2020 (7) TMI 502 - AT - Income Tax

Disallowance u/s.14A r.w.Rule 8D(2) - disallowance made under third limb of Rule 8D(2) of the Rules - HELD THAT -We find that the Hon ble Supreme Court in the case of Maxopp Investments Ltd., 2018 (3) TMI 805 - SUPREME COURT had held that in the case of bank, investments that are held as stock in trade cannot be subject matter of disallowance u/s.14A. The Special Bench of Delhi Tribunal in the case of Vireet Investments 2017 (6) TMI 1124 - ITAT DELHI had held that those investments which had not yielded any exempt income should not be considered for the purpose of working out the disallowance u/s.14A of the Act r.w.Rule 8D(2) of the Rules. We direct the ld. AO that since, assessee being a bank, investments held as stock in trade should not be considered for the purpose of working of disallowance u/s.14A of the Act irrespective of the fact whether exempt income was derived from such investments or not. Strategic investments held by the assessee which had yielded exempt income alone are to be considered for the purpose of working out the disallowance u/s.14A of the Act read with Rule 8D(2)(iii) of the Rules. Deduction for provision for bad and doubtful debts u/s.36(1)(viia) - HELD THAT - We find that the ld. CIT(A) in principle had accepted to the fact that assessee would be entitled for deduction u/s.36(1)(viia) of the Act which would be restricted to 7.5% of total business income plus 10% of average rural advances. This is the benefit provided to the assessee in the statute which had to be duly provided to the assessee. The ld. AO is hence directed to apply this statutory provision and consider the claim of deduction u/s.36(1)(viia) of the act for the year under consideration after suitable verification of the details provided by the assessee. Claim of deduction towards bad debts written off u/s.36(1)(vii) - HELD THAT - As opening credit balance brought forward as on 1st April of the relevant accounting year in provision for bad and doubtful account is more than the bad debts written off during the year, the appellant will not be entitled to any deduction u/s.36(1)(viia) in the above manner. The AO after examining the balance in provision for bad and doubtful debts account 36(1)(viia) shall allow deduction of bad debts written off only if it exceeds the credit balance in the provision account as explained. Broken period interest - HELD THAT - CIT(A) had deleted this addition by following the decision of the Hon ble Jurisdictional High Court in assessee s own case and the decision of this Tribunal in assessee s own case for A.Y.2008-09 and 2009-10 and 2010-11 2015 (9) TMI 643 - ITAT MUMBAI . In all these decisions, it was held that the broken period interest paid by the assessee is allowable as deduction while computing total income of the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2).
2. Deduction for provision for bad and doubtful debts under Section 36(1)(viia).
3. Deduction towards bad debts written off under Section 36(1)(vii).
4. Disallowance of broken period interest.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D(2):
The assessee raised ground No. II regarding disallowance under Section 14A read with Rule 8D(2). The assessee had claimed exempt income of ?195,79,61,072/- and voluntarily disallowed ?32,56,564/- under Section 14A. The Assessing Officer (AO) computed the disallowance as ?27.99 Crores under Rule 8D(2), which included ?24.69 Crores under Rule 8D(2)(ii) and ?3.30 Crores under Rule 8D(2)(iii). After reducing the voluntary disallowance, the AO made a net disallowance of ?27,66,43,436/-. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance under Rule 8D(2)(ii) and directed the AO to disallow the higher of the voluntary disallowance or the amount calculated per directions. The Tribunal directed the AO to exclude investments held as 'stock in trade' and only consider strategic investments yielding exempt income, following the Supreme Court decision in Maxopp Investments Ltd. and the Special Bench decision in Vireet Investments.

2. Deduction for provision for bad and doubtful debts under Section 36(1)(viia):
The assessee claimed a deduction under Section 36(1)(viia) amounting to ?566,35,62,434/-, which included 7.5% of total business income and 10% of average rural advances. The AO did not allow this deduction, relying on the Supreme Court decision in Goetze India Ltd. The CIT(A) directed the AO to grant the deduction after verification, restricting it to 7.5% of total business income and 10% of average rural advances. The Tribunal upheld the CIT(A)'s direction, emphasizing that the statutory benefit must be provided after due verification.

3. Deduction towards bad debts written off under Section 36(1)(vii):
The assessee sought a deduction for bad debts written off, reducing the claim by ?2,64,21,552/- for rural advances. The CIT(A) held that the balance in the provision account under Section 36(1)(viia) must be considered for both rural and non-rural branches. The Tribunal modified the CIT(A)'s order, directing the AO to allow the deduction only if the bad debts written off exceed the opening credit balance in the provision account as of 1st April of the relevant year, following CBDT Instruction No.17/2008.

4. Disallowance of broken period interest:
The revenue appealed against the deletion of disallowance of broken period interest amounting to ?1947,35,93,107/-. The AO had disallowed this amount, treating it as a capital outlay. The CIT(A) deleted the disallowance, following the jurisdictional High Court and Tribunal's decisions in the assessee's favor for previous years. The Tribunal upheld the CIT(A)'s order, noting that the issue was covered by earlier decisions allowing the deduction of broken period interest.

Procedural Note:
The order was pronounced beyond 90 days due to the COVID-19 lockdown, following the precedent set by the Tribunal in the case of JSW Ltd. The Tribunal justified the delay by excluding the lockdown period from the 90-day limit, considering it an extraordinary circumstance.

Conclusion:
The assessee's appeal was allowed for statistical purposes, and the revenue's appeal was dismissed. The Tribunal directed the AO to follow specific guidelines for disallowance under Section 14A, deduction under Section 36(1)(viia), and bad debts under Section 36(1)(vii), while upholding the deletion of broken period interest disallowance.