2024 (11) TMI 152 - AT - Income Tax

Disallowance of sum incurred by the assessee on reservation of seats in the schools for the children of the bank officer - bank has paid the above sum to various schools towards reservation of seats for the children of the officers of the bank - assessee has claimed that this is staff welfare expenditure as the payment has been made to mitigate the hardship faced by the officers of the bank for children's education during the transfer - HELD THAT - As we find that this issue is squarely covered in favour of the assessee by the decision of the honourable High Court in case of the assessee for assessment year 1996 1997 2016 (8) TMI 963 - BOMBAY HIGH COURT which is not disputed by the revenue before us, therefore, we confirm the order of the learned CIT A on this issue deleting the disallowance - Further argument raised by the revenue that whether such amount is chargeable to tax in the hands of the parents of the children i.e., employees and whether it is reflected as income of those parents or not is irrelevant for the reason that, we are supposed to examine whether the assessee has incurred this expenditure for the purposes of the business or not. This is not the issue raised by the learned assessing officer also. In view of this, ground number 2 of the appeal is dismissed. Disallowance u/s 14A - as submitted assessee has sufficient owned interest free funds available - provisions of rule 8D is prospective in operation or applies to the appeals for assessment year 2006 07 and 2007 08 pending? - HELD THAT -There cannot be any interest disallowance in the hands of the bank which has sufficient own / interest free funds more than the amount invested in the stock securities earning tax free income. In view of this even in absence of separate books of accounts, even in absence of showing direct Nexus of the funds, no interest disallowance could have been made in the hands of the assessee u/s 14 A. Disallowance of administrative expenditure for earning the exempt income - We find that in the case of the assessee for assessment year 2005 06 the coordinate bench in its order dated 22nd of March 2022 and for other years also has retained the disallowance to the extent of 1% of the exempt income. It is not shown before us that nature, quantum of expenditure is different in this year compared to earlier years, or there are specific expenditure incurred for earning exempt income, which exceeds the 1 % of the exempt income, Therefore, in absence of any change in the facts and circumstances of the case and because of the non-applicability of rule 8D for these assessment years, we direct the learned assessing officer to retain the disallowance under section 14 A of the act to the extent of 1% of the exempt income earned by the assessee. Nature of expenditure - broken period interest expenditure - Tribunal justification in holding that interest paid by the assessee on purchase of securities constituting stock-in-trade but paid for the broken period is allowable as a deduction? - HELD THAT - In view of the decision of honourable high court in Bank of Hyderabad 2023 (1) TMI 673 - TELANGANA HIGH COURT we also do not incline to the argument of the ld. CIT DR. with respect to broken period interest paid on securities which are on closing stock. Thus, we do not find any merit and hence we confirm the order of the ld. CIT (A) in allowing the broken period interest included in the cost of securities at the time of purchase correctly written off/ debited to profit and loss account as allowable interest. Accordingly Ground no 4 (a) is dismissed. Revenue recognition - Treating interest on securities on due basis - claim of the AO is that when the assessee is following mercantile system of accounting the interest on securities to be accounted for on accrual basis while arriving at profit - HELD THAT - As per the accounting methodology applied by the assessee for revenue recognition of accrual, and also the method adopted by the assessee of offering income only which is accrued in the due instead of accrual as on the last day of the accounting year, but, respectfully following the decision of the honourable High Court Credit Suisse first Boston (Cyprus) Ltd. 2012 (8) TMI 17 - BOMBAY HIGH COURT we find that the addition to the income cannot be made of interest accrued as on the last day of the accounting year but only the income which has accrued and due can be charged to tax, therefore, this ground of appeal no 4 (b) does not survive, hence, dismissed. Loss on revaluation of investments - assessee has booked a total loss on account of depreciation of securities on the last day of the financial year - HELD THAT - The claim of the assessee that in accordance with the guidelines issued by the reserve bank of India investments in held to maturity category should be carried at acquisition cost. In case the purchase price is higher than the face value, the premium should be amortized over the remaining period of maturity of the security. The bank as amortized the sum being amortization cost of investment held in that bucket i.e., held to maturity HTM . No doubt the investments held by the assessee are trading securities therefore such amortization premium is claimed as allowable by relying on the decision of the honourable Bombay High Court in assessee s own case for assessment year 96 97 2016 (8) TMI 963 - BOMBAY HIGH COURT wherein the appeal of the revenue was dismissed on this count. Similarly for assessment year 97-98 also the honourable Bombay High Court as per order 2019 (6) TMI 1183 - BOMBAY HIGH COURT decided the issue in favour of the assessee. Disallowance of contribution to pension fund by applying provisions of section 40A (9) - AO has found that the contribution to provident fund and pension fund was excess by 27% of basic salary and DA - HELD THAT - We find that as this issue is squarely covered by the decision of GlaxoSmithKline pharmaceuticals Ltd. 2013 (3) TMI 759 - BOMBAY HIGH COURT which is not disputed by the revenue, ground number 3 do not survive and hence dismissed. Disallowance u/s 36 (1) (viii) - taxing the deferred payment guarantee commission on receipt