9911796707
TMI Blog2012 (9) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of assessment proceedings it was noticed by the A.O. that operating expenses included other expenditure of Rs. 56.76 crores comprising of various sub-heads including an amount of Rs. 20,87,88,103/- which was termed as "loss on account of frauds." It was submitted by the assessee that it represents the payment made by bank amounting Rs. 15.56 crores to various parties on account of failure by Home Trade Ltd., a broking company engaged in broking deals syndicated by the Bank to make delivery of securities to the buying counter parties. Bank has been providing advisory services to various Provident funds and Co-operative Banks and Gramin Banks in primary market issues since January, 2001. These advisory services were being provided to meet the clients' ongoing requirements for Government Securities/PSU Bonds which were available in the secondary market. Since the bank was not a registered broker with any stock exchange, its services were restricted to advising/facilitating the clients in sourcing their requirements from brokers at competitive market rates. Where deals are facilitated by advisors, the investors make payment directly to the brokers after receiving the confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-1-2003 levied a penalty of Rs. 5 lac on the assessee in respect of the above syndication. The R.B.I. held that the Bank had contravened the provisions of section 6(1) of the Banking Regulation Act, 1949 by acting as a "broker" for purchase or sale of Govt. Securities and for selling the securities without taking the delivery of the securities thereby indulging in "short selling" which is prohibited by RBI guidelines. After considering the aforesaid facts, the A.O. held that the out of the fraud expenses of Rs. 20,87,88,103/- an amount of Rs. 15.56 crores was paid to various Provident Fund organization cannot be termed as fraud expenses interalia for the following reasons. (1) The transaction entered into by the assessee has been held to be in violation of section 6(1) of the Banking Regulation Act, 1949 by the Bank and thereby a penalty of Rs. 5 lacs was imposed on the assessee and the same was paid by the assessee. (2) The A.O. was of the view that there was no fraud committed by the Bank as the transactions were between Home trade Ltd (the broker) and the P.F. organizations. The claim of the assessee that there was vicarious liability on it was not acceptable to the AO. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation as a result of the payment. (d) Having regard to the quantum of funds involved, legal proceedings of all forms against the bank, with a view to seeking refund of the funds, was a very strong possibility; this could have dragged the bank into enormous litigation. (e) The bank realized while the bank as also the investors were innocent and were the victims of the fraud, as between two innocent persons, the loss may be suffered by a person who has been privy to making offer to another innocent person. 9. The assessee's submission that the compensation was an item of loss on account of fraud arising due to 3rd party fraud has been paid by the assessee in the business interest on a voluntary basis. The assessee has also not suffered anything in relation to the short sale transaction noted adversely by the RBI. The levy of penalty by RBI was for procedural lapses. SEBI, the appropriate authority in-charge of merchant banking activities, has also not found anything wrong with the assessee. The assessee also relied on the following decisions:- (1) CIT vs. Nainital Bank Ltd., 62 ITR 638 (SC) (2) CIT vs. Georgepolous 146 ITR 380 (Mad.) (3) Eveready Industries India Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an and MD agreed unequivocally during the hearing by the RBI that the type of transaction done by the assessee is neither permissible under the Banking Regulation Act, 1949 nor under the SEBI Act. 3.4.(iv) In view of the above indictment by the RBI, the transaction in question was not incidental to its business of banking. The question of allowance of such expenditure u/s. 37(1) is, therefore, untenable. 3.4.(v) The appellant showed this expenditure related to fraud expenses under miscellaneous expenses and also penalty levied by the RBI was also claimed under miscellaneous expenses. These payments were in violation of the banking regulations Act. The Hon. Supreme Court in the case of Maddi Venkataramanan & Co. (P) Ltd. vs. CIT (1998) 229 ITR 534 (SC) held that one can carry on his trade without violating the law and after the introduction of Explanation in Sec. 37 such expenditure is clearly disallowable. In the present case, the transactions entered into by the appellant were found to be violative of Sec. 6(1) of the Banking Regulation Act, 1949 and the appellant has been penalized for the violation. The alleged fraud payment made by the appellant is emanating from the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable. In the case of Annamalai Timber Trust Ltd. vs. CIT 47 ITR 814 (Ker.), it was held that for any negligence of the assessee's servants while acting on the course of their employment is also incidental to such business, the liability of the assessee to pay damages for such negligence is also incidental to the business, and loss resulting from payment of such damages is allowable. It is not the case in the present case. Therefore, in my view, the A.O. was justified in disallowing the payment made for Rs. 15.56 crores and also justified in disallowing the penalty of Rs. 5 lacs levied by the RBI. Hence ground No.2 and 3 both are rejected." 