1984 (9) TMI 98 - AT - Income Tax

Summary

Issues Involved:
1. Claim for bad debts.
2. Taxability of interest credited to interest suspense account.
3. Taxability of guarantee commission.
4. Deductibility of subsidy paid to associate banks.
5. Deductibility of interest credited to provident/pension funds.
6. Deductibility of expenses related to employee benefits.
7. Applicability of Rule 40 regarding interest.

Summary:

1. Claim for Bad Debts:
The assessee, a bank, claimed bad debts amounting to Rs. 29,20,91,437. The IAC rejected this claim, stating that the debts did not become bad during the previous year and that the interest credited to 'interest suspense account' was taxable. The Tribunal held that "a debt becomes bad when all reasonable hope of recovering it is extinguished" and emphasized the need for objective factors to support the claim. The Tribunal found that the bank's estimation process was thorough and based on objective factors, but noted that interest credited to 'interest suspense account' cannot be claimed as bad debt as it was never included in the total income of the bank.

2. Taxability of Interest Credited to Interest Suspense Account:
The assessee argued that interest on 'sticky advances' should not be taxed as it was credited to 'interest suspense account' and not to the profit and loss account. The Tribunal held that since the bank follows a mercantile system of accounting, the interest income accrued and was taxable, even if credited to 'interest suspense account'. The Tribunal distinguished between 'protested bills account' and 'sticky advances', noting that the latter still had the potential to yield interest and thus constituted real income.

3. Taxability of Guarantee Commission:
The assessee received guarantee commission amounting to Rs. 77,19,719, which it spread over the guarantee period. The department included the entire amount in the total income for the year of receipt. The Tribunal upheld this inclusion, stating that the right to receive guarantee commission accrues at the time of execution of the contract, irrespective of the period over which it is spread.

4. Deductibility of Subsidy Paid to Associate Banks:
The assessee paid a subsidy of Rs. 17,19,712 to its associate banks, which was disallowed by the revenue. The Tribunal allowed the deduction, stating that the subsidy was paid to further the business interests of the bank and its associate banks, and thus constituted a legitimate business expenditure u/s 37 of the Act.

5. Deductibility of Interest Credited to Provident/Pension Funds:
The assessee credited interest amounting to Rs. 12,43,66,644 to its provident/pension funds, which was disallowed by the revenue. The Tribunal allowed the deduction, stating that the payment of interest was in accordance with rules approved by the Central Government and constituted an expenditure laid out wholly and exclusively for the purpose of business.

6. Deductibility of Expenses Related to Employee Benefits:
The Tribunal upheld the disallowance of expenses related to depreciation on buildings and furniture provided to employees, as well as maintenance expenditure, under section 40A(5). However, it deleted the disallowance of motor car expenses and club fees, stating that the recoveries made from employees for personal use of motor cars were adequate and that club memberships were in the interest of the bank's business.

7. Applicability of Rule 40 Regarding Interest:
The Tribunal found the Commissioner (Appeals)'s refusal to adjudicate on the applicability of Rule 40 erroneous and directed him to determine this ground in accordance with law.

Conclusion:
The appeal was partly allowed, with specific directions for reappraisal and reconsideration of certain claims and deductions.