2019 (3) TMI 1002 - AT - Income Tax

Addition u/s 14A - Disallowance of expenses on exempted income - application to securities/shares held as stock-in-trade - whether assessee bank is having sufficient non - interest bearing funds? - whether no expenditure was incurred to earn the exempt income as the employees, who are employed to carry out banking activity are used in the activities related to the earning of the exempt income? - HELD THAT - AO had not recorded finding as to the satisfaction reached by him about the contention of the appellant that the appellant has not incurred any expenditure. In the light of this finding by the AO, the contentions urged by the assessee-bank that resort cannot be made to the provisions of s. 14A of the Act cannot be accepted. Further, the Hon ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT OF INDIA had clearly held that whether the shares are held as stock in trade or to maintain a controlling interest in the company is irrelevant for disallowance u/s. 14A of the Act. Therefore, the contention that the resort to provisions of s. 14A of the Act cannot be made when the shares are held as stock in trade is rejected. The approach of the AO in making a disallowance @ 2% of exempt income was also approved - Decided against assessee Addition of ex-gratia payment - assessee-bank made a claim for deduction of exgratia payment made to the employees excluded from the purview of the payment of bonus act, the incentives were paid to these employees on the completion of 90 years of the existence - AO disallowed the claim placing reliance on the provisions of s. 36(1)(ii) which lays down that any sum paid to an employee as a bonus for services rendered, where the same would not have been payable to the employee as profit or dividend, if it is not paid as a bonus or commission shall be allowed as a deduction - HELD THAT - There are no doubts about the genuineness of the expenditure but the AO disallowed that the ex-gratia payment holding that it is in the character of bonus and gratuity, which are specifically covered by the provisions of s. 36(1)(vii) and s. 37(1) of the Act. The view of the AO that the payment is made in lieu of the dividend or distribution of profit cannot be accepted because employees are not entitled to share in the profits as well as distribution of the dividend. The second contention of the AO that the ex-gratia payment is in the nature of bonus and gratuity also cannot be accepted for the reason that the gratuity is only paid at the time of retirement and the bonus, which is paid in excess what prescribed in the Bonus Act is also allowable as deduction as in the light of the decision of Hon ble Jurisdictional High Court in the case of Kumaran Mills Ltd. v. CIT 1997 (12) TMI 31 - MADRAS HIGH COURT and in the case of CIT v. Carborundum Universal Ltd. 1976 (4) TMI 21 - MADRAS HIGH COURT . Inasmuch as, the Bonus Act only prescribed the minimum amount of bonus to be made there is no bar on the payment of bonus over and above prescribed under the Bonus Act. We are of the considered opinion that the claim for deduction of ex-gratia payment should be allowed, accordingly, we direct the AO to allow the same as a deduction. Nature of expenses - disallowance of expenditure incurred on bonus shares - issue of right shares - AO disallowed the same holding to be a capital expenditure - Held that - Undoubtedly, on account of right issue shares, there would be change in the capital structure of the company. Any expenditure incurred in increasing the capital structure of the company is a capital expenditure as held by the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation v. CIT 1996 (12) TMI 6 - SUPREME COURT and Brooke Bond India Ltd. v. CIT 1997 (2) TMI 11 - SUPREME COURT . The case laws relied upon by the ld. Counsel cannot be applied to the facts of the present case, wherein the Hon'ble Supreme Court held that the expenditure incurred on issue of bonus shares is revenue expenditure, whereas In the present case, we were concerned with the issue of right shares. Thus, this ground of appeal filed by the assessee is dismissed. Disallowance of Pooja expenses - Allowable business expenses - AO disallowed claim holding that the expenditure, was not incurred wholly and exclusively for business purpose also confirmed by CIT-A - HELD THAT - Similar expenditure was allowed in the assessee s own case in the AY 2004-05, 2005-06 and 2006-07 by this Tribunal, following the decision in the case of CIT v. Aruna Sugars Ltd. 1977 (1) TMI 8 - MADRAS HIGH COURT . The decision of the Tribunal was accepted by the Revenue by not filing any further appeal. These submissions of the ld. Authorized Representative of assessee were not controverted by the ld. Sr. Departmental Representative. In the circumstances, following the decision of this Tribunal in assessee s own case, we direct the AO to allow the same as a deduction. Disallowances of interest swap transactions - HELD THAT - The issue in the present grounds of appeal is covered by the decision of Mumbai Special Bench of Tribunal in the case of Bank of Baharain Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI . It is further submitted that for AY 2010-11, the ld. CIT(A) granted relied to the assessee-bank on the issue. The decision of ld. CIT(A) was accepted by the Department