13. Aggrieved by the decision of CIT (A), the assessee is now in appeal before us. 14 Before us, the Ld. A.R. submitted that the Bank is registered with the Securities & Exchange Board of India (SEBI) as a Category I Merchant Banker and carries on merchant banking activities within the ambit of the SEBI Regulations and the Banking Regulations Act. During the year 2002, the bank had syndicated/facilitated certain security deals mainly with certain PSU Provident Fund trusts through Home Trade limited and its holding company, Giltedge Mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's ability to grow its business in the eastern region where Home trade limited and its associates had defrauded investors. The assessee considering the overall situation including its business interest, its brand image and goodwill felt that under the circumstances, it has a fiduciary accountability and responsibility. Thus in order to avoid protracted litigation and out of commercial expediency, the assessee decided to have a settlement with some of the investing bodies particularly because the PSU employees interest was involved in those transactions subject to the condition that the amount would be refunded to the assessee if any amount is recovered from Home Trade Ltd or their custodians. The assessee also filed a case against Giltedge Management Services Ltd for recovery of the amounts paid to the investing parties. The staff accountability in the matter was also fixed and the concerned manager was dismissed from services of the assessee. The assessee also placed on record at page 52 of the paper book the letter dated 13-8-2002 of Indian Iron & Steel Co. Ltd., to SEBI, at page 69 of the paper book was the copy of the complaint made by Chairman, Hindustan Steel Ltd., to SEBI. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved was only Rs. 75 lacs. The final order of the criminal court has not been pronounced holding as to who are found guilty in fraud. The assessee has not made any disclosure about the same in the annual accounts or in the statement of total income and there was no observation to this effect by the Auditors in their report. In these circumstances, the claim of the assessee that there was vicarious liability on the assessee is not acceptable. It was pointed out by the D.R. that the assessee's stand before the RBI was that it had never entered into short selling or brokering and the mistake had happened due to ignorance and that there was no monetary loss suffered out of the above transaction. This statement which was made before the RBI is opposite to that made during the course of assessment proceedings to claim the loss. Thus the compensatory payments claimed as fraud expenses for the default committed by 3rd party is not allowable business expenditure as it is not incidental to the business of banking including merchant banking. The Ld. D.R. also relied on the decision of Supreme Court in the case of Maddi Vankatanraman & Co. (P) Ltd. vs CIT (1998) 229 ITR 534 (SC). 20. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors by making payment of Rs. 15.56 crore and this payment was claimed as loss due to fraud. The aforesaid facts are undisputed facts and have not been controverted by the Revenue. The only dispute is whether the amount of compensation of Rs. 15.56 crore paid is an allowable expenditure or not. In the case of CIT vs. Georgepolous (1984) 146 ITR 380, (Mad.) the Hon'ble Madras High Court has held that U/s 37 there is no requirement that an item of expenditure or outgoing must be incurred or laid out with a view to earn the profits nor is there any requirement that the expenditure must be incurred in order to meet an obligation arising either out of a commercial contract or out of any provision of law or custom. All that the section requires is that the expenditure must be incurred or laid out wholly and exclusively for the purposes of the assessee's business. In the case of Annamalai Timber Co. vs. DCIT (1963) 47 ITR 814 (Ker) the issue was that the assessee was in the business of timber. It had hired elephants for carrying logs. Due to the negligence of the mahout engaged for controlling the elephants, injuries suffered by the elephant. Assessee paid damages to the owner of the ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the amount being expended voluntarily by the assessee-company. If the assessee derives any indirect benefit also, then the amount paid is to be considered to have expended wholly and exclusively for the purpose of business and therefore allowable. In the case of Maddi Vankataraman & Co. (P) Ltd. vs CIT (1998) 229 ITR 534 (SC), the facts of the case is that the assessee