2018 (9) TMI 415 - AT - Income Tax

Accrual of income - Addition on account of interest income in relation to advances classified as Non-Performing Advances (NPA)- mercantile basis OR receipt basis - Held that - When the account becoming NPA is not disputed by the revenue the recognition of income is to be done only on receipt basis which is in consonance with the real income theory. In these circumstances and respectfully following the decisions of Hon ble Delhi High Court in COMMISSIONER OF INCOME TAX VERSUS VASISTH CHAY VYAPAR LTD. & OTHERS 2010 (11) TMI 88 - DELHI HIGH COURT and various other decisions referred to by the ld AR and in view of this issue being already decided in favour of the assessee by this tribunal in its own case supra we hold that the interest income on NPA accounts should not be assessed on mercantile basis and the same is to be taxed only on receipt basis. Disallowance of lease rentals u/s 40(a)(ia) - payee had included the subject mentioned receipt as its income - Held that - We find that the assessee had furnished the certificate from a chartered accountant in the prescribed form as mandated in first proviso to section 201(1) of the Act to prove that the payee had included the subject mentioned receipt as its income and had paid taxes thereon. Hence by application of second proviso to section 40(a)(ia) and 201(1) of the Act which has been held to be retrospective in operation in the case of Principal CIT vs Tirupati Construction 2016 (8) TMI 1310 - CALCUTTA HIGH COURT we hold that no disallowance u/s 40(a)(ia) of the Act in the hands of the payer assessee could be made. Disallowance of Payment made to employees in relation to unfunded pension - Held that - There was no contribution made by the assessee bank to any of the funds. The payments were directly made to the employees of the bank and subjected to deduction of tax at source. The moment the payments are made to those employees the assessee had lost complete control over those funds and it had not come back to the assessee in any manner whatsoever either by creation of any fund managed by it or otherwise. From the approval letter of the competent authority of the assessee bank we find that these payments were made only to meet the increased cost of living of the employees and hence it is effectively a payment made as a welfare measure . Hence the provisions of section 40A(9) as heavily relied upon by the ld DR is not at all applicable to the facts of the instant case - no hesitation in directing the ld AO to grant deduction of the sum of Rs. 4.09 crores in the instant case to the assessee Deduction on account of write off of unavailed service tax credit - Held that - The assessee had only postponed the claim of deduction by showing at CENVAT receivable as an asset in its balance sheet on the bonafide belief that the same could be utilized against the output service tax liability of the bank. When the same remains unutilized over a period of time and going by the future prospects of the business wherein the said credit would not be utilized in full the assessee chose to write off the same in part during the year under consideration based on some rationale and proper workings which in our considered opinion is in order and cannot be questioned by the revenue. Accordingly we direct the ld AO to grant deduction for the same Deduction of provision for bad and doubtful debts u/s 36(1)(viia)(b) - Held that - while computing the statutory deduction under Clause (viia) of Sub- section 1 of Section 36 of the Income Tax Act 1961 the total income would be the business income of the assessee before deducting the deduction under this Clause and deductions under Chapter 6A of the Income Tax Act 1961. Therefore the brought forward losses would not be deducted while computing the total income for the purpose of Section 36(1)(viia). Since the deduction is available only for computing the business income under the clause therefore the total income also refers the income of the assessee from profit and gain from a business and shall not include the income other than the business income - final order of the ld AO granting relief to the assessee does not call for any interference. MAT - applicability of provisions of Section 115JB for the assessee bank - Held that - the provisions of section 115JB of the Act are not applicable to an assessee unless it is registered as a company under the Companies Act 1956 and prepares its financial stated in accordance with the provisions of Section 211 and Part II and Part III of Schedule VI of the Companies Act 1956. Thus the provisions of section 115JB of the act are not applicable to the assessee bank for the year under appeal. Refund of TDS as deducted from interest paid to its head office and other overseas branches - Held that - Since the issue is already settled in favour of the assessee the ld AO has to give refund of the said TDS. We are not inclined to accept the arguments of the revenue that the said refund is to be collected from the TDS officer and not from the assessing officer. Accordingly we direct the ld AO to grant refund of TDS to the assessee with immediate effect.