basis - HELD THAT - According to provisions of section 36 (1) (viii) allows deduction in respect of any special reserve created and maintained by a financial Corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructural facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for specified activities, the deduction is amount not exceeding 40% of the profits derived from such business before making any deduction under this subsection. Now such deduction is available only to financial Corporation which shall include a public company and the government company, the claim of the revenue raised before us for the first time is that state bank of India does not qualify for this deduction as it is neither a company, nor a financial corporation and also not a government company. Therefore, state bank of India, assessee is not eligible for this deduction at all for impugned assessment year. Though the issue is decided in favour of the assessee as stated by the learned authorized representative however we do not find that those decisions have looked into this aspect. The learned authorized representative also could not show us whether this aspect is examined by the coordinate benches in earlier year or not. Further ground number 3 in appeal of the assessee is also on this issue wherein assessee has stated that the learned CIT A has not at all adjudicated this issue as far as computation is concerned. In view of these facts where the eligibility itself of the assessee is contested by the revenue to claim this deduction, we restore this ground of appeal back to the file of the learned assessing officer with a direction to the assessee to satisfy the learned assessing officer that how assessee qualifies for this deduction. Taxing the deferred payment guarantee commission on receipt basis - such commission relates to subsequent years - whether guarantee commission should be accrued and chargeable to tax in the hands of the bank as and when it is received at the time of issuing the guarantee or such income can be spread on the basis of the time for the period for which guarantee is persisting - HELD THAT - Revenue recognition policy of the bank as per accounting policy number 9.2 (a) wherein the commission other than the commission on deferred payment guarantee and government transactions) is recognized on realization basis. Thus, the deferred payment guarantee is recognized as income not on realization basis. We also do not find any revenue recognition policy with respect to commission on deferred payment guarantee in the annual accounts of the assessee. Therefore, those are accounted for on accrual basis as per policy number 9.1. We find that the learned Departmental Representative has correctly relied on the judgment rendered in Kerala Urban Development Finance Corpn. Ltd. 2002 (12) TMI 18 - KERALA HIGH COURT in which case the administration and supervision charges were collected and retained by the assessee, a nodal agency for disbursement and loan realized by HUDCO to various urban local bodies. It has been held in this case that the income accrued to the assessee at the time of disbursal of loan and hence assessable to tax in the year in which the loan amount was disbursed. Accordingly, respectfully following the decisions of the tribunal in assessee's own case for the earlier years, we find that the commission on deferred guarantee issued by the bank is chargeable to tax as and when deferred guarantee is issued and commission is received. Accordingly ground number 1 of the appeal is dismissed. Disallowance of depreciation on leased assets confirmed. Whenever bad debts written off is recovered should not be liable to tax under section 41 (4) for the reason that assessee has not claimed any deduction of such advances under section 36(1)(vii) - HELD THAT - It is crystal clear that it is for the assessee to first establish that what is the outstanding amount of that debt, whether out of such that any deduction has been allowed to the assessee under section 36(1)(viia) of the act, whether there is any recovery of debts subsequently from that account, what is the difference between the amount outstanding as at that date and the amount of deduction allowed as a provision to the assessee, thereafter give an effect to the provisions of section 41 (4) of the act. It is the duty of the assessee to give these primary details to the assessing officer, thereafter the learned assessing officer may look at each of such accounts against which the deduction of provision under section 36(1)(viia) of the act is allowed to the assessee and then apply the provisions of section 41 (4) of the act. Undoubtedly, it would be the duty of the assessee to show before the learned assessing officer that in such cases where there is a recovery of outstanding that, assessee has not claimed deduction under section 36(1)(viia) of the act. On furnishing of such information, the learned AO is duty-bound to examine the same. Accordingly with above direction, the issue is restored to the file of the learned AO. Assessment of profit from its foreign branches - HELD THAT - The impugned assessment year before us is assessment year 2006 07 and 2007 08. Therefore, the assessee is not entitled for exclusion of the income of foreign branches from its tax computation but is only entitled to tax credit or exemption in accordance with those agreements. The assessee was specifically asked to give the details of the Double Taxation Avoidance Agreement where assessee is claiming benefit of exemption, in all those agreements as per article 22 or article 23 or article 25 only the credit methods for elimination of Double taxation are provided. Therefore, assessee is entitled to only credit of foreign taxes paid. Reliance on the decision of the coordinate bench by the learned authorized representative in case of bank of India 2015 (1) TMI 1418 - BOMBAY HIGH COURT does not help the case of the assessee as it pertains to assessment year 2003 04. The reliance placed on the decision of Bank of India 2015 (1) TMI 1418 - BOMBAY HIGH COURT also does not help the case of the assessee as it also pertains to assessment year 2003 04 - Ground dismissed.

