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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 ..... o disallowance is permissible. We are, therefore, of the opinion that in spite of the introduction of section 14A, the principles laid down by the Apex Court in the case of Rajasthan State Warehousing Corpn. [ 2000 (2) TMI 5 - SUPREME COURT] still hold good law and as there is no clear identity in respect of the funds applied by the assessee for making the investment for earning the tax free income as well as taxable income and as assessee s business is indivisible one, the method adopted by the Assessing Officer for making the disallowance is not a permissible method and Assessing Officer was not justified in making the disallowance from the expenditure in respect of the interest attributable to investment on tax free bonds and expenditure incurred for earning the dividend income. We, therefore, set aside the order of the CIT(Appeals) on this issue and direct the Assessing Officer to delete the said addition. Bad debt - It is revealed that the assessee had made certain provision directly to the profit and loss account which as per the assessee, is the special provision made for working out the realizable value. It is not denied on the facts of this case that the provision was in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 earnings of interest does not involve any expenditure was also rejected. As per the Assessing Officer, average cost of deposit for the year under consideration came to 8.11% and investment in tax free bonds was Rs. 33.97 crores. The Assessing Officer worked out proportionate interest which was attributable to the investment on the tax free bonds at Rs. 2,75,49,670 and same was disallowed as expenditure incurred on earning interest on tax free bonds. 3. The assessee also had earned income from dividend on investment in shares amounting to Rs. 1,66,45,690. The Assessing Officer made disallowance of Rs. 90,60,850 from the total deduction claimed by the assessee in respect of the interest paid holding that said part relates to funds utilized for investment in shares. The assessee challenged the said disallowances before the CIT(Appeals) but same were confirmed. 4. We have heard the ld. counsel Shri P. Balakrishnan for the assessee bank and the ld. Sr. Departmental Representative Shri V. Sreekumar for the revenue. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 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 funds are utilised for investment in the tax free bonds is not accepted by the Assessing Officer and in the light of the newly inserted sub-section (2) and sub-section (3) to section 14A, if no method is prescribed, the Assessing Officer cannot make the disallowance without due prescribed method. Alternatively, he submitted that the total disallowance of the expenditure is very high which comes to 72 per cent of the total earnings and the said disallowance is totally arbitrary. In support of his contentions, he relied on the following precedents : ( i ) CIT v. C. Parakh Co. (India) Ltd. [1956] 29 ITR 661 (SC) ( ii ) CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC) ( iii ) Punjab State Co-operative Supply Marketing Federation Ltd. v. CIT [1981] 128 ITR 189 (Punj. Har.)/143 ITR (St.) 64 ( iv ) CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC) ( v ) Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 (SC) ( vi ) CIT v. Jamnagar Jilla Sahakari Kharid Vechan Sangh Ltd. [2006] 283 ITR 116 (Guj.) 5. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed 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 being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. 25.2 Through Finance Act, 2001, a new section 14A has been inserted so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. 25.3 It is also being clarified that the assessments where the proceedings have become final before the first day of April, 2001 should not be reopened under section 147 of the Act to disallow expenditure relatable to the exempt income by applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee in respect of disallowance of the expenditure, then the Assessing Officer is bound to determine the amount of expenditure for disallowance in accordance with such method which may be prescribed. The sub-section (3) is only by way of Explanation to sub-section (2). 10. Now, before the introduction of section 14A, the Apex Court has dealt with this issue in the case of Rajasthan State Warehousing Corpn. ( supra ). In the said case also, the Assessing Officer had made disallowance of the expenditure which was referable to the non-taxable income being exempt under section 10(29) of the Act. The Apex Court also referred to the judgment in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77. The Apex Court has laid down the following principles : In view of the above discussion, the following principles may be laid down : ( i ) if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computation under each head results in taxable income; ( ii ) if income of an assessee arises under any of the heads of income but from different items, e.g. , different house properties or diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable. 13. In the case of the assessee bank, it is an admitted position that the assessee is having the indivisible business and considering the nature of the business of the assessee the investment in the tax free bonds or investment in the shares may be in the nature of stock-in-trade. There is no identity in respect of the funds applied for investment in the tax free bonds or shares and funds which are applied for earning taxable income. The ld. counsel submitted that the assessee bank is also having the surplus funds and reserves from which the investment is made and that makes the case of the assessee that the funds applied for investment cannot be said to be interest or cost bearing funds alone. 