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2022 (3) TMI 1135 - AT - Income TaxDisallowance for prior period expenditure - HELD THAT - Assessee is following mercantile system of accounting and as and when the expenditure are approved then the same are said to be incurred and for that year those claim are allowable. Naturally, though the expenses may relate to period of earlier year but when the liability to pay such sum is acknowledged during the year, the same is allowable. In the present case, ₹ 44,563/- is with respect to rent, ₹ 37,124/- is also of water charges and electricity and expenditure of ₹ 1,112/- of different branches are also disallowed for the same reason. With respect to the sum of ₹ 1 lac that was given, as advance in earlier years but accounted for expenditure during the current year on completion of the work. Therefore, it cannot be said to be an expenditure pertaining to earlier year because the event of completion of work falls in this year. Therefore, respectfully following the decision of coordinate Bench in assessee s own case for earlier years we direct the learned Assessing Officer to delete the disallowance which is expenses pertaining to earlier year but incurred during the year. Ground No.1 of the appeal is allowed. Disallowance being 1/5th expenditure on stamp duty for increasing the authorized share capital of the assessee - HELD THAT - Hon'ble Karnataka High Court in the case of CIT s. Buhler India Ltd. 2011 (9) TMI 797 - KARNATAKA HIGH COURT , in case of Dhanalakshmi Bank Ltd. 2018 (12) TMI 836 - KERALA HIGH COURT and CIT vs. Nuchem Ltd. 2015 (5) TMI 259 - PUNJAB HARYANA HIGH COURT , has held that assessee bank extending financial services would be entitled to amortization of preliminary expenses for public subscription. The Hon'ble Punjab and Haryana High Court has also held that fees of ROC, for enhancement of authorized capital is deductible over a period of ten years under section 35D(2) of the Act. Further, this is the second year of amortization period expenses challenged before us. In the first year, co-ordinate bench has decided the above issue in favour of the assessee, respectfully following the decision of co-ordinate Bench in assessee s own case; we also allow the ground No.2 of the appeal. Disallowance under section 14A - HELD THAT - In the present case, we find that the interest free funds available with the assessee are far important in excess of investment of the assessee in tax free income generating instruments, therefore, there cannot be any disallowance on account of interest under section 14A of the Act. The learned Assessing Officer has not held that any other expenditure other than the interest income is also disallowable under section 14A - Assessing Officer is directed to delete the disallowance under section 14A. Disallowance on account of bad debts - HELD THAT - According to the provisions of section 36(1)(viia) banking companies are entitled to claim bad debts to the extent of the actual bad debts exceeds amount of balance in the provision made under section 36(1)(viia) of the Act. The actual bad debts written off for the bank was ₹ 83,01,10,149/- whereas the balance in the provision account was ₹ 22,69,44,299/- thus, the claim of bad debts of ₹ 60,31,65,850/- was made. The assessee has also claimed deduction of ₹ 15,43,09,093/- under section 36(1) (viia) of the Act. The Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. 2012 (2) TMI 262 - SUPREME COURT as well as the in the case of UTI Bank Ltd. 2013 (1) TMI 209 - GUJARAT HIGH COURT held that where there is a claim by the bank under section 36(1)(vii) and 36(1)(viia) are different and under both these section the deduction is allowable. Therefore we direct the learned Assessing Officer to delete the disallowance. Disallowance of penalty levied by Reserve Bank of India - AO held that penalty is not a deductible expenditure under section 37(1) - HELD THAT - Any payment in violation of the RBI directions is not allowable as deduction under section 37. Explanation to section 37(1) makes it clear beyond doubt that any expenditure prohibited by law cannot be allowed as deduction under section 37. We find that Hon'ble Supreme Court in ICCI Bank Vs. official liquidator 2010 (9) TMI 236 - SUPREME COURT has also held that guideline issued by Reserve Bank of India in exercise of various powers conferred under the banking Regulation Act and they have force of law. Therefore we do not find that violation of the above provisions of the banking Regulation Act is merely technical or venial in nature. In view of this, we confirm the action of the learned lower authorities in disallowing the above sum of ₹ 5 lacs under section 37(1) of the Act. Ground no 5 of the appeal is dismissed. Reopening of assessment u/s 147 - Disallowance of any loss claimed - HELD THAT - No doubt, the treatment of similar sum in earlier year is a tangible material coming in to the possession of the assessee. In the present case, it was not shown that whether above issue was at all examined or even looked at by the learned Assessing Officer. The facts shows that the Assessing Officer has applied his mind on this issue while making an assessment for Assessment Year 2001- 02, wherein it is found that the above sum was not allowable as deduction to the assessee , identical sum was also claimed y assessee in this year. Therefore, we find that there is a fresh material available before the Assessing Officer to take a prima facie view that income of the assessee had escaped assessment and it definitely forms a tangible material to invoke provision under section 147 - CIT (A) also considered the fact that as per the note mentioned in the financial statements there was no mention of claim of the provision made in the earlier year. Had there been such a reference, the LD Assessing Officer would not have allowed claim, as he has already disallowed this sum in Assessment Year 2001-02. In view of all facts, we do not find any infirmity in the action of the learned Assessing Officer in reopening of the above assessment. Therefore, ground no. 1 of the appeal is dismissed. Penalty u/s 271 (1)(c) - addition on account of loss of sale of shares claim as bad debts per order under section 143(3) read with section 147 - HELD THAT - As the issue of disallowance on which penalty has been levied has been restored back to the file of learned Assessing Officer, issue of levy of penalty thereon is also set aside to the file of the learned Assessing Officer to decide it afresh after deciding about allowability of loss.