by not filing further appeal. Thus, it is prayed that the same may be allowed as a deduction. The above submissions made on behalf of the assessee-bank were not controverted by the ld. DR. In the circumstances, this ground of appeal filed by the assessee-bank is allowed. Disallowance of loss on account of sale of HTM securities - AO denied the claim on the ground that the claim was made in the revised return, which was beyond the time prescribed u/s. 139(5) - HELD THAT - In the return of income, the claim relating the sale of securities was made but the claim was made at an amount of ₹ 1,39,30,565/- as against the correct amount of ₹ 24,78,54,994/-. The correct amount of claim was made by filing a revised return. The AO as well as ld. CIT(A) denied the claim on the ground that the claim was made by a revised return which was filed beyond the prescribed period under the statute. The approach of the AO cannot be appreciated in view of the settled principle of law that it is the bounden duty of the AO to compute the taxable income of the assessee in accordance with law and the assessment proceedings are not adverse proceedings. In fact, it is not a new claim made for the first time before the AO. It is only the variation in the amount of the claim. Therefore, we direct the AO to examine workings furnished by the assessee-bank and if, satisfied about the correctness of the working of the loss on sale of HTM securities to allow the same as a revenue loss. Disallowance of entertainment expenditure - expenditure was incurred for supplying tea, coffee etc, to the customers at the time of canvassing the business - AO agreed in principle on the allowabillity of expenditure but made adhoc disallowance of 5% of the total expenditure on the ground that a certain portion of the expenditure may not be relating to the business also confirmed by CIT-A - HELD THAT - Issue is covered in favour of the assessee-company in its own case by the decision of this Tribunal for the AY 2010- 11 wherein the Tribunal deleted the addition on the ground that there was nothing on the record to show that any expenditure was incurred for the benefit of the employees. The ld. CIT(A) had not controverted above submissions. Therefore, we allow this ground of appeal. Disallowance of claim for deduction u/s. 36(1)(vii) - credit balance available in the account of provision for bad and doubtful debts more than the amount claimed as a bad debts - HELD THAT - The issue in the present grounds of appeal is covered against the Revenue by decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v. CIT 2002 (8) TMI 266 - ITAT COCHIN . Calculation of deduction u/s. 36(1)(viia) - inclusion of outstanding rural advances or incremental advances made by the rural branches - HELD THAT - In the case of PCIT v. Uttarbanga Kshetriya Gramina Bank 2018 (5) TMI 903 - CALCUTTA HIGH COURT upheld the interpretation of the provisions of Rule 6ABA of the Rules for the purse of s. 36(1)(viiia) that only aggregate average advance made by rural branches of a scheduled bank should be computed by aggregating separately the advances made by each rural branch as outstanding at the end of the last day of each months comprised in the previous year. The Hon ble High Court had categorically held that the method of taking the loans and advances made during the year only is not correct. Therefore, we direct the AO to consider only the outstanding rural advances not the incremental advances made by the rural branches for the purpose of calculating the deduction u/s. 36(1)(viia) of the Act Deduction of loss on account of HTM category of securities held by the assessee-bank - addition on ground that the notional profit made on account of AFS and HFT securities categories cannot be brought to tax - bona fide of the assessee-bank in changing the method of accounting - HELD THAT - As decided in assessee's own case 2004 (7) TMI 52 - MADRAS HIGH COURT Notwithstanding treatment given in the books of account, it is undisputed fact that investments are made only to comply with the regulations of RBI governing SLR requirement. Even otherwise, the Hon'ble jurisdictional High Court in the case of Karnataka Bank 2013 (7) TMI 656 - KARNATAKA HIGH COURT held that circular issued by the RBI for treatment in the books of account is not relevant for classifying the investments whether stock-in-trade or not. In the present case, undisputedly, assessee-bank has changed its method of accounting by classifying the investments from investments to stock-in-trade. Addition on account of brokerage paid to HTM securities - Revenue or capital expenditure - HELD THAT - While dealing with the issue of allowability of loss of depreciation on the value of HTM securities, we held that the securities held by banking company are stock in trade. When the securities have been held as stock in trade the expenditure incurred for the acquisition of the same should be treated as Revenue expenditure and the same should allowed as deduction. Therefore, we do not find any fallacy in the reasoning of ld. CIT(A). Hence, this ground of appeal by the Revenue is dismissed. Broken period interest for the purchase of securities - AO disallowed a sum being the interest paid on broken period of the HTM securities purchases - CIT(A) allowed the same following the reasoning that the