was engaged in the tobacco business. The assessee had indulged in transactions in violation of the provisions of FERA. The assessee's plea was that if it had not entered into such transaction, it would have incurred a loss. In those facts the H'ble Apex court held that spur of loss cannot be a justification for contravention of law. If the assessee contravenes the provisions of FERA to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. In the case before us, the fact is that the assessee is in the business of Merchant banking activities and the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can start using the bank's ATMs. The AO considered it to be capital expenditure as addition to the existing ATMs and granted depreciation on the same. 23. On both the above additions the assessee carried the matter before CIT (A). CIT (A). CIT(A) vide para 4.3 on page 18 of his order held that the expenditure incurred resulted into modification of existing system and supplementing of additional features and accordingly held it to be of capital expenditure and thus upheld the order of AO. Aggrieved by the order of CIT(A) the assessee is now in appeal before us. 24. Before us, the Ld. A. R. pointed out to the fact that the AO himself vide para 7.3 and 7.5 stated that the assessee be granted depreciation of the aforesaid expenditure but no depreciation has been granted while computing the total income. He accordingly urged that the AO be directed to grant depreciation. The Ld. D.R. did not seriously object it. 25. We have heard the rival contentions, perused the material on record. We observe that vide para no 7.3 and 7.5 of the Assessment order has stated that the assessee is allowed depreciation at the applicable rates depending upon the date put to use. In view of these facts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds the other operating expenses are concerned, the appellant has not filed any details as to how much expenditure is to be apportioned for earning the exempted income. The total operating expenses are Rs. 205.47 cr. and the exempt income claimed by the appellant is Rs. 39.65 cr. whereas the total income earned by the appellant is Rs. 1595.40 cr. Hence the exempted income is 2.485% of the total income. Therefore, by allocating the operating expenses of Rs. 205.47 cr. in this ratio, the expense allocable to the exempt income comes to Rs. 5.11 cr. (205.47 x 2.485%) Therefore, this expenditure has to be disallowed out of the total expenditure for earning the exempt income under the provisions of Sec. 14A. This view is supported by the decision of ITAT Chennai Bench in the case of Southern Petro Chemicals v. DCIT, 93 TTJ 161. As per this decision, the investment decisions are very strategic decisions in which top management is involved and, therefore, proportionate management expenses are required to be deducted while computing the exempt income. On similar logic, the other operating expenses are also to be deducted. The appellant has already disallowed Rs. 6.23 cr. out of interest ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a chart showing the position of interest free funds vis a vis tax free investments as on the balance sheet dates right from 31st march 1995 to 31st March 2003. From the chart it was pointed out that as on 31st March 2003, the interest free funds in the form of capital, reserves and interest free demand deposits was to the extent of Rs. 3404 crore as against the tax free investments of Rs. 589 crores. Thus the interest free funds were far in excess of the investments. It was submitted that the AO had worked out the disallowance primarily on the presumption that interest bearing funds have been utilized for making the tax free investments without any cogent evidence. It was submitted that since the assessee has already suo moto disallowed Rs. 5.53 crores, which is already excessive, the disallowance be restricted to it and no further disallowance be made. The Ld. A.R. further relied on the decision of Bombay High Court in the case of CIT Vs Reliance Utilities & Power Ltd (2009) 313 ITR 340 for the proposition that if there are interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative expenses is concerned, the undisputed fact is that the disallowance has been made by the AO without giving a finding as to how much administrative expenditure has been incurred to earn the exempt income. In the case of Hero Cycles (supra) the Hon'ble High Court has held that the contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted. Disallowance u/s 14A requires finding of incurring of expenditure. In the present case, the AO has presumed that the assessee might have incurred expenditure to earn the exempt income. He has not given any finding of incurring of expenditure. In view of these facts and respectfully following the decision of High Court, we are of the view that no disallowance of administrative expenses can be made. We accordingly direct for the deletion of the addition made by the AO and allow this ground of the assessee. Ground No.5 relates to deduction u/s. 36(1)(vii). 