2015 (4) TMI 727 - AT - Income Tax

Provision for bad and doubtful debts claimed to the extent eligible under section 36(1)(viia) - Held that - In the course of assessment proceedings before the AO, a query was raised by the AO by his letter March 12, 2008 regarding the claim of the assessee with regard to deduction on account of provision for bad and doubtful debts under section 36(1)(viia) of the Act as to whether the aggregate average rural advances was worked out on the basis of 2001 census because the assessee has in one of its letter dated February 19, 2008 claimed that aggregate average rural advances have been worked out based on 1991 census. The assessee in response to the same by its letter dated February 20, 2008 gave a working of aggregate average rural advances as per 2001 census data. The figure as originally given in the books in this regard was revised to ₹ 35,25,25,92,038. In paragraph III.1.4 of the Assessing Officer s order, the Assessing Officer has accepted such working given by the assessee. CIT(Appeals) has also not thought it fit to make any enquiries in this regard in exercise of his powers of enhancement. Assuming the order of the Assessing Officer to be erroneous on this aspect, the same could only be set right in proceedings under section 263 of the Act. This issue does not arise out of the order of the AO or the CIT(Appeals) at all. The issue is no doubt one facet of the claim for deduction under section 36(1)(viia)(a)but this aspect has been examined and accepted by the Assessing Officer in the order of assessment and not interfered with by the CIT (Appeals) either in the first appeal or by the Commissioner of Income-tax in exercise of powers under section 263 of the Act. We are therefore of the view that the additional ground now sought to be raised by the Revenue cannot be admitted for adjudication. - Decided against revenue. Provision for bad and doubtful debts relating to rural advances are allowed under section 36(1)(viia)(a) - Held that - Under section 36(1)(viia)(a) deduction is allowed when (a) provision is made in the books of account at 10 per cent of the aggregate average rural advances ; (b) aggregate average rural advances is computed in accordance with rule 6ABA of the Rules ; (c) 7.5 per cent of the total income. The opening balance in the provision for bad and doubtful debts account is irrelevant for allowing the said claim. That becomes relevant only when a claim for deduction on account of bad debts written off in respect of rural advances is made by an assessee. If such a claim is made then the proviso to section 36(1)(vii) of the Act and section 36(2)(v) of the Act will come into play. For allowing deduction under section 36(1)(viia)(a) of the Act, no bifurcation of provision for bad and doubtful debts account is required. What is relevant is the provision made in the books of account of the assessee.Thus, the submission made by the learned Departmental representative with regard to opening balance available in provision for bad and doubtful debts account are all irrelevant and therefore ground even if found admissible is without any merit. -Decided against revenue. Provisions of section 36(1)(viia)(a) of the Act - Held that - The Assessing Officer did not dispute the classification as made by the assessee in its books of account. The deduction under the first proviso to section 36(1)(viia)(a) of the Act is in addition to what is allowed under section 36(1)(viia)(a) of the Act and the assessee is given the option to claim deduction under the proviso. The above being the purport of the provisions, we find no basis for additional ground No. (iii) sought to be raised by the Revenue. Ground No. (iii) is therefore held to be unsustainable on merits and does not even require an admission for adjudication as it does not arise out of the order of the Assessing Officer or the Commissioner of Income-tax (Appeals). - Decided against revenue. Disallowance the claim for deduction on account of bad debts written off in respect of non-rural debts - CIT (Appeals) deleted the addition holding that provision for bad and doubtful debts account is not relevant when bad debts are written off in respect of non-rural debts - Held that - With the decision of Catholic Syrian Bank Ltd. 2012 (2) TMI 262 - SUPREME COURT OF INDIA we are of the view that the order of the Commissioner of Income-tax (Appeals) on this issue has to be upheld. The learned Departmental representative however sought to put forth a plea with regard to bifurcation of provision for bad and doubtful debts account into one in relation to rural branches and the other relating to non-rural branches. We have already dealt with this argument while dealing with the additional grounds raised by the assessee. The provision for bad and doubtful debts account is not relevant while allowing deduction under section 36(1)(vii) of the Act in respect of bad debts of non-rural branches written of. - Decided in favour of assessee. Provision for bad and doubtful debts - as per AO claim for deduction under section 36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision, thus proposed to disallow a sum of ₹ 2,07,93,45,318 (difference between ₹ 5,03,49,00,000 and ₹ 2,95,55,54,682) - CIT(A) deleted addition - Held that - We allow ground raised by the Revenue and hold that disallowance to the extent of ₹ 2,07,83,45,338 be restored. - Decided in favour of revenue. Profit on sale of investments and investment trading loss - CIT(A) accepting the assessee s claim that the assessee has traded in securities, shown as investments in the