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TMI Blog2014 (1) TMI 1586X X X X Extracts X X X X X X X X Extracts X X X X ..... led to the benefit of Section 37(1) of the Act - The claim of the assessee for depreciation on the basis of diminution of value of the capital asset or even loss sustained in the business would not be appropriate - The assessee would be entitled to the claim as expenditure incurred in the business because the entire amount was invested as commercial expediency with the intention of preserving their goodwill in the business - Decided in favour of assessee. - Income Tax Appeal No. 1397,1416 of 2006 & Income Tax Appeal No. 723,834 of 2007 - - - Dated:- 12-11-2013 - N Kumar And Rathnakala, JJ. For the Appellant : Sri G Sarangan Sr. Counsel for Sri S Parthasarathi, Adv. Sri K V Aravind, Adv For the Respondent : Sri E R Indrakumar Sr. Counsel for Sri. E I Sanmathi, Adv. Sri K S Ramabhadran, Adv. JUDGEMENT :- PER : N Kumar, J All these four appeals are taken up for consideration together as common question of law is involved. 2. The assessee Canara Bank is a Nationalized Bank carrying on banking business. It filed its return of income for the assessment year 2000-01 on 29.11.2000 declaring total income of Rs.143,56,29,680/- and claiming refund of Rs.44,34, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: (9) Canstar The Canstar units purchased during the year ended 31.3.1998 by the bank constitute our current investments. Like any other Investments we had claimed depreciation of Rs. 232.42 crore on these units in our Income Tax return for the above year. As the Government had permitted us to write off the depreciation on these units out of the Capital contribution of Rs. 600 crore made by it, we had submitted our claim in the return of Income without reckoning for arriving at taxable Income. For the Assessment Year 2001-02, as the entire CANSTAR units have been redeemed, there has been loss of ₹ 95.21 crore for which we have submitted our claim as business loss under Part V in the Return of Income and not reckoned for Computation of Income. It may be submitted that our claim for deduction is fully allowable either under section 37(1) or under 28(i) of the Act. Under Section 37(1) of the Act, an assessee is entitled to deduct any expenditure laid out or expended wholly and exclusively for the purposes of the business. Considering the scope of the expression for the purposes of the business or profession , in its decision in the case of CIT v. Malayalam Pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments of the bank as contested by the department. 7. In the appeal before the Commissioner of Income Tax, in support of their claim, the assessee in the note appended to the return of income for the assessment year 2001-02, in support of the claim for deduction, has stated as under: During the financial year 1997-98, the bank had purchased CANSTAR units of CANSTAR scheme of Canbank Mutual fund from unit holders at Rs.23/- the assured purchase price as the Mutual Fund was unable to fulfill its commitment. As a commercial expediency the bank has purchased these units from the unit holders in order to gain the goodwill and confidence of the public. As at 31.3.1998 due to valuation of these units it resulted in depreciation amounting to Rs.2,32,42,42,100/-. As the depreciation is on account of valuation of the investments of the bank like other investments, we were eligible for deduction of the same from our taxable income. However, the Assessing Officer had not allowed our claim of depreciation on the contention that the units were purchased by the Bank only as an investment and the same cannot be treated as Stock in Trade. Against the Orders of the Assessing Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r scheme was not evolved in the present year. So an adverse inference is called for against the appellant. In view of the above the AO s action in not allowing the diminution in the value of Canstar units as deduction is upheld and no interference is called for. 9. Therefore, for the assessment year 2001-02, the assessee s claim for deduction of Rs.95.22 crores claimed as loss was rejected. Aggrieved by the said order, the assessee preferred an appeal before the Tribunal. The Tribunal by detailed order held that the Canbank Mutual Fund being a separate entity, the loss suffered on redemption or for protecting Canbank Mutual Fund cannot be said to be incurred while running the banking business and therefore, is not allowable. Further, it also held that the loss of Rs.499.05 crores + 95.22 crores is not suffered in the year. Since the element of Rs.23/- included Rs.10/- face value also, which is initial deposit made by the unit holders, it is necessary to set off the capital amount and it is only the element of Rs.13/- that requires to be considered. The element of Rs.13/- is not the interest payable for the assessment year in entirety. It is payable on completion of six year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is incurred in earning the dividend income, the gross income would become the net income. Thus, there is no scope for any estimation being made or any amount being deducted as notional expenditure. 12. In the instant case, facts set out above demonstrates the income is derived by the dividends u/s. 10[33] of the Act and interest on tax free bonds u/s. 10[15][h] of the Act and interest on long term finance to infrastructure companies u/s. 10[23G] of the Act. In other words, the persons with whom the amounts are invested by the assessee are crediting the aforesaid amount to the assessee s account by way of a bank transfer. Therefore, no human agency is involved in collecting these dividends and interest for which the assessee has to incur any expenditure. This is the consequence of computerization, online transaction through NEFT[National Electronic Fund Transfer], RTGS [Real Time Gross Settlement] and also DEMAT Accounts. The assessing authority should take note of these developments in deciding whether any expenditure is incurred in earning the said income. The discussion by the assessing authority clearly demonstrates these aspects has not been taken note of and the notional exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and in fact, the Tribunal has gone in a tangent and has denied the relief to the assessee. Therefore, he submitted that these orders require to be set aside. 14. Per contra, learned Counsel appearing for the Revenue contended that, as the assessee and Canbank Mutual Fund are distinct legal entities, there was no obligation cast upon the assessee to go to the rescue of the mutual fund. It is not done in the course of the business and therefore, they are not entitled to any benefit either as depreciation or as loss or as an expenditure. Even otherwise, he submits that the units were purchased at Rs.23/- per unit, out of which, Rs.13/- was the interest payable, even if they pay the said interest and therefore, are entitled to the benefit of disallowance as an expenditure, they cannot claim the said benefit for the entire