14. The Assessing Officer has adopted the method which is not prescribed as per the provisions of sub-section (2) of section 14A. Moreover, we find that unless the method for working out disallowance of the expenditure in case of an indivisible business is prescribed as provided in sub-section (2) of section 14A, no disallowance is permissible. We are, therefore, of the opinion that in spite of the introduction of section 14A, the principles laid down by the Apex Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-section (2) will be allowed in two different cases enumerated in section 35D(1) of the Act, viz. ( i ) Expenditure incurred before the commencement of the business; and ( ii ) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up of a new industrial unit. In the strict sense, bank is not an industrial undertaking. It is only an undertaking. It is true, some times we refer bank as an industry. But that is with reference to Industrial Disputes Act and not with reference to Income-tax Act. The assessee s plea that for the purpose of allowing the expenses for the issuance of shares, the definition should be imported from Industrial Disputes Act, since no definition of industrial undertaking is given in section 35D is far fetched. Perhaps, this would have been acceptable in none of the sections, industrial undertaking is defined in Income-tax Act. In the Industrial Disputes Act, as we have already held, banking is treated as an industrial undertaking for the purpose of labour oriented problems and to settle the disputes under Industrial Disputes Act. The same cannot be imported to the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y loss in the realizable value has to be treated as a loss like depreciation in the case of securities and incurred in the course of business of the assessee. He, therefore, submitted that the Assessing Officer as well as the CIT(Appeals) have failed to consider the important aspect that what is assessable in the hands of the assessee is the real income. He further submitted that in the case of South Indian Bank, the identical issue has come up for consideration and the same may be applied. 21. On the other hand, the ld. DR supported the order of the Assessing Officer as well as CIT(A). The ld. DR further submitted that Explanation was inserted to clause ( vii ) of section 36(1) with retrospective effect from 1-4-1989 that any provision for bad and doubtful debts shall not be treated as the part of the bad debt. 22. We have heard the rival submissions of the parties. We have also carefully considered the facts of this case as per material placed before us. It is revealed that the assessee had made certain provision directly to the profit and loss account which as per the assessee, is the special provision made for working out the realizable value. It is not denied on the facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been held as under : . . . In the case of subscription to clubs, insofar as the assessee is concerned, the expenditure was incurred to promote and foster its business relationship. The object of the assessee was that its directors by remaining as members in some of the city clubs would give them certain social status, and it is obvious that by being members of the club, they would be able to meet various kinds of people in a calm and cool atmosphere of the club and because of the meeting they would develop business relationship, benefiting the assessee. Therefore, it cannot be said that the possible advantage to the assessee is remote and far fetched. No doubt, there may be a personal benefit enjoyed by the director by the various types, of amenities afforded at the club. But the personal benefit that goes to the director is incidental to the membership of the club. The question whether a particular expenditure is allowable or not has to be tested from the point of view of the person expending the same and the object with which he incurred the expenditure. The assessee has not spent the money with the object of providing a personal relaxation to the director, but it was incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee bank for broken period till the date of acquisition of the securities is an allowable deduction and it is covered in favour of the assessee by the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Nedungadi Bank Ltd. [2003] 264 ITR 545 (Ker.). 29. We have heard the rival submissions of the parties. In the case of Nedungadi Bank Ltd. ( supra ), this issue has come for judicial scrutiny before the Jurisdictional High Court and in that case, it is held as under : The last question arising for consideration in some of these appeals is as to whether the Tribunal was justified in allowing the claim for deduction of the interest paid for the broken period for the acquisition of the securities till the date of such acquisition. In fact, the said question is squarely covered by the decision of this court in South Indian Bank Ltd. s case [2000] 241 ITR 374. This court in the above decision held that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of the total income of the bank under the head Profits and gains of business or profession. In view of the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to prove the claim, hence the finding of the CIT(Appeals) is contrary to the facts on record. The same may be set aside and that of the Assessing Officer restored. 34. On the other hand, the ld. counsel for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the Jurisdictional High Court in the case of South Indian Bank Ltd. ( supra ). He further submitted that the Assessing Officer is not correct in noting that no evidence was produced to prove the claim. The ld. counsel supported the order of the CIT(Appeals). 35. We have heard the rival submissions of the parties. We have also carefully considered the facts as per material placed before us. We have also perused the reasons given by the Assessing Officer as well as CIT(Appeals). The Assessing Officer disallowed the claim by stating that the assessee has not proved that the requirement of clause ( v ) of section 36(2) are satisfied. We find that the CIT(Appeals) has made comments on the action of the Assessing Officer disallowing the claim stating that the Assessing Officer disallowed the claim on the ground that bad debt written off does not exceed the claim under section 36(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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