2014 (2) TMI 272 - AT - Income Tax

Assessment of interest income on securities Held that - As per terms of securities, the interest became payable to the holder of security and only on the due dates - the interest is not payable to the holder of security on a date other than the one stipulated in the instrument - The right to receive interest on the securities was vested in the assessee only on the due dates mentioned in the securities - income on account of interest of securities for the broken period till the end of the previous year had not accrued to the assessee - The decision in Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. 2012 (8) TMI 17 - BOMBAY HIGH COURT followed - interest from securities for the broken period till the end of the previous year is not assessable in case of the assessee order of the CIT(A) set aside and the additions made for noth the years are deleted. Disallowance of depreciation on the assets leased Held that - It was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers & Chemical Corporation and there was no genuine leasing of the boiler - no depreciation was allowable in case of the assessee lessor the order of the CIT(A) upheld. Disallowance u/s 37(1) of the Act - Entertainment expenditure 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 - There is no case made out by the revenue that expenses are not properly vouched - CIT(A) had agreed that expenses were allowable but has restricted the same to 75% when there is no limit provided under the Act order of the CIT(A) set aside and the claim of the assessee is allowed. Disallowance of loss on unmatured foreign exchange contracts Held that - The claim as per the method of accounting is allowed and as per FEDAI guidelines which is allowable the order of CIT(A) set aside and the claim of the assessee allowed. Reduction of claim of bad debt u/s 36(1)(vii) of the Act Held that - The decision in Oman International Bank, SAOG vs. DCIT 2012 (12) TMI 414 - ITAT MUMBAI followed - The deduction s. 36(1)(vii) is only supplemental in nature inasmuch as it comes to the play only when, and is admissible to the extent, the provision for bad and doubtful debts allowed u/s 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable thus, the AO is directed to allow deduction u/s 36(1)(vii), without taking into account the admissible deduction u/s 36(1) (viia)(b) for the relevant previous year which can only be taken into account for computing deduction u/s 36(1)(vii) for subsequent year(s) Decided partly in favour of Assessee.

Summary

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 primary issue was whether interest income from securities accrued during the broken period before the due date should be assessed. The assessee argued that interest only accrued on the due dates specified in the securities, citing the Bombay High Court judgment in Director (International Taxation) vs. Credit Suisse First Boston (Cyprus) Ltd. The Revenue countered, citing Supreme Court judgments, that interest accrues on a day-to-day basis. The Tribunal concluded that the issue was covered by the Bombay High Court judgment, which held that interest income does not accrue during the broken period if the due date falls after the end of the previous year. Thus, the Tribunal set aside the CIT(A)'s order and deleted the additions.

2. Allowability of Depreciation on Leased Assets:
The assessee's claim for depreciation on a leased boiler was disallowed by the AO, who deemed the transaction a financial one rather than a genuine lease. The Tribunal referred to a Special Bench decision in the assessee's own case, which found the transaction to be a mere loan, not a genuine lease, and upheld the disallowance of depreciation.

3. Disallowance of Entertainment Expenses:
The AO disallowed entertainment expenses on the grounds that they were not wholly and exclusively for business purposes. The CIT(A) restricted the disallowance to 25%. The Tribunal found that the expenses were incurred in connection with clients and business visitors and were thus for business purposes. Since the specific provision for disallowance of entertainment expenses under section 37(2) was deleted, the Tribunal allowed the full claim of the assessee, setting aside the CIT(A)'s order.

4. Disallowance of Loss on Unmatured Foreign Exchange Contracts:
The AO disallowed the loss on unmatured foreign exchange contracts, considering it notional. The Tribunal noted that the issue was covered by a previous decision in the assessee's own case, which allowed the claim based on the method of accounting and FEDAI guidelines. The Tribunal set aside the CIT(A)'s order and allowed the claim.

5. Reduction of Claim of Bad Debt under Section 36(1)(vii):
The AO reduced the bad debt claim by deducting the opening and closing provisions, which was upheld by the CIT(A). The Tribunal referred to a previous decision in the assessee's own case and the case of Oman International Bank, SAOG vs. DCIT, which clarified that the deduction under section 36(1)(vii) should be allowed without considering the provision under section 36(1)(viia)(b) for the relevant year. The Tribunal directed the AO to compute the deduction accordingly.

Conclusion:
The Tribunal allowed the appeals partially, providing relief to the assessee on the issues of interest on securities, entertainment expenses, loss on unmatured foreign exchange contracts, and bad debt claims, while upholding the disallowance of depreciation on leased assets.