Summary

Issues Involved:
1. Rate of Tax
2. Addition Towards Interest Income on NPA
3. Disallowance of Lease Rentals u/s 40(a)(ia) of the Act
4. Disallowance of Payment Made to Employees in Relation to Unfunded Pension
5. Disallowance of CENVAT Credit Written Off
6. Short Credit of Advance Tax
7. Initiation of Penalty u/s 271(1)(c) of the Act
8. Deduction Under Section 36(1)(viia)(b) of the Act
9. Applicability of Provisions of Section 115JB of the Act
10. Tax Deducted at Source on Interest Payments Made to Head Office/Other Branches

Detailed Analysis:

1. Rate of Tax:
The assessee, a non-resident foreign company, contended that it should be taxed at a rate of 30% instead of 40%. The tribunal dismissed the appeal, citing previous decisions in the assessee's own case for earlier assessment years, which had established the applicable rate as 40%.

2. Addition Towards Interest Income on NPA:
The issue was whether the addition of Rs. 39,78,079 towards interest income on Non-Performing Advances (NPA) was justified. The tribunal found that the RBI guidelines, which mandate recognizing interest income on NPA accounts only on receipt basis, should prevail. The tribunal ruled in favor of the assessee, allowing the interest income on NPA accounts to be taxed only on receipt basis, aligning with the real income theory and previous tribunal decisions.

3. Disallowance of Lease Rentals u/s 40(a)(ia) of the Act:
The assessee had not deducted tax on lease rental payments. However, the payee had included the lease income in its income tax returns and paid taxes. The tribunal held that no disallowance under section 40(a)(ia) was warranted, as the second proviso to section 40(a)(ia) was retrospective, and the payee had paid taxes on the lease income.

4. Disallowance of Payment Made to Employees in Relation to Unfunded Pension:
The assessee claimed a deduction for payments made towards unfunded pension liability. The tribunal found that these payments were made directly to employees and subjected to TDS, thus qualifying as a welfare measure under section 37 of the Act. The tribunal allowed the deduction, distinguishing it from contributions to a fund, which were subject to disallowance under section 40A(9).

5. Disallowance of CENVAT Credit Written Off:
The assessee wrote off unutilized CENVAT credit of Rs. 46 crores, arguing it was unlikely to be utilized due to reduced business prospects. The tribunal allowed the deduction, recognizing the write-off as a business decision based on commercial expediency and in line with accounting standards and judicial precedents.

6. Short Credit of Advance Tax:
The tribunal directed the AO to verify and grant credit for the advance tax paid of Rs. 92 crores, as it was a matter of verification of tax paid challans.

7. Initiation of Penalty u/s 271(1)(c) of the Act:
The tribunal deemed the ground premature for adjudication at this stage, given the decisions rendered on various grounds.

8. Deduction Under Section 36(1)(viia)(b) of the Act:
The issue was whether the deduction for provision for bad and doubtful debts should be computed before setting off brought forward losses. The tribunal upheld the DRP's direction, allowing the deduction before setting off losses, aligning with judicial precedents that brought forward losses should not be deducted while computing total income for this purpose.

9. Applicability of Provisions of Section 115JB of the Act:
The tribunal reiterated that section 115JB does not apply to the assessee, a foreign bank not registered under the Companies Act, 1956, and not preparing financial statements under Schedule VI of the Companies Act. This was consistent with previous tribunal decisions and applicable from assessment year 2013-14 onwards.

10. Tax Deducted at Source on Interest Payments Made to Head Office/Other Branches:
The assessee claimed a refund of TDS deducted on interest payments to its head office and other branches, arguing these payments were not taxable. The tribunal directed the AO to grant the refund, following previous tribunal decisions in the assessee's favor.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, and the revenue's appeal was dismissed. The tribunal's decisions were based on established judicial precedents and interpretations of relevant sections of the Income Tax Act.