2012 (12) TMI 416 - AT - Income Tax

Assessment of interest on securities, allowability of depreciation on leased assets, disallowance of entertainment expenses, disallowance of bad debt and disallowance of loss on unmatured foreign exchange contracts. - One of the due dates fell after the end of the previous year i.e. after 31st March. The issue is whether any income on account of interest had accrued to the assessee during the broken period from the previous due date till 31st March of the previous year which was not the due date. - held that - the issue is fully covered by the judgment of Hon ble High Court of Bombay in case of Director (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd. (2012 (8) TMI 17 - BOMBAY HIGH COURT). - interest from securities for the broken period till the end of the previous year is not assessable in case of the assessee. - Decided in favor of assessee Depreciation on leased assets - held that - The Special Bench has since decided the issue in M/s.IndusInd Bank Limited Versus The Addl.Commissioner of Income-tax 2012 (3) TMI 212 - ITAT MUMBAI in which it has been held that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers & Chemical Corpn. and there was no genuine leasing of the boiler. The Special Bench therefore held that no depreciation was allowable in case of the assessee lessor. - Decided against the assessee. Disallowance of entertainment expenses on estimate basis - held that - from assessment year 1988-89 there is no provision for disallowance of entertainment expenses. The expenses incurred by the assessee bank on employees during the official visits and in connection with clients and business visitors have to be allowed as incurred wholly and exclusively for business purposes. - Decided in favor of assessee. Loss amounting to Rs.2,37,82,608/- on unmatured foreign exchange contracts - held that - The assessee had made the claim as per the method of accounting and as per FEDAI guidelines which is allowable. - Decided in favor of assessee. Reduction of claim of bad debt under section 36(1)(vii) - held that - In the first place, the ad hoc deduction under s. 36(1)(viia) (b) being the last item on the computation of taxable business profits, it cannot be taken into account at the time of allowing deduction under s 36(1)(vii), and, to that extent, the actual deduction attributable to bad debts i.e. 36(1)(vii) plus 36)(1)(vii)(b) will indeed be more than the actual bad debts in that year However, since the provision so allowed under s 36(1)(viia)(b) is be taken into account while allowing deduction for actual bad debts in the subsequent year, the effect of excess deduction, if any, will be squared up in that subsequent year. Secondly, a view seems perfectly acceptable that the provision for bad debts allowable under s. 36(1)(viia)(b) being inherently attributable to the debts outstanding at the end of the year, provision allowable as such is against future bad debts out of debts outstanding at the year end, and, therefore, It need not he mixed up with actual bad debts incurred during the year. - AO to compute deduction allowable on account of bad debt in line with the decision of the Tribunal in case of Oman International Bank, SAOG vs. DCIT 2003 (11) TMI 286 - ITAT BOMBAY-H

Issues Involved:
1. Assessment of interest on securities
2. Allowability of depreciation on leased assets
3. Disallowance of entertainment expenses
4. Disallowance of loss on unmatured foreign exchange contracts
5. Reduction of claim of bad debt under section 36(1)(vii)

Issue-wise Detailed Analysis:

1. Assessment of Interest on Securities:
The dispute centered on whether interest income from securities, which became due after the end of the previous year, should be assessed for the broken period till 31st March. The assessee argued that interest accrued only on due dates and thus should not be assessed for the broken period. The revenue contended that interest accrued on a day-to-day basis under the mercantile system of accounting. The Tribunal, referring to the judgment of the Hon'ble High Court of Bombay in the case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd., held that interest income for the broken period had not accrued to the assessee, as the right to receive interest was vested only on the due dates. Consequently, the Tribunal set aside the order of CIT(A) and deleted the additions made for both assessment years.

2. Allowability of Depreciation on Leased Assets:
The assessee claimed depreciation on a boiler leased to Indo Gulf Fertilizer & Chemical Corporation. The AO disallowed the claim, interpreting the transaction as a financial transaction rather than a genuine lease. The CIT(A) confirmed the disallowance. The Tribunal referred to a Special Bench decision which held that the transaction was merely an advance of loan and not a genuine lease, thereby confirming the disallowance of depreciation in both years.

3. Disallowance of Entertainment Expenses:
For the assessment year 1998-99, the AO disallowed entertainment expenses on the grounds that they were not wholly and exclusively for business purposes. CIT(A) restricted the disallowance to 25%. The Tribunal found that the expenses were incurred in connection with clients and business visitors, and since the specific provision for disallowance of entertainment expenses under section 37(2) had been deleted, the expenses were allowable. The Tribunal set aside the CIT(A)'s order and allowed the claim of the assessee.

4. Disallowance of Loss on Unmatured Foreign Exchange Contracts:
For the assessment year 1999-2000, the assessee claimed a loss on revaluation of unmatured foreign exchange contracts. The AO disallowed the claim, considering it notional. CIT(A) confirmed the disallowance. The Tribunal, following its own decision in the assessee's case for the assessment year 2000-01 and the Special Bench decision in the case of Bank of Bahrain & Kuwait, allowed the claim, stating that the loss was computed as per the method of accounting and FEDAI guidelines.

5. Reduction of Claim of Bad Debt under Section 36(1)(vii):
The AO reduced the claim of bad debt by deducting the opening and closing provisions. CIT(A) confirmed this approach. The Tribunal referred to its decision in the assessee's case for the assessment year 2000-01 and the case of Oman International Bank, SAOG vs. DCIT, which clarified the computation of bad debt deduction. The Tribunal directed the AO to compute the deduction in line with the earlier decisions, allowing the claim of the assessee.

Conclusion:
The Tribunal's comprehensive analysis and reliance on precedents led to a mixed outcome, with some claims being allowed and others disallowed, thereby partly allowing both appeals.

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