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TMI Blog2006 (7) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... income which does not form part of the total income, then the expenditure incurred by the assessee for earning the said income is not allowable as a deduction. The Assessing Officer proposed to disallow proportionate interest and other expenditure incurred for earning interest on tax free bonds. As noted by the Assessing Officer, the assessee contended that only direct expenditure incurred to collect interest on tax free bonds can be disallowed. It was further contended by the assessee that the total investment in tax free bonds/shares as on 31-3-2000 was only Rs. 57.75 crores whereas the bank equity net worth as on 31-3-1999 worked out to Rs. 65.95 crores. The assessee also objected to the disallowance on the contention that there is no provision to disallow proportionate interest and expenditure attributable to the interest on the tax free bonds. The Assessing Officer noted that the assessee did not file any documentary evidence to prove that the money invested in tax free bonds are out of the interest free funds. Hence, he rejected the assessee's contention that investments in tax free bonds are out of the interest free funds. The alternative contention of the assessee that ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of expenditure which is relating to the exempt income then as per the method prescribed [Emphasis supplied], the Assessing Officer shall work out or determine the expenditure incurred for earning the tax free bonds. He further submitted that section 14A was brought on the statute books which is clarificatory in nature. As per the circular of the CBDT No. 11 of 2001 dated 23-7-2001, the CBDT has explained that section 14A was introduced retrospectively only in order to clarify and state the position of law which otherwise stands even without existence of section 14A as per different judicial pronouncements. Hence, he submitted that sub-section (2) and sub-section (3) which are introduced to section 14A are also having the retrospective effect and unless specific method is prescribed, if the Assessing Officer is not accepting the claim of the assessee, then as per the prescribed method, the Assessing Officer should work out the disallowable proportionate expenditure which is incurred for earning the exempt income. He further submitted that the assessee's business is indivisible business. The assessee is having surplus funds and hence the contention of the assessee that no borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure attributable for earning the interest on the tax free bonds and Rs. 90,60,850 being the expenditure incurred for earning the dividend income. In making the disallowance, the Assessing Officer has adopted some method stating as under:- "As admitted by the assessee, the average cost of deposit for the year under consideration comes to 8.11 per cent." The Assessing Officer, therefore, worked out the cost of investment in the tax free bonds as well as shares are Rs. 33.97 crores and Rs. 11.16 crores respectively. 7. Section 14A was introduced in the Act by the Finance Act, 2001 with retrospective effect from 1-4-1962. In the Memorandum the object for introduction of section 14A, in Circular No. 14 of 2001 dated 12-12-2001, the CBDT has explained as under :- "25. No deduction for expenditure incurred in respect of exempt income against taxable income. 25.1. Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of section 14A also, the disallowance was made on the principle that expenditure which is not directly attributable to the income, but which does not form part of the total income is not allowable. The Legislature has introduced section 14A just to clarify the said principles which were otherwise governing the disallowance before the introduction of the said section under the Income-tax Act. The sub-sections (2) and (3) are introduced to section 14A by the Finance Act, 2006 which are made applicable from the assessment year 2007-08. There is substance in the argument of the ld. counsel that section 14A as it stood up to assessment year 2006-07 from its inception only clarifies the already existing principles in respect of the disallowance of the expenditure that if the expenditure is incurred for earning the income which does not form part of the total income then the same is disallowable. Sub-section (2) which will be operative from the assessment year 2007-08 provides that if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of disallowance of the expenditure, then the Assessing Officer is bound to determine the amount of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure is not permissible. 12. After the judgment of the Apex Court in the case of Rajasthan State Warehousing Corpn. (supra), section 14A was brought on the statute book and as stated hereinabove as explained by the CBDT in its Circular, the principles for disallowance of the expenditure relating to the exempt or non-taxable income were already there, but the said position has been made clear by virtue of introduction of section 14A. It means that the principles laid down by the Apex Court in the case of Rajasthan State Warehousing Corpn. (supra) still hold good law in respect of the introduction of section 14A governing the disallowance of the expenditure which is incurred for earning tax free income or in other words income which does not form part of the total income. Moreover, the ratio decidendi of Rajasthan State Warehousing Corpn. (supra) could not be nullified even after introduction of section 14A that if the business of the assessee is indivisible one, then no disallowance can be made on proportionate basis and entire expenditure is allowable. 13. In the case of the assessee bank, it is an admitted position that the assessee is having the indivisible business and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of this Tribunal in ITA No. 180 (Coch.)/2000 for assessment year 1996-97 order dated 31-10-2003. The ld. counsel has also filed the copy of the said order which is placed on record. 