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TMI Blog2012 (12) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... MUMBAI] in which it has been held that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers & Chemical Corpn. and there was no genuine leasing of the boiler. The Special Bench therefore held that no depreciation was allowable in case of the assessee lessor. - Decided against the assessee. Disallowance of entertainment expenses on estimate basis - held that:- from assessment year 1988-89 there is no provision for disallowance of entertainment expenses. The expenses incurred by the assessee bank on employees during the official visits and in connection with clients and business visitors have to be allowed as incurred wholly and exclusively for business purposes. - Decided in favor of assessee. Loss amounting to Rs.2,37,82,608/- on unmatured foreign exchange contracts - held that:- The assessee had made the claim as per the method of accounting and as per FEDAI guidelines which is allowable. - Decided in favor of assessee. Reduction of claim of bad debt under section 36(1)(vii) - held that:- In the first place, the ad hoc deduction under s. 36(1)(viia) (b) being the last item on the computation of taxable business profits, it cannot be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest income had accrued. Though the assessee had accounted such income in the books of account which had been prepared as per mercantile system of accounting, in the computation of income, the assessee had deducted the interest for the broken period from the taxable income, which came to Rs.38,36,31,175/- and Rs.24,27,32,189/- respectively for assessment years 1998-99 and 199-2000. The AO held that the assessee had right to receive the interest for the broken period and, therefore, interest income had accrued as the assessee was following mercantile system of accounting. Accordingly he assessed the interest for the broken period. CIT(A) confirmed the view taken by the AO aggrieved by which the assessee is in appeal before the Tribunal in both the years. 2.1 Before us, the ld. AR for the assessee reiterated the submissions made before lower authorities that interest accrued only on the due dates and therefore interest could not be assessed for the broken period as the assessee had no right to receive the interest during the said period. The ld. AR further submitted that the issue was covered in favour of the assessee by the judgment dated 9.2.2012 of the Hon'ble High Court of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Bombay in case of DIT vs. Credit Swisse First Boston (Cyprus) Ltd. (supra) was per innqurium as the same had been passed without considering the binding judgment of Hon'ble Supreme Court in the case of Rama Bai (supra). It was thus argued that the judgment of Hon ble Court was not a binding precedent. The ld. DR also pointed out that the assessee had shown the broken period interest as accrued and thus had recognized it as revenue in the books of account but excluded it from taxable income in computation of income. It was submitted that the Hon'ble High Court of Bombay was not concerned with the situation in which the income had had been recognized by the assessee itself in the books of account. The High Court had also not considered the aspect as to whether even after the deletion of section 18, the interest on securities could still be assessed on due basis. It was accordingly submitted that the judgment of Hon'ble High Court of Bombay could not be followed and issue had to be decided in favour of the revenue. 2.3 In reply the ld. AR submitted that the judgment of Hon'ble Supreme Court in the case of Rama Bai (supra) related to interest payable under section 28 and section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues on day to day basis in a mercantile system of accounting irrespective of the date of payment which may be at a later date as accrual of income is different from actual payment or receipt thereof. The case of the assessee is that income on account of interest accrued only on due dates as the assessee had right to demand interest only on due dates. It has also been argued on behalf of the assessee that the case is covered by the judgment of Hon'ble Jurisdictional High Court in the case of Director of (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. dated 9.2.2012 in which identical issue of accrual of interest on securities was decided by the Hon ble Court. 2.5 We have carefully considered the material on record and, perused the judgment of Hon'ble High Court of Bombay in case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra). We find that identical issue of accrual of income on account of interest from securities for the broken period had been considered by the Hon'ble High Court of Bombay. In the said case, the Hon'ble High Court noted that as per terms of securities, the interest became payable to the holder of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of Land Acquisition Act which accrued from day to day basis as there were no due dates prescribed on which the interest accrued. Therefore, we agree with the ld. AR that the judgment in the case of Ramabai (supra), is distinguishable on facts and not applicable to the facts of the present case in which we are concerned with the interest on securities which became due only on specified dates. Accordingly the judgment of Hon'ble High Court of Bombay in case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra), could not be considered per inquirium. 2.7 Ld. CIT-Departmental Representative has also distinguished the judgment of Hon'ble High Court of Bombay in the case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra), on the ground that in the present case the assessee itself had shown the interest income as accrued in the books of account for the broken period which was not show so case of Credit Swisse First Boston (Cyprus) Ltd. (supra). This argument is also not convincing. As rightly pointed out by the ld. AR., the book keeping by itself does not result in real income as held by Hon'ble Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction and not a genuine lease transaction. The AO thus disallowed depreciation amounting to Rs.17,59,47,475/- and Rs.1,44,40,632/- respectively for the assessment year 1998-99 and assessment year 1999-2000. In appeal, CIT(A) confirmed the disallowance aggrieved by which the assessee is in appeal before the Tribunal. 