2020 (10) TMI 980 - AT - Income Tax

Deemed income / addition u/s 41(1) - Recovery of bad debts written off - AO held that assessee claimed deduction of provision for bad and doubtful debts u/s.36(1)(viia) of the Act out of which bad debts written off is set off - HELD THAT - In the instant case, the bad debts written off did not exceed the credit balance in provision for bad and doubtful debts and the bad debts written off was not claimed as deduction u/s.36(1)(vii) of the Act in earlier years. This fact was not controverted by the Revenue before us. Accordingly, we hold that the provisions of Section 41(4) of the Act which has been invoked by the ld. AO in the instant case are not applicable at all in the facts of the instant case. DR had in principle agreed to the fact that the ratio laid down by the Bangalore Tribunal in the case of State Bank of Mysore 2009 (5) TMI 610 - ITAT BANGALORE shall be applicable to the facts of the instant case but he pleaded for remitting back this issue to the file of the ld. AO for verification of figures alone. In this regard, we find that while giving effect to the order of the ld. CIT(A), the ld. AO would obviously allow the claim only after verifying the figures and hence, no purpose would be served by remitting this issue again to the file of the ld. AO for verification of figures. Hence, the argument made by the ld. DR in this regard is dismissed. In view of the aforesaid observations, the ground No.1 raised by the revenue is dismissed. Income accrued in India - income of its foreign branches - taxability in India - HELD THAT - There is absolutely no finding recorded either by the ld. AO or by the ld. CIT(A) with regard to availability of relevant information with regard to payment of taxes in foreign countries by the assessee in respect of income of the foreign branches. Hence, we find considerable force in the argument advanced by the ld. DR that this aspect needs to be factually verified by the ld. AO. Hence, we deem it fit and appropriate to remand this issue to the file of the ld. AO only for the limited purpose of making following verifications - (a) The details of branches located in country with which DTAA has been entered into, by India (b) The details of branches located in the Country with which DTAA has not been entered into, by India (c) The details of taxes paid by the foreign branches in respect of its income earned outside India. Assessee is directed to provide the aforesaid details before the ld. AO. Adjustment of refund granted by the revenue to the assessee - HELD THAT - CIT(A) had granted relief to the assessee by placing reliance on the order of his predecessor in assessee s own case for A.Y.1995-96 wherein reliance had been placed on the decision of CIT vs. HEG Limited 2009 (12) TMI 35 - SUPREME COURT and decision of India Trade Promotion Organisation vs. CIT 2013 (9) TMI 451 - DELHI HIGH COURT . In the case of Bank of Baroda 2018 (12) TMI 1836 - ITAT MUMBAI (authored by the undersigned) wherein it was held that the refund granted by the revenue should be first adjusted against the interest portion of refund due and balance, if any, is to be adjusted against the tax portion of refund due and interest for the subsequent period shall be calculated on such tax portion of refund due. It was also held that this would not tantamount to interest on interest claimed by the assessee and the assessee was right in claiming interest on such portion - Decided against assessee.

Summary

Issues Involved:
1. Recovery of bad debts written off.
2. Taxability of income of foreign branches.
3. Adjustment of refund granted by the revenue.

Issue-wise Detailed Analysis:

1. Recovery of Bad Debts Written Off:
The primary issue was whether the recovery of bad debts written off should be taxed under Section 41(4) of the Income Tax Act, 1961. The assessee bank recovered bad debts amounting to ?42,63,46,635/- during the F.Y. 1995-96, relevant to A.Y. 1996-97, without claiming any deduction under Section 36(1)(vii) in the past. The Assessing Officer (AO) argued that the recovery should be taxable under Section 41(4) since the bad debts were initially set off against the provision for bad and doubtful debts under Section 36(1)(viia). However, the Tribunal found that the bad debts written off did not exceed the credit balance in the provision for bad and doubtful debts and were not claimed as a deduction under Section 36(1)(vii) in earlier years. Therefore, Section 41(4) was not applicable. The Tribunal upheld the CIT(A)'s decision, referencing the Bangalore Tribunal's decision in the case of State Bank of Mysore and the Tribunal's own decision in the assessee’s case for A.Y. 2008-09. The argument for remitting the issue back to the AO for verification was dismissed, and the ground raised by the revenue was dismissed.

2. Taxability of Income of Foreign Branches:
The second issue concerned the taxability of income from the assessee's foreign branches. The assessee argued that the income of its foreign branches should not be taxed in India based on various judicial pronouncements and Double Taxation Avoidance Agreements (DTAA). The AO, however, relied on the Tribunal's decision in the case of Bank of Baroda and held that such income should be taxable in India. The CIT(A) granted relief to the assessee, relying on the Tribunal's decision in the case of Bank of India, which was subsequently upheld by the Jurisdictional High Court. The Tribunal noted that the AO needed to verify whether the assessee provided evidence of taxes paid in foreign countries for the income of its foreign branches. The Tribunal remanded the issue back to the AO for verification of the details of branches in countries with and without DTAA and the taxes paid by these branches. The ground raised by the revenue was allowed for statistical purposes.

3. Adjustment of Refund Granted by the Revenue:
The third issue was about the adjustment of the refund granted by the revenue. The CIT(A) directed the AO to adjust the refund first towards the interest amount refundable and then towards the tax amount refundable, referencing the Supreme Court's decision in the case of CIT vs. HEG Limited and the Delhi High Court's decision in the case of India Trade Promotion Organisation vs. CIT. The Tribunal noted that this issue had been settled in favor of the assessee by previous Tribunal decisions, including the case of State Bank of Indore and Bank of Baroda. The Tribunal upheld the CIT(A)'s decision, dismissing the ground raised by the revenue.

General Ground:
The fifth ground raised by the revenue was general in nature and did not require specific adjudication.

Conclusion:
The appeal of the revenue was partly allowed for statistical purposes, with specific directions for verification on the taxability of income from foreign branches and upholding the CIT(A)'s decisions on the recovery of bad debts and adjustment of refunds. The order was pronounced on 21/10/2020.