HTM securities were stock in trade in the case of the assessee bank - HELD THAT - Supreme Court had laid down in the case of City Bank 2008 (8) TMI 766 - SUPREME COURT OF INDIA that where the securities were forming part of the stock in trade the broken period interest should be allowed as a deduction, while dealing with the issue of disallowance on account of depreciation of HTM securities, we have categorically held that the securities formed part of the stock in trade and therefore, the broken period interest paid should be allowed as a deduction. Therefore, we do find any fallacy in the reasoning of the ld. CIT(A). Additions unclaimed balance - HELD THAT - The issue is covered in favour of the assessee company by Karnataka High Court in the case of Karnataka Vikas Gramena Bank 2015 (12) TMI 1420 - KARNATAKA HIGH COURT , wherein held that the decision of Hon'ble Supreme Court in the case of T.V. Sundaram Iyengar 1996 (9) TMI 1 - SUPREME COURT cannot be applied to the present claim. Addition of provision for leave encashment and medical leave u/s 43B - HELD THAT - The clause (f) to s. 43B of the Act enacts that no expenditure shall be allowed on account of any leave salary unless, the expenditure is actually paid. Thus, provision is intended to overcome the decision of Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT 2000 (8) TMI 4 - SUPREME COURT . The case laws relied upon by the ld. Counsel cannot come to the rescue of the assessee-bank. Thus as long as Section 43B(f) is on Statute, the said disallowance is justified. Addition on account of loss on derivatives transactions - HELD THAT - Mumbai Special Bench, in the case of Bank of Baharain Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI , wherein it was held that edging against the future losses cannot be treated as a speculative loses. Loss incurred for derivative transaction is allowable as a business deduction. Accordingly, we direct the AO to allow the same as deduction. Addition u/s 14A - contention of the appellant that the appellant has not incurred any expenditure to earn exempt income - HELD THAT - AO had not given any finding as to how the claim of the assessee-bank that no expenditure was incurred to earn the exempt income was incorrect. In the absence of this finding resort to the provisions of Rule 8D of the Income Tax Rules cannot be made as held by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT OF INDIA . Therefore, this ground of appeal filed by the assessee is allowed. Addition on account of interest accrued in NPAs accounts - AO had brought to tax the interest on the NPAs accounts by holding that interest had accrued in terms of the agreement entered by the appellant with borrowers - HELD THAT - This issue is now covered in favour of the assessee-bank by decision of Hon'ble Supreme Court in the case of CIT v. Vasisth Chay Vyapar Ltd. 2018 (3) TMI 56 - SUPREME COURT OF INDIA , wherein confirmed the decision of Hon'ble Delhi High Court, that the interest income cannot be said to have been accrued to the assessee on the NPA accounts. Accordingly, we direct the AO to delete the addition Rectification u/s 154 - mistake apparent from the record, inasmuch as, the deprecation debited to the profit and loss account is apparent and patent - HELD THAT - Adopting wrong amount of provision for depreciation in the books of account constitutes a mistake apparent from the record. The application was made by the assessee-bank within the period of four years from the date of receipt of the assessment order as the assessment was completed on 15.03.2000 and the petition u/s. 154 of the Act was made on 23.06.2003. Thus, the contention that the petition was filed beyond the period of limitation has no legs to stand. Thus, we do not find any fallacy in the orders of ld. CIT(A) directing the AO to allow the petition filed by the assessee-bank. Allowance of depreciation claimed on the assets leased - HELD THAT - There is no conclusive finding by the Tribunal on the issue. Therefore, the submissions made on behalf of the appellant that the AO had travelled behind the direction of the Tribunal cannot be accepted. However, the reasons assigned by the AO as confirmed by the CIT(A) to disallow the claim for depreciation cannot be accepted as the assessee had no control over the assessment record of M/s. Prakash Industries Ltd. It is always open to the AO to verify the assessment records of M/s. Prakash Industries Ltd. Therefore, we are of the considered opinion that the AO was not justified in disallowing the claim for depreciation on unjustified grounds. In the case of Annamalai Finance Ltd. 2004 (10) TMI 51 - MADRAS HIGH COURT has laid down certain parameters for allowance of depreciation in the case of sale and leased back of transaction. Nothing is brought on record to say that the above parameters are not met by the assessee and therefore we direct the AO to allow the depreciation as claimed by the appellant. MAT provision application u/s 115J to banking companies - HELD THAT - This issue is settled in favour of the assessee-bank by several judicial decisions. The recent decision of Co-ordinate Bench of Tribunal, Bangalore in the case of Canara Bank v. JCIT 2017 (11) TMI 1425 - ITAT BANGALORE held that the assessee-bank is not liable for tax u/s 115JB for the year under consideration.

