2022 (11) TMI 528 - AT - Income Tax

Validity of assessment on non-existent entity - merger proceedings completed - notice in the name of company before amalgamation - corporate death of an entity upon amalgamation - HELD THAT - As relying on case of State Bank of India 2022 (11) TMI 429 - ITAT MUMBAI assessment made on non-existent entity is quashed as void ab initio - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A
2. Addition as per Rule 6EA
3. Taxability of income from exchange houses
4. Taxability of amount credited to P&L account in respect of bankers cheque
5. Disallowance under Section 36(1)(viii)
6. Disallowance under Section 36(1)(vii)
7. Disallowance of provision for LFC/HTC and sick leave
8. Disallowance of expenditure on community services banking
9. Disallowance of provision for leave encashment
10. Recovery in respect of bad debts written off
11. Enhancement of income by disallowing interest paid on bonds
12. Additional grounds raised by the assessee: Non-existent entity and Deduction in respect of education cess

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee challenged the CIT(A)'s decision to confirm disallowance by invoking Rule 8D(2)(iii) to the extent of 0.5% of average investments, even when investments are held as stock-in-trade. The assessee contended that any disallowance should be limited to prorate expenditure incurred by the treasury department, as per the regular method of accounting followed.

2. Addition as per Rule 6EA:
The CIT(A) confirmed the addition of unrealized interest of Rs. 2.41 crore on non-performing accounts under RBI directions. The assessee argued that collecting the principal itself was uncertain, hence no income could accrue. Additionally, the assessee sought the allowance of Rs. 5.26 crore taxed in earlier years, which were credited to the P&L account or satisfied the requirements of the said Rule in the current year.

3. Taxability of Income from Exchange Houses:
The CIT(A) did not exclude income from exchange houses in UAE and Oman, totaling Rs. 12.40 crore, from taxation. The assessee argued that these exchanges constituted associated enterprises under Article 7 read with Article 9 of the respective DTAA with India, making the income non-taxable in India.

4. Taxability of Amount Credited to P&L Account in Respect of Bankers Cheque:
The CIT(A) confirmed the taxation of amounts written back in the P&L account based on RBI directions, even though the write-back did not remove the liability to buyers of bankers cheques.

5. Disallowance under Section 36(1)(viii):
The CIT(A) confirmed the AO's method of arriving at profit derived from eligible business for deduction under Section 36(1)(viii) by apportioning income, contrary to the assessee's method of apportioning common expenditure between specified and other businesses.

6. Disallowance under Section 36(1)(vii):
The CIT(A) directed the AO to follow a particular method of arriving at the balance in the provision for bad and doubtful debts account, omitting any debit balance. The assessee argued that such omission is not prescribed under the section.

7. Disallowance of Provision for LFC/HTC and Sick Leave:
The CIT(A) confirmed the disallowance of expenditure by way of provision for LFC/HTC and sick leave under Section 43B, even though such expenditures are not covered by the section.

8. Disallowance of Expenditure on Community Services Banking:
The CIT(A) disallowed Rs. 1.59 crore as CSR expenditure under Section 37(1), arguing that the appellant bank is not governed by mandatory CSR requirements and that the expenditure was made to promote the bank's image and goodwill.

9. Disallowance of Provision for Leave Encashment:
The CIT(A) failed to note that Section 43B does not apply to the provision for leave encashment, as upheld in several judicial decisions, making the disallowance unwarranted.

10. Recovery in Respect of Bad Debts Written Off:
The CIT(A) confirmed the taxation of recovery in respect of bad debts written off, relying on the Karnataka High Court decision in Pragathi Gramin Bank, without appreciating that the issue was on the taxability of write-back of excess provision for bad and doubtful debts, decided in favor of the assessee.

11. Enhancement of Income by Disallowing Interest Paid on Bonds:
The CIT(A) made an enhancement of assessed income by disallowing Rs. 28.63 crore interest paid on Innovative Perpetual Debt Instruments, re-characterizing funds raised through debt instruments as share capital and extrapolating interest payments as dividends.

12. Additional Grounds Raised by the Assessee:
- Non-Existent Entity: The assessee argued that the assessment order was invalid as it was passed on a non-existent entity (State Bank of Travancore) post its merger with State Bank of India. The Tribunal quashed the assessment as void ab initio, following the Supreme Court decision in PCIT Vs Maruti Suzuki India Ltd.
- Deduction in Respect of Education Cess: This ground was not pressed and dismissed as infructuous.

Conclusion:
The Tribunal quashed the assessment made on the non-existent entity as void ab initio, rendering the remaining grounds academic and dismissing them as infructuous. Consequently, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed.