2016 (7) TMI 834 - AT - Income Tax

Disallowance of diminution in value of investments - Held that - In the earlier years, the Tribunal had allowed this claim by following the decision rendered by Hon ble Bombay High Court in the case of CIT Vs. Bank of Baroda (2003 (3) TMI 80 - BOMBAY High Court ). We notice that the Ld CIT(A) has followed the above said binding decision of Hon ble jurisdictional High Court as well as the orders passed by the ITAT. Hence we do not find any infirmity in the order passed by him on this issue. Deduction allowed in respect of bad debts written off - Held that - In the case of Catholic Syrian Bank (2012 (2) TMI 262 - SUPREME COURT OF INDIA ), the Hon ble Supreme Court had held that the restriction provided in the proviso to sec. 36(1)(vii) shall apply only to the provision created for rural advances. Accordingly, the Tribunal has restored this matter to the file of the AO with the direction to allow the claim in the light of decision rendered by Hon ble Supreme Court. Consistent with the view taken in the assessee s own cases in the earlier years by the co-ordinate benches, the order passed by Ld CIT(A), wherein he has directed the AO to examine this issue in the light of decision rendered by Hon ble Supreme Court in the case of Catholic Syrian Bank (supra) is upheld. Disallowance u/s 14A - Held that - 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 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. Disallowance of lease premium paid - Held that - This issue has been decided against the assessee by the Tribunal in AY 2006-07 by following the decision rendered by Special Bench of Tribunal in the case of JCIT Vs. Mukund Ltd (2007 (2) TMI 358 - ITAT MUMBAI ) Provisions of sec. 115JB shall not be applicable for both the years under consideration. Disallowance of claim made u/s 36(1)(viii) - Held that - 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 of expenditure relating to issue of capital - Held that - There is difference between funds inflow and funds outgo. The funds raised by issuing capital shall increase the capital base. The funds so raised, if used for the purpose of business, would ultimately increase the volume of business as well as profitability. The ultimate aim of raising more funds is to increase the volume of business and profitability. Viewed from this angle, the volume and profitability is bound to increase, when funds are used either for creating the assets or as working capital. Hence, we are of the view that the expenses incurred in increasing the capital base is capital expenditure as held by Hon ble Supreme Court in the case of Brooke Bond India Ltd (1997 (2) TMI 11 - SUPREME Court ), since it would incidentally help in the business of the company and may also help in the profit making.

Issues Involved:
1. Deduction for bad debts written off.
2. Disallowance of diminution in value of investments.
3. Disallowance of depreciation on leased assets.
4. Disallowance under Section 14A of the Act.
5. Disallowance of lease premium paid.
6. Applicability of provisions of Section 115JB.
7. Disallowance under Section 36(1)(viii).
8. Disallowance of expenditure related to the issue of capital.

Issue-wise Detailed Analysis:

1. Deduction for Bad Debts Written Off:
The primary issue was the deduction allowed for bad debts written off. The AO restricted the deduction in excess of the amount available in the "Provision for Bad and Doubtful Debts Account" created under Section 36(1)(viia). The CIT(A) directed the AO to apply the principles laid down by the Supreme Court in the case of Catholic Syrian Bank Ltd. Both parties agreed that this issue was covered by previous Tribunal decisions in the assessee’s own case. Consistent with earlier years' decisions, the Tribunal upheld the CIT(A)'s order directing the AO to examine the issue in light of the Supreme Court's decision.

2. Disallowance of Diminution in Value of Investments:
The Tribunal noted that in earlier years, the claim for diminution in the value of investments had been allowed by following the Bombay High Court's decision in CIT Vs. Bank of Baroda. The CIT(A) followed this binding decision, and the Tribunal found no infirmity in the CIT(A)'s order.

3. Disallowance of Depreciation on Leased Assets:
The AO's disallowance of depreciation on leased assets was contested. The Tribunal noted that similar disallowances in earlier years were deleted by the CIT(A) and accepted by the revenue without appeal. Consistent with this position, the Tribunal upheld the CIT(A)'s order for the current assessment years.

4. Disallowance under Section 14A:
For the years under consideration, the AO worked out the disallowance under Section 14A in accordance with Rule 8D. The CIT(A) upheld the workings for AY 2008-09 but took a different view for AY 2007-08. The Tribunal directed the AO to restrict the disallowance to 1% of the exempt income for AY 2007-08, consistent with earlier years. For AY 2008-09, the Tribunal remanded the matter to the AO for fresh examination in light of new contentions raised by the assessee.

5. Disallowance of Lease Premium Paid:
The Tribunal noted that this issue had been decided against the assessee in AY 2006-07 by following the Special Bench decision in JCIT Vs. Mukund Ltd. Consistent with this view, the Tribunal upheld the CIT(A)'s order for the current years.

6. Applicability of Provisions of Section 115JB:
The Tribunal had previously decided in favor of the assessee regarding the applicability of Section 115JB in AY 2006-07. Following this precedent, the Tribunal set aside the CIT(A)'s order and held that Section 115JB was not applicable for the years under consideration.

7. Disallowance under Section 36(1)(viii):
For AY 2007-08, the Tribunal noted that this issue had been decided in favor of the assessee in AY 2006-07. The Tribunal set aside the CIT(A)'s order and directed the AO to allow the claim under Section 36(1)(viii), recognizing that banks are covered by the inclusive definition of "financial Corporations."

8. Disallowance of Expenditure Related to Issue of Capital:
In AY 2008-09, the AO disallowed the expenditure incurred for increasing the share capital, treating it as capital expenditure. The CIT(A) confirmed this view, supported by Supreme Court decisions in Brooke Bond India Ltd and Punjab State Industrial Corporation Ltd. The Tribunal upheld the CIT(A)'s order, noting that the expenses incurred for expanding the capital base are capital in nature, as they incidentally help in business and profit making.

Conclusion:
Both appeals filed by the revenue were dismissed, and the appeals of the assessee were partly allowed.

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