34. The Assessee is required to make provision for loss assets, doubtful assets and standard assets as per the RBI prudential guidelines, such provision is charged to Profit and loss account as per the RBI dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. We find that the identical issue was decided by the co-ordinate Bench in ITA No 81/Ahd/2005 and ITA No 3665/Ahd/2004 for AY 2001-02 by holding as under: "5. ... At the time of hearing both the parties submitted that identical issue has been considered in the assessee's own case in the assessment year 1998-99 in which a view has been taken that the amount of deduction claimed by the assessee u/s 36(1)(viia) of the Act in respect of bad debts written off was not required to be reduced by the opening balance in the provision of bad debt account. Since the issue has already been considered and decided by this tribunal in the assessee's own case in the assessment year 1998-99 it is considered appropriate to direct the Assessing officer to examine the matter and allow the claim in accordance with the aforesaid order of the tribunal" 39. Since the issue in the present appeal is identical to that of AY 2001- 02, we take a similar view and accordingly direct the AO to examine the matter and allow the claim in accordance with the order of the tribunal and the instruction no 17/2008 dated 26th Nov 2008 issued by CBDT. In the result the appeal is allowed for statistical purposes. 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de various submissions. The Ld. A. R. also relied on various decisions in its support. CIT (A) agreed with the contentions of the assessee and deleted the addition made by the AO. Aggrieved by the action of the CIT(A), the Revenue is in appeal before us. 45 Before us, the Ld. D.R. relied on the order of the AO and submitted that the expenses is not for the purpose of business. The Ld. D.R. therefore urged that the action of the AO be upheld. 46. On the other hand the Ld. A.R. placed on record at page 195 to 204 of the paper book various correspondence exchanged between the assessee and the landlord. He pointed out to the letter at page 200 where the landlord interalia stated that a wide publicity had already been made in the city about the branch of the assessee being established in his property. With the cancellation of the agreement, there is likelihood of loss of reputation and fall in market value of the property besides monetary loss of more than 25 to 30 lacs. Based on the negotiation the landlord agreed for a compensation of Rs. 6 lacs in full and final settlement of all its claim. The copy of the letter was placed at page 203 and 204 of the paper book. 47. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had spent Rs. 5.58 lac on the travelling expenses including travelling expenses and allowance of the Chairman of the assessee bank to visit USA and UK for exploring business opportunity in overseas market. The AO was of the view that since the assessee is governed by Banking Regulation Act, 1949, prior permission of RBI was necessary for opening any foreign branch and incurring expenditure. Since in the case of assessee as it did not have operations in foreign country and no licence was granted by RBI to open any branch abroad, the expenditure was not allowable. He accordingly disallowed it. The Assessee carried the matter before CIT (A). Before CIT (A) it was submitted by the assessee that no permission was required from RBI for incurring the expenditure. It was further submitted that based on the suggestions made by KPMG, the assessee started NRI service hub in India to serve as a single point of contact for NRIs for their banking needs in India. The Ld. A. R. also relied on various decisions in its support. CIT (A) after considering the facts and the case law cited by assessee, deleted the addition made by the AO and allowed the appeal of the assessee. Being aggrieved b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the income of the assessee. 54. Assessee had paid Rs. 1,52,893/- to Nilme electric for telephone cable expenses. The assessee submitted that the expense was made for replacement of computer network and telephone wires on shifting of some of the banks departments to the new leased premises. The Ao held the same to be of capital in nature and disallowed it but granted depreciation on it. 55. Assessee carried the matter before CIT (A). CIT (A) held the expenses of Rs. 25.84 lacs to be of capital nature but however allowed depreciation on it and accordingly upheld the order of the AO. With respect to the disallowance of Rs. 1.52 lacs, CIT (A) deleted the addition for the reason that the amount was spent on shifting the telephone from one leased premises to the other and therefore no new advantage has been obtained by the assessee and the lease is liable to termination in the event of default by the assessee. 56. Aggrieved by the action of the CIT (A), the Revenue is in appeal before us. Before us the Ld. D.R. relied on the order of the AO and the Ld. A.R. relied on the order of the CIT(A). 57. We have heard the rival submission and perused the material on record. CIT(A) has gi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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