17. It is seen that in assessee's own case for assessment year 1996-97, this issue has been examined by this Tribunal in assessee's own case in ITA No. 180 (Coch)/2000 (supra) wherein it has been held as under :- "17. In the case in 225 ITR 798, i.e., in the case of Brooke Bond India Ltd. v. CIT, the Hon'ble Supreme Court held that 'expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit-making'. Expansion of industrial undertaking and setting up of an industrial undertaking and setting up of a new industrial unit are different from the expansion of the capital base by issuance of shares by a bank. The expenditure specified in sub-section (2) will be allowed in two different cases enumerated in section 35D(1) of the Act, viz. (i) Expenditure inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer, therefore, made disallowance of Rs. 2,96,89,000. On appeal, the CIT(Appeals) confirmed the said addition. 20. We heard the ld. counsel for the assessee and the ld. DR for the revenue. The ld. counsel submitted that the Assessing Officer disallowed the deduction in respect of the claim which relates to the amount written off in the profit and loss account towards bad debt as a provision and deducted from the total advances shown in the balance sheet. He further contended that the working of this provision was made strictly in accordance with the guidelines issued by the Reserve Bank of India (RBI). He stated that reliance placed by the Assessing Officer on the Explanation inserted to section 36(1)(vii) by the Finance Act, 2001 has no applicability. It was further argued that the advances made by the assessee are the current assets and hence, it should be valued at the realizable value only. It was further submitted that RBI has issued guidelines for working out the realizable value as per which, the, provision is made. It was further argued that any loss in the realizable value has to be treated as a loss like depreciation in the case of securities and incurred in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lub membership. It is noted by the Assessing Officer that the assessee bank had debited a sum of Rs. 96,081 incurred towards the subscription to the club membership in the names of the executives of the bank and had claimed it as a business expenditure. The Assessing Officer made the disallowance under section 37(1) treating it as incurred for non-business purposes. On appeal, the CIT(Appeals) deleted the said addition. 24. We have heard the ld. DR for the revenue and the ld. AR for the assessee. The ld. DR supported the order of the Assessing Officer. On the other hand, the ld. AR submitted that this issue is covered in favour of the assessee by the decision of the Hon'ble Madras High Court in the case of CIT v. Sundaram Industries Ltd. [1999] 240 ITR 335 . 25. We have heard the rival submissions of the parties. In the case of Sundaram Industries Ltd. (supra), the issue before the Hon'ble Madras High Court was whether the subscription paid by the assessee to Rotary Club, Gymkhana Club and Mylapore Club is the business expenditure. In the said decision it has been held as under :- ". . . In the case of subscription to clubs, insofar as the assessee is concerned, the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in respect of the broken period interest at the time of purchase of securities is not an allowable deduction but the alternative plea of the assessee was that if the broken period interest is allowed as a capital expenditure, representing a portion of the cost of acquisition of the securities, the profit on the sale of the concerned securities and depreciation on such securities treated as a current asset should be modified. The Assessing Officer accepted the alternative contention of the assessee and after allowing deduction in respect of the additional depreciation on the current securities and reduction in profit on the sale of securities from the total claim in respect of the broken period interest, the Assessing Officer made the addition of Rs. 1,53,88,750. On appeal to the CIT(Appeals), the CIT (Appeals) deleted the said addition and now the revenue has challenged the finding of the CIT(Appeals) on this issue before us. 28. We have heard the ld. DR for the revenue and the ld. AR for the assessee. The ld. AR submitted that the interest paid by the assessee bank for broken period till the date of acquisition of the securities is an allowable deduction and it is cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 36. He, therefore, made the addition of Rs. 24,34,305. 32. The assessee carried the issue in appeal before the CIT(Appeals) and the CIT(Appeals) deleted the said addition. Now, the revenue has challenged the finding of the CIT(Appeals) on this issue before us. 33. The ld. DR for the revenue submitted that the CIT(Appeals) has erred in coming to the conclusion that the Assessing Officer disallowed the claim on the ground that bad debt written off does not exceed the claim under section 36(1)(viia). It was further submitted that it is well-settled principle of law that if any claim is made by the assessee, the burden is on the assessee to prove that the condition or the requirement of the section are fulfilled. As the assessee did not file any supporting evidence except the copy of the ledger account, hence, the Assessing Officer disallowed the said claim. He further submitted that for applying the principles laid down in the judgment of the Jurisdictional High Court in the case of South Indian Bank Ltd. v. CIT [2003] 262 ITR 579 (Ker.), the assessee has to furnish evidence to prove the claim, hence the finding of the CIT(Appeals) is contrary to the facts on record. The same may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off in the previous and credit balance of the provision for bad and doubtful debt account made under clause (viia). This issue has also been under dispute for the earlier assessment year. This issue has been finally settled by the Jurisdictional High Court in ITA No. 126/2001 dated 11-11-2002 and also the decision in the case of South Indian Bank Ltd. v. CIT [2003] 262 ITR 579 . The honourable ITAT in ITA Nos. 179 and 180/Coch./2000 dated 31st October, 2003 for the assessment years 1995-96 and 1996-97 has followed the decision of honourable High Court. Therefore, following the decision of Tribunal as well as the Jurisdictional High Court, I delete the addition on this point at Rs. 24,34,305." 36. In the case of South Indian Bank Ltd. (supra), the issue before the Hon'ble Jurisdictional High Court was regarding the scope and ambit of the proviso to clause (vii) of sub-section (1) of section 36 of the Act. But it appears that as far as the present issue before us is concerned, the Assessing Officer has made the disallowance by applying clause (v) of section 36(2). 37. On perusal of the assessment order, we find that the sum of Rs. 24,34,305 written off by the assessee is in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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