidance agreement then such person shall be entitled to deduction from the income tax payable by him a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the same country whichever is lower or at the Indian rate of tax if both the rates are equal. He therefore directed the AO to decide the issue as per law. As could be seen from the observations of the learned Commissioner (Appeals) he has simply issued a direction to the Assessing Officer to decide the issue of credit of TDS keeping in view the provisions of section 199 and section 91 of the Act. We fail to understand how the Department can be aggrieved with the aforesaid directions of the learned Commissioner (Appeals). In view of the aforesaid ground raised is dismissed.

Summary

Issues Involved:
1. Part disallowance of deduction claimed under section 36(1)(viii) of the Income Tax Act.
2. Disallowance under section 14A of the Act read with rule 8D.
3. Disallowance of deduction claimed under section 36(1)(viia) of the Act for provisions of bad and doubtful debts.
4. Disallowance of amortization of lease premium.
5. Inclusion of profits of foreign branches in the income of the assessee.
6. Disallowance of broken period interest paid.
7. Disallowance of loss arising out of payment made to Lehman Brothers Special Financing Inc.
8. Applicability of the provisions of section 115JB of the Act to the assessee.
9. Allowing credit for TDS of foreign branches.

Issue-wise Detailed Analysis:

1. Part Disallowance of Deduction Claimed under Section 36(1)(viii):
The assessee, a Public Sector Banking company, claimed a deduction of Rs. 200 crore under section 36(1)(viii) for special reserve created for income from eligible business. The Assessing Officer (AO) restricted this to Rs. 157.33 crore, disallowing Rs. 42.67 crore, based on incorrect allocation of operational expenses by the assessee. The Commissioner (Appeals) upheld this disallowance. However, the Tribunal noted that similar issues in previous years (2007-08, 2008-09, 2009-10) were decided in favor of the assessee, recognizing banks under the inclusive definition of "financial Corporations" in section 36(1)(viii). Thus, the Tribunal allowed the assessee's claim, deleting the addition.

2. Disallowance under Section 14A read with Rule 8D:
The AO made a disallowance of Rs. 59.76 crore under section 14A read with rule 8D, for exempt income earned by the assessee. The Commissioner (Appeals) upheld this, referencing previous years' decisions. The Tribunal noted that the Supreme Court's decision in Maxopp Investment Ltd. v/s CIT clarified that disallowance under section 14A applies even if shares are held as stock-in-trade. However, considering the specific context of banking companies, the Tribunal restored the issue to the AO for reconsideration in light of the Supreme Court's observations, allowing the ground for statistical purposes.

3. Disallowance of Deduction under Section 36(1)(viia):
The AO reduced the assessee's claimed deduction of Rs. 1376.51 crore to Rs. 1365.95 crore, disallowing Rs. 10.56 crore, as the claimed amount exceeded the provision made in the books. The Commissioner (Appeals) upheld this based on the Punjab & Haryana High Court's decision in State Bank of Patiala. The Tribunal, referencing the Ahmedabad Bench's decision in Sarvodaya Sahakar Bank Ltd., held that the deduction allowable should be based on provisions made in the books, whether in the current or preceding years. The issue was restored to the AO for recomputation, partly allowing the ground for statistical purposes.

4. Disallowance of Amortization of Lease Premium:
The AO disallowed Rs. 2.61 crore claimed as amortization of lease premium, treating it as capital expenditure. The Commissioner (Appeals) upheld this, following previous years' decisions. The Tribunal noted that this recurring issue had been consistently decided against the assessee in earlier years (2003-04, 2004-05), and upheld the disallowance, dismissing the ground.

5. Inclusion of Profits of Foreign Branches:
The AO included Rs. 551.23 crore of foreign branch profits in the assessee's income, which the assessee claimed was exempt under DTAA provisions. The Commissioner (Appeals) upheld the inclusion. The Tribunal, referencing its decisions in previous years (2004-05, 2009-10), and supported by the Bombay High Court, held that profits of foreign branches are not taxable in India if taxed abroad under DTAA. The Tribunal deleted the addition, allowing the ground.

6. Disallowance of Broken Period Interest Paid:
The AO disallowed Rs. 83.55 crore claimed as broken period interest, arguing it was not offered on an accrual basis. The Commissioner (Appeals) upheld this. The Tribunal noted that the Jurisdictional High Court in State Bank of India and American Express International Banking Corporation had allowed such claims. The issue was restored to the AO for reconsideration in light of these decisions, allowing the ground for statistical purposes.

7. Disallowance of Loss Arising Out of Payment to Lehman Brothers:
The AO treated the Rs. 211.08 crore paid to Lehman Brothers as speculative loss under section 73. The Commissioner (Appeals) upheld this. The Tribunal noted that the payment was related to hedging agreements, not speculative transactions, and was allowable as business expenditure. The Tribunal deleted the addition, allowing the ground.

8. Applicability of Section 115JB to Banking Companies:
The Commissioner (Appeals) held that section 115JB does not apply to banking companies, based on various judicial precedents. The Tribunal, agreeing with the parties, dismissed the Revenue's ground.

9. Allowing Credit for TDS of Foreign Branches:
The AO did not allow credit for TDS on foreign dividend income. The Commissioner (Appeals) directed the AO to decide the issue as per sections 199 and 91. The Tribunal found no reason for the Department's grievance with this direction and dismissed the ground.

Summary:
The assessee's appeal was partly allowed, with several issues restored to the AO for reconsideration, while the Revenue's appeal was dismissed. The Tribunal's decisions were largely based on consistency with previous years' rulings and relevant judicial precedents.