Summary

Issues Involved:

1. Taxation of Deferred Payment Guarantee Commission.
2. Disallowance under Section 14A of the Income Tax Act.
3. Depreciation on Lease Assets.
4. Deduction for Bad Debts Written Off.
5. Valuation of Securities and Taxation of Appreciation.
6. Taxation of Recovery of Bad Debts.
7. Taxation of Income from Foreign Branches.
8. Deduction under Section 36(1)(viii) of the Income Tax Act.

Detailed Analysis:

1. Taxation of Deferred Payment Guarantee Commission:
The issue revolves around whether the deferred payment guarantee commission should be taxed on receipt basis or over the period of the guarantee. The tribunal upheld the decision to tax the commission on receipt basis, aligning with previous judgments that the income accrues at the time of issuing the guarantee.

2. Disallowance under Section 14A of the Income Tax Act:
The tribunal addressed the disallowance of expenses related to earning exempt income under Section 14A. It was concluded that Rule 8D does not apply to the assessment years in question (2006-07 and 2007-08). The tribunal directed that the disallowance should be limited to 1% of the exempt income, as the bank had sufficient interest-free funds.

3. Depreciation on Lease Assets:
The tribunal confirmed the disallowance of depreciation on leased assets, agreeing with the lower authorities that the transactions were not genuine leases but rather financial arrangements. This decision was consistent with previous rulings against the bank in similar cases.

4. Deduction for Bad Debts Written Off:
The issue was whether the write-off of bad debts in respect of non-rural advances should be allowed. The tribunal restored the matter to the assessing officer for verification of the actual write-off and its eligibility under the Income Tax Act, following the principles laid down in the case of Catholic Syrian Bank Ltd.

5. Valuation of Securities and Taxation of Appreciation:
The tribunal allowed the bank's method of valuing securities at lower of cost or market value, rejecting the approach of netting off depreciation and appreciation script-wise. This decision was in line with the bank's consistent practice and previous tribunal decisions.

6. Taxation of Recovery of Bad Debts:
The tribunal remanded the issue to the assessing officer to verify whether the bank had claimed a deduction for the bad debts under Section 36(1)(viia) and whether the recovery should be taxed under Section 41(4). The tribunal emphasized the need for detailed verification of the bank's claims.

7. Taxation of Income from Foreign Branches:
The tribunal dismissed the bank's claim to exclude income from foreign branches from its total income, citing legislative changes post-2004 which mandate inclusion of global income in the total income of a resident. The tribunal directed the assessing officer to grant tax credit as per relevant Double Taxation Avoidance Agreements.

8. Deduction under Section 36(1)(viii) of the Income Tax Act:
The tribunal remanded the issue of eligibility for deduction under Section 36(1)(viii) back to the assessing officer. The bank was required to demonstrate its qualification as a financial corporation or a public company to claim the deduction, as the eligibility was contested by the revenue.

Overall, the tribunal's decisions were largely based on consistency with prior rulings and adherence to legislative provisions, with several matters being remanded for further verification by the assessing officer.