3.1 we have heard both the parties in the matter. We find that the issue of allowability of depreciation on leased assets in case of the assessee had been referred by the division Bench of the Tribunal to the Hon ble President, ITAT, for constitution of a Special Bench. The Special Bench has since decided the issue vide order dated 14.3.2012 in ITA No.6566/M/2002 and ITA No.606/Mum/2003 in which it has been held that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers Chemical Corpn. and there was no genuine leasing of the boiler. The Special Bench therefore held that no depreciation was allowable in case of the assessee lessor. Respectfully following the decision of the Special Bench, we confirm the order of CIT() disallowing depreciation in both the years. 4. The third issue which is relevant only for the assessment year 1998-99 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visitors of the bank and therefore, for business purpose. The AO had disallowed the expenditure holding that the same was not wholly and exclusively incurred for the purposes of business. CIT(A) restricted the disallowance to 25% of the claim. After careful consideration we are of the view that disallowance of expenditure is not justified. The claim of the assessee that the expenses had been incurred in connection with clients and business visitors has not been controverted before us. Therefore, we agree with the submission of the assessee that the expenses had been incurred wholly and exclusively for the purpose of business. Earlier there was specific provision for disallowance of entertainment of expenses under section 37(2) but the said provision has been deleted w.e.f. 1.4.88. Therefore, from assessment year 1988-89 there is no provision for disallowance of entertainment expenses. The expenses incurred by the assessee bank on employees during the official visits and in connection with clients and business visitors have to be allowed as incurred wholly and exclusively for business purposes. There is no case made out by the revenue that expenses are not properly vouched. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Tribunal in assessee s own case for the assessment year 2000- 01 in ITA No.931/M/04 dated 14.1.2011 in which the Tribunal following the decision of the Special Bench of the Tribunal in the case of DCIT (Intl. Taxation) vs. Bank of Bahrain Kuwait (41 SOT 290) has allowed the claim of the assessee. The assessee had made the claim as per the method of accounting and as per FEDAI guidelines which is allowable. We, therefore, respectfully following the decision of the Tribunal in assessee s own case in assessment year 2000-01 (supra), set aside the order of CIT(A) on this point and allow the claim of the assessee. 6. The fifth dispute which again relates only to assessment year 1999-00 is regarding reduction of claim of bad debt under section 36(1)(vii) from Rs.44,95,22,581/- to Rs.34,76,45,118/-. The claim of bad debt is allowable under the provisions of section 36(1)(vii) as per which any bad debt or part thereof which is irrecoverable is allowable as deduction. The provisions of bad debt relating to banks are contained in clause (viia) and, in case of foreign banks, clause (viia)(b) is applicable as per which the amount not exceeding 5% of total income computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iia)(b) in respect of any provision for bad and doubtful debts made by- (a) [Not relevant for our purposes] (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A); 6. On a careful analysis of these provisions, it is immediately clear that the deduction s. 36(1)(vii), so far as a foreign bank is concerned, is only supplemental in nature inasmuch as it comes to the play only when, and is admissible to the extent, the provision for bad and doubtful debts allowed under s. 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable. Learned Departmental Representative, however, contends that the expression used in sub-s. 36(1)(vii) being the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause , it is not material as to what was the actual deduction under s. 36(1)(viia) allowed by the Revenue, but as long as the bad debt is less than the total credit balance in the provision account, deduction under s. 36(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (6,41,77,764 + 40,48,390 = 6,82,26,154) which should have been then Rs. 34,11,307. The inconsistency has arisen because the AO computed the admissible deduction under s. 36(1)(viia)(b) even before computing deduction under s. 36(1)(vii) because he wanted to restrict the deduction under s. 36(1)(vii) on the basis of deduction permissible for the current year under s. 36(1)(viia)(b). This methodology adopted by the AO is inherently contrary to the scheme of the Act, and is, in our humble understanding, bound to give results which fail the equation. We are, therefore, of the opinion that the CIT(A) indeed erred in upholding the action of the AO in taking into account the admissible deduction under s. 36(1)(viia)(b) for the relevant previous year, for computing shortfall for the purpose of s. 36(1) (vii) of the Act. As for the learned CIT(A) s reliance on Hon ble Punjab Haryana High Court s judgment in the case of Nandlal Sohanlal vs. CIT 1978 CTR (P H)(FB) 5 : (1977) 110 ITR 170 (P H)(FB) suffice to mention that, in our considered view, the view canvassed by the Revenue is not a correct or acceptable view of the matter. We, therefore, reject the same as an untenable view and decli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld, the assessee will get undue benefit in the first year of operations, because, on one hand, the assessee will be entitled to an ad hoc claim on the basis of taxable business income and, on the other hand, such an ad hoc claim will not be set off in deduction for actual bad debts. According to the learned Departmental Representative, this incongruity will end up in a situation that the assessee will get deduction for more than actual bad debts something which is clearly contrary to the scheme of the Act and patently absurd. 9. There are two aspects to this issue. In the first place, the ad hoc deduction under s. 36(1)(viia) (b) being the last item on the computation of taxable business profits, it cannot be taken into account at the time of allowing deduction under s 36(1)(vii), and, to that extent, the actual deduction attributable to bad debts [i.e. 36(1)(vii) plus 36)(1)(vii)(b)] will indeed be more than the actual bad debts in that year However, since the provision so allowed under s 36(1)(viia)(b) is be taken into account while allowing deduction for actual bad debts in the subsequent year, the effect of excess deduction, if any, will be squared up in that subse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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