Summary

Issues Involved:
1. Disallowance of expenses on exempted income under Section 14A.
2. Disallowance of ex-gratia payment.
3. Disallowance of expenses related to bonus shares.
4. Disallowance of pooja expenses.
5. Disallowance of speculative loss on derivative transactions.
6. Disallowance of loss on sale of HTM securities.
7. Disallowance of entertainment expenses.
8. Disallowance of bad debts written off.
9. Disallowance of broken period interest.
10. Disallowance of brokerage paid.
11. Disallowance of unclaimed balance.
12. Provision for leave encashment and medical leave.
13. Interest on non-performing assets.
14. Applicability of Section 115J for banking companies.

Detailed Analysis:

1. Disallowance of Expenses on Exempted Income under Section 14A:
The Tribunal upheld the disallowance of 2% of exempt income under Section 14A, stating that the provisions of Rule 8D were not applicable for AY 2007-08. The assessee's contention that no expenditure was incurred to earn the exempt income was rejected based on the AO’s findings. The Tribunal referenced the Supreme Court's decision in Maxopp Investment Ltd. v. CIT, which held that Section 14A applies irrespective of whether shares are held as stock in trade.

2. Disallowance of Ex-Gratia Payment:
The Tribunal allowed the deduction of ex-gratia payment of ?6,26,71,637/-, stating that it was made out of commercial expediency and not in lieu of profit or dividend. The decision referenced previous favorable rulings for the assessee in similar cases.

3. Disallowance of Expenses Related to Bonus Shares:
The Tribunal dismissed the assessee's appeal, holding that expenses incurred for the issue of bonus shares are capital in nature, referencing the Supreme Court's decisions in Punjab State Industrial Development Corporation v. CIT and Brooke Bond India Ltd. v. CIT.

4. Disallowance of Pooja Expenses:
The Tribunal allowed the deduction of pooja expenses, referencing previous Tribunal decisions in the assessee’s favor and the Madras High Court’s decision in CIT v. Aruna Sugars Ltd.

5. Disallowance of Speculative Loss on Derivative Transactions:
The Tribunal allowed the deduction for speculative loss on derivative transactions, referencing the Mumbai Special Bench decision in Bank of Bahrain & Kuwait and the Bombay High Court's decision in CIT v. Badridas.

6. Disallowance of Loss on Sale of HTM Securities:
The Tribunal directed the AO to verify the correct amount of loss on the sale of HTM securities and allow the same as a revenue loss, referencing the Supreme Court's decision in United Commercial Bank v. CIT and the Madras High Court’s decision in CIT v. Karur Vysya Bank Ltd.

7. Disallowance of Entertainment Expenses:
The Tribunal allowed the deduction of entertainment expenses, referencing previous Tribunal decisions in favor of the assessee.

8. Disallowance of Bad Debts Written Off:
The Tribunal upheld the CIT(A)’s decision to allow the deduction for bad debts written off, referencing the Supreme Court’s decision in Catholic Syrian Bank Ltd. v. CIT.

9. Disallowance of Broken Period Interest:
The Tribunal allowed the deduction for broken period interest on securities, referencing the Supreme Court’s decision in City Bank and the Madras High Court’s decision in Karur Vysya Bank.

10. Disallowance of Brokerage Paid:
The Tribunal allowed the deduction for brokerage paid on HTM securities, referencing the Madras High Court’s decision in the assessee’s own case.

11. Disallowance of Unclaimed Balance:
The Tribunal upheld the CIT(A)’s decision to delete the addition on account of unclaimed balance, referencing the Karnataka High Court’s decision in Karnataka Vikas Grameena Bank.

12. Provision for Leave Encashment and Medical Leave:
The Tribunal dismissed the assessee’s appeal, upholding the disallowance under Section 43B(f), referencing the Kerala High Court’s decision in South Indian Bank Ltd. v. CIT and the Supreme Court’s stay on the Calcutta High Court’s decision in Exide Industries Ltd. v. Union of India.

13. Interest on Non-Performing Assets:
The Tribunal allowed the deduction for interest on non-performing assets, referencing the Supreme Court’s decision in CIT v. Vasisth Chay Vyapar Ltd.

14. Applicability of Section 115J for Banking Companies:
The Tribunal upheld the CIT(A)’s decision that Section 115J is not applicable to banking companies, referencing multiple Tribunal decisions and the Bangalore Tribunal’s decision in Canara Bank v. JCIT.