2017 (4) TMI 566 - AT - Income Tax

Addition u/s 14A - as per assessee shares/units held by it whether classified as investment or stock-in-trade in balance sheet, that has to be considered as stock-in-trade only for tax purpose, and Section 14A of the Act had no application - Held that - CBDT itself has accepted the line of thinking that income from investment made by a banking concern is part of its business of banking to be considered under the head Business and Profession . Direct result of this view is that such investments would be only a part of stock-in-trade. In our opinion, how the assessee has treated the shares and mutual funds in its balance sheet prepared under Banking Regulation Act may not be relevant when the income therefrom is treated as a part of business profit and not under the head of Income from other sources . There is no case for the Revenue that assessee was holding these investments solely for the purpose of earning dividend. Once holding of investment was considered incidental to the business of banking to the assessee, in our opinion, Section 14A of the Act could not have been applied. Thus disallowance under Section 14A of the Act could not have been made in the assessee s case for investments which were considered as part of stock-in-trade for tax purposes. - Decided in favour of assessee Method of calculation of Aggregate Average Rural Advances for the purpose of application of Section 36(1)(viia) not adjudicated by the Ld. CIT(Appeals) - Held that - Irrespective of the fact whether computation made by the Assessing Officer is having an effect on the taxable income of the assessee, Ld. CIT(Appeals) ought to have decided the ground raised by the assessee on merits. We are, therefore, of the opinion that ground No.10 raised before the Ld. CIT(Appeals) needs to be adjudicated by him. We, therefore, set aside the order of the CIT(Appeals) and remit the issue back to the file of the Ld. CIT(Appeals) for consideration Disallowance of clam under Section 36(1)(viii) - Held that - Assessee cannot be stopped from making an enhanced claim of deduction. It is not a case where the assessee had not made any claim under Section 36(1)(viii) of the Act in its original return. In other words, it is not a fresh claim altogether. It had only revised its claim based on fresh method of computation which was not earlier adopted by it. In our opinion, the lower authorities ought have verified whether the method of computation adopted by the assessee for the enhanced claim was acceptable under law. We are of the opinion that by virtue of judgment of Hon ble Apex Court in the case of National Thermal Power Corporation Ltd. (1996 (12) TMI 7 - SUPREME Court ) assessee could make such a claim before Ld. CIT(Appeals). Considering the facts of the case we are, therefore, of the opinion that the matter requires a fresh consideration by the A.O. We set aside the orders of the lower authorities and remit the issue regarding deduction under Section 36(1)(viii) of the Act back to the file of the A.O. for consideration afresh Addition for stale draft account - Held that - Just because a draft remained unclaimed by the beneficiaries, in our opinion, would not entitle the assessee to claim it as its money or property. Assessee was always obliged to pay the amount either to the beneficiary or the original drawer. Assessee held the money only as a trustee in fiduciary capacity. Once the money is held as trustee, the question of limitation will not arise at all. In any case, RBI itself has issued a Notification on 24.05.2014 mandating the banks to transfer such unclaimed amounts to Depositor Education and Awareness Fund Scheme . In our opinion, in such circumstances, Ld. CIT(Appeals) was justified in taking the view that the amount cannot be construed as income of the assessee. - Decided in favour of assessee Disallowance for ex-gratia payment made by the assessee - Held that - Assessing Officer could not have put himself in the shoes of the businessman and decide whether employees concerned were eligible for such ex-gratia payment. When part of employees alone were eligible for bonus under Payment of Bonus Act, the assessee, in our opinion, was justified in taking a business decision as to how to treat those employees who were not covered by such enactment. Assessee cannot be faulted for making such payment so as to ensure smooth and better relationship with its employees. In any case, we find Hon ble jurisdictional High Court in the case of Kumaran Mills Ltd.(1997 (12) TMI 31 - MADRAS High Court) had held that ex-gratia payments could not be disallowed if it was found to be commercial expedient. Therefore, in our opinion, Ld. CIT(Appeals) was justified in disallowing this issue.- Decided in favour of assessee Disallowance of entertainment expenses - Held that - It is not disputed that the claim of entertainment expenditure was in relation to customers of the assessee-bank. There is no ground for the Revenue that entertainment expenditure was incurred by the employees of the assessee for their own benefit. In the nature of business of the assessee, we cannot say that the entertainment expenditure claimed by the assessee was not required to be incurred. In any case, there is no reason why an ad-hoc disallowance of 5% was made. If the Assessing Officer was of the opinion that any expenditure was not vouched, he could have made disallowance for such expenditure. In our opinion, the CIT(Appeals) was justified in deleting 5% disallowance made by the Assessing Officer. Addition made for interest accrued on NPAs - Held that - Only for non-viable or sticky advances having irregularities falling within sub-clause (ii) alone the six months limitation apply. However, where accounts or information of accounts show usual signs of sickness, this condition regarding six months may not be applicable. In any case, once the rule does not follow the guidelines issued by RBI, in our opinion, it becomes necessary to read down such rule so that it is in consonance with the RBI regulations or prudential norms for recognizing income.Therefore, in our opinion, CIT(Appeals) was justified in deleting the addition made on interest on NPAs. - Decided in favour of assessee Claim of disbursement on actual payment basis - Held that - The provision made by the assessee for such wage arrears in earlier year was disallowed. Against such disallowance, assessee has taken no grounds before this Tribunal in its appeal for assessment year 2010-11. Accordingly, the claim of the assessee that it had to be allowed on actual payment basis was, in our opinion, rightly allowed by the CIT(Appeals). However, whether the assessee had actually disbursed ₹ 17,66,43,818/- requires to be verified by the A.O. For this limited purpose, the matter is remitted back to the file of the Assessing Officer.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Calculation of Aggregate Average Rural Advances for Section 36(1)(viia).
3. Claim under Section 36(1)(viii) of the Act.
4. Addition for stale draft account.
5. Disallowance of ex-gratia payments.
6. Disallowance of entertainment expenses.
7. Addition for interest accrued on NPAs.
8. Deduction on account of wage settlement on actual payment basis.

Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The assessee, a scheduled bank, contested the disallowance of ?5,46,512 under Section 14A, which was enhanced to ?51,85,950 by the CIT(A). The assessee argued that investments were part of its treasury operations and treated as stock-in-trade, thus disallowance under Section 14A was not applicable. The Tribunal referred to CBDT Circular No.18 and the judgment in Principal CIT v. State Bank of Patiala, holding that investments by a banking company are part of its business and income arising from such investments falls under "Profits and Gains of Business." Consequently, the disallowance under Section 14A was deleted, allowing the assessee's ground.

2. Calculation of Aggregate Average Rural Advances for Section 36(1)(viia):
The assessee claimed a deduction of ?76,84,72,154 under Section 36(1)(viia) for bad and doubtful debts, which the AO restricted to ?24,48,02,775 based on actual provisions made. The CIT(A) did not adjudicate on the method of calculation. The Tribunal remitted the issue back to the CIT(A) for adjudication on merits, noting that the CIT(A) should have provided a specific finding irrespective of the taxable income effect.

3. Claim under Section 36(1)(viii) of the Act:
The assessee initially claimed ?9,17,03,880, later revised to ?9,99,93,927, under Section 36(1)(viii). The AO did not accept the revised claim due to the absence of a revised return. The CIT(A) rejected the enhanced claim, stating it could not be allowed in appellate proceedings. The Tribunal, citing the National Thermal Power Company Ltd. case, held that the assessee could revise its claim and remitted the issue back to the AO for fresh consideration.

4. Addition for stale draft account:
The AO added ?2,68,97,833 from stale draft accounts to the income, treating it as unclaimed money beyond the limitation period. The CIT(A) deleted the addition, noting that the assessee held the money in fiduciary capacity and referred to the RBI Notification mandating transfer of such amounts to the "Depositor Education and Awareness Fund Scheme." The Tribunal upheld the CIT(A)'s decision, confirming that the amount could not be construed as the assessee's income.

5. Disallowance of ex-gratia payments:
The AO disallowed ?8,12,68,024 paid as ex-gratia to employees not covered under the Payment of Bonus Act, considering it an appropriation of profits. The CIT(A) allowed the claim, recognizing it as a business expenditure for maintaining good employee relations. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's judgment in Kumaran Mills Ltd. v. CIT, which allowed ex-gratia payments on grounds of commercial expediency.

6. Disallowance of entertainment expenses:
The AO disallowed 5% of the ?56,45,550 claimed as entertainment expenses, citing insufficient proof of business purpose. The CIT(A) deleted the disallowance, stating the expenses were purely for business purposes. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was related to customer entertainment and there was no evidence of personal benefit.

7. Addition for interest accrued on NPAs:
The AO added ?74,60,000 as accrued interest on NPAs, adhering to a 180-day recognition period, contrary to the 90-day period mandated by RBI guidelines. The CIT(A) deleted the addition, aligning with RBI norms. The Tribunal upheld the CIT(A)'s decision, emphasizing the need to follow RBI guidelines for income recognition and referencing the Royal Bank of Scotland N.V. case.

8. Deduction on account of wage settlement on actual payment basis:
For assessment year 2011-12, the assessee claimed ?17,66,43,818 as wage arrears disbursed during the year. The CIT(A) allowed the claim, but the Tribunal remitted the issue back to the AO to verify the actual disbursement, acknowledging the need for factual verification.

Conclusion:
The Tribunal allowed the assessee's appeals for assessment years 2010-11 and 2011-12 pro-tanto, dismissed the Revenue's appeal for assessment year 2010-11, and partly allowed the Revenue's appeal for assessment year 2011-12 for statistical purposes.