Issues Involved:
1. Disallowance of prior period expenses. 2. Disallowance of expenditure on stamp duty for increasing authorized share capital. 3. Disallowance under Section 14A regarding tax-exempt income. 4. Disallowance of bad debts under Section 36(1)(vii). 5. Disallowance of penalty levied by RBI. 6. Reopening of assessment. 7. Disallowance of expenditure related to ESOP. 8. Penalty under Section 271(1)(c). Detailed Analysis: 1. Disallowance of Prior Period Expenses: The assessee contested the disallowance of ?72,956/- for prior period expenses. The Assessing Officer (AO) disallowed ?2,04,359/- of such expenses, which was partly sustained by the Commissioner of Income Tax (Appeals) [CIT(A)]. The ITAT noted that similar disallowances were deleted in the assessee's case for the previous year (AY 2001-02) by the coordinate bench. The ITAT held that these expenses, though related to earlier periods, were crystallized during the current year and thus allowable. The ITAT directed the AO to delete the disallowance of ?2,04,359/-. 2. Disallowance of Expenditure on Stamp Duty for Increasing Authorized Share Capital: The assessee claimed 1/5th of the expenditure on stamp duty under Section 35D(2)(c)(iv). The AO disallowed ?7,00,000/- on the grounds that the provisions of Section 35D apply to industrial undertakings and not to banks. The CIT(A) confirmed this disallowance. The ITAT, relying on the decision of the coordinate bench in the assessee's own case for AY 2001-02, allowed the claim, noting that banks are entitled to amortization of preliminary expenses for public subscription. 3. Disallowance under Section 14A: The AO disallowed ?7,23,00,000/- under Section 14A, attributing it to tax-free income. The CIT(A) upheld this disallowance. The ITAT found that the assessee had sufficient interest-free funds to cover the investments in tax-free income-generating instruments, thus no disallowance on account of interest was warranted. The ITAT directed the AO to delete the disallowance under Section 14A. 4. Disallowance of Bad Debts: The AO disallowed ?2,68,54,381/- on account of bad debts, arguing that the claim exceeded the provision under Section 36(1)(viia). The CIT(A) confirmed this disallowance. The ITAT, following the Supreme Court's decision in Catholic Syrian Bank Ltd. and Gujarat High Court's decision in UTI Bank Ltd., held that the assessee is entitled to claim bad debts under both Sections 36(1)(vii) and 36(1)(viia). The ITAT directed the AO to delete the disallowance. 5. Disallowance of Penalty Levied by RBI: The AO disallowed ?5,00,000/- paid as a penalty to RBI, considering it non-deductible under Section 37(1). The CIT(A) confirmed this disallowance. The ITAT upheld the disallowance, noting that the penalty was for violating RBI guidelines, which is an offence under the Banking Regulation Act, and thus not allowable under Section 37(1). 6. Reopening of Assessment: The assessee challenged the reopening of the assessment, arguing it was based on a mere change of opinion without tangible material. The ITAT found that the AO had tangible material from the assessment records of AY 2001-02, where a similar claim was disallowed. The ITAT upheld the reopening of the assessment. 7. Disallowance of Expenditure Related to ESOP: The AO disallowed ?2,35,00,000/- related to the Employee Stock Option Plan (ESOP), which was confirmed by the CIT(A). The ITAT noted that a similar issue for AY 2001-02 was remanded to the AO. Following this precedent, the ITAT set aside the issue to the AO for fresh consideration. 8. Penalty under Section 271(1)(c): The AO levied a penalty of ?83,94,975/- under Section 271(1)(c) for disallowance of the ESOP-related expenditure, which was confirmed by the CIT(A). The ITAT, considering that the primary issue was remanded to the AO, also set aside the penalty issue for reconsideration based on the final outcome of the disallowance. Conclusion: The ITAT partly allowed the appeals, directing the AO to delete certain disallowances and remanding other issues for fresh consideration. The penalty issue was also remanded to the AO for reconsideration based on the final assessment.
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