balance sheet, and that the asses see has incurred loss of ₹ 3,74,97,43,513 on account of revaluing the investments, held as on March 31, 2006, at cost or market value whichever is less - Held that - he contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in the assessee s own case on an identical issue for the assessment year 2005-06 has upheld the claim of the assessee. The later decision of the hon ble High Court of Karnataka in Commissioner of Income-tax Versus Vijaya Bank 2013 (10) TMI 1030 - KARNATAKA HIGH COURT herein the court took the view that depreciation claimed on investments held on maturity by a bank has to be treated as stock-intrade in accordance with the Reserve Bank of India guidelines and the Central Board of Direct Taxes Circular is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the Revenue in its appeal is without merit. - Decided against revenue. Expenditure on issue of bonds - CIT(A) allowing the assessee s claim for deduction of stamp duty on bonds - Held that - order of the Commissioner of Income-tax (Appeals) does not call for any interference. The contention on behalf of the Revenue that the sum raised by way of issue of bonds is capital expenditure is erroneous. The distinction between a capital and a loan is well recognised in law. The raising of funds by issue of bonds will be akin to a borrowing. The expenses incurred in issuing bonds will therefore be cost of loan or borrowing. They are therefore to be considered as revenue expenditure. The decisions relied upon by the Commissioner of Income-tax (Appeals), in our view, clearly indicate that expenses incurred on issue of bonds have to be regarded as revenue expenditure. - Decided against revenue. Estimated expenditure on earning tax free income under section 14A - Held that - Remand the issue to the Assessing Officer for fresh consideration to be decided on the lines indicated by the Tribunal in the order for the assessment year 2005-06 to decide the issue afresh by following the ratio of the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT after giving effective opportunity of hearing to the assessee. - Decided in favour of revenue by way of remand. Deduction under section 35D - CIT(A) allowed the claim - Held that - Order of the CIT (Appeals) cannot be sustained. Firstly, the provisions of section 35D of the Act were applicable only when the expenses are incurred after commencement of business in connection with expansion of industrial undertaking or in connection with setting up of a new industrial unit. Admittedly, the assessee was not an industrial undertaking. This aspect has been overlooked by the Commissioner of Income- tax (Appeals). Even assuming that the claim is not one made under section 35D of the Act, the assessee s claim for deduction as a revenue expenditure on the basis that the issue of share capital was for meeting the working capital requirement cannot also be sustained. The fact that the capital raised by issue of shares is for meeting the working capital requirement or otherwise, will not be a relevant consideration. This aspect has been made clear by the hon ble Supreme Court in the case of Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME Court wherein observed that by issue of shares there is increase in capital and therefore there is a expansion of capital base of the company and therefore the expenses will retain the character of capital expenditure - Decided in favour of revenue. Disallowance of provision made for credit card reward points - Held that - The assessee was legally bound to provide equivalent of reward points in cash or kind. In the case of the assessee, the reward points are given in the form of cash reimbursement. The fact that the customers did not make claim for such reimbursement will not stop the accrual of liability. In our view, the liability of the assessee insofar as accumulated reward points are concerned is certain and the Revenue has not disputed the basis of quantification of such liability. In such circumstances, we are of the view that in the light of the principles laid down by the hon ble Supreme Court in the case of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME Court the claim for deduction should be allowed. - Decided in favour of assessee. Computation of book profits - AO rejected computation as it was done as per Schedule VI of the Companies Act, but had not adopted the profit arrived at in the profit and loss account approved by shareholders in the annual general meeting, certified by the auditors, and filed before the Reserve Bank of India - Held that - In the light of the decision of Krung Thai Bank PCL v. Joint DIT (IT) 2010 (9) TMI 18 - ITAT, MUMBAI , we have to necessarily hold that provisions of section 115JB of the Act are not applicable to the assessee which is a banking company. The decisions relied upon by learned counsel for the assessee, clearly support the plea of the assessee in this regard. - Decided in favour of assessee. Interest on securities on accrual basis - CIT(A) allowed relief to assessee on the point of accrued interest on securities offered on cash basis - Held that - It is not in dispute before us that identical decision has also been rendered by the hon ble High Court of Kerala in the case of CIT v. Federal Bank Ltd. 2008 (1) TMI 195 - KERALA HIGH COURT . In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the Revenue in the past. In view of the aforesaid decision, we are of the view that the order of the Commissioner of Income-tax (Appeals) does not call for any interference. - Decided against revenue.

Summary

Issues Involved:
1. Bad debts of non-rural branches written off under section 36(1)(vii).
2. Provision for bad and doubtful debts claimed under section 36(1)(viia).
3. Profit on sale of investments and investment trading loss.
4. Expenditure on issue of bonds.
5. Estimated expenditure on earning tax-free income under section 14A.
6. Deduction under section 35D.
7. Provision made for credit card reward points.
8. Applicability of section 115JB (Minimum Alternate Tax) to the assessee.

Issue-wise Detailed Analysis:

1. Bad Debts of Non-Rural Branches Written Off Under Section 36(1)(vii):
The Revenue argued that the Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim of write-off of bad debts relating to urban branches without first setting off the bad debts against the credit balance in the provision for bad and doubtful debts account. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals) based on the Supreme Court's decision in Catholic Syrian Bank Ltd., which clarified that provisions under section 36(1)(vii) and 36(1)(viia) are independent and cannot be intermingled.

2. Provision for Bad and Doubtful Debts Claimed Under Section 36(1)(viia):
The Revenue contended that the Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for the provision for bad and doubtful debts amounting to Rs. 503.49 crores, even though the assessee debited only Rs. 295.55 crores to the profit and loss account. The Tribunal followed the Supreme Court's decision in Catholic Syrian Bank Ltd. and the decision in the case of Canara Bank, leading to the disallowance of Rs. 207.83 crores.

3. Profit on Sale of Investments and Investment Trading Loss:
The Revenue challenged the assessee's treatment of investments as stock-in-trade and the resultant loss on valuation. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s order, which relied on the Supreme Court decision in UCO Bank and subsequent decisions, confirming that investments held by banks can be treated as stock-in-trade and valued at lower of cost or market value.

4. Expenditure on Issue of Bonds:
The assessee claimed stamp duty expenses on bonds as revenue expenditure. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision, which relied on the Supreme Court's decision in India Cements Ltd. and the Karnataka High Court's decision in ITC Hotels Ltd., confirming that such expenses are revenue in nature.

5. Estimated Expenditure on Earning Tax-Free Income Under Section 14A:
The issue was remanded to the Assessing Officer for fresh consideration in light of the Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd., which requires the Assessing Officer to determine the expenditure incurred in relation to income that does not form part of the total income.

6. Deduction Under Section 35D:
The Tribunal reversed the Commissioner of Income-tax (Appeals)'s decision, holding that the assessee, being a banking company and not an industrial undertaking, is not eligible for deduction under section 35D. The Tribunal relied on the Supreme Court's decision in Brooke Bond India Ltd., which clarified that expenses related to the expansion of capital base are capital expenditures.

7. Provision Made for Credit Card Reward Points:
The Tribunal allowed the assessee's claim for deduction of the provision made for credit card reward points, holding that the liability to incur the expenditure is certain and quantifiable, thus meeting the criteria laid down by the Supreme Court in Bharat Earth Movers.

8. Applicability of Section 115JB (Minimum Alternate Tax) to the Assessee:
The Tribunal held that the provisions of section 115JB do not apply to the assessee, a banking company, as it is not required to prepare its profit and loss account in accordance with Schedule VI to the Companies Act. The Tribunal relied on the Mumbai Bench's decision in Krung Thai Bank PCL and other relevant judgments.

Conclusion:
The Tribunal allowed the appeals by the assessee on issues related to the provision for credit card reward points and the applicability of section 115JB, while partly allowing the Revenue's appeals on the provision for bad and doubtful debts under section 36(1)(viia) and disallowance under section 35D. Other issues were either upheld in favor of the assessee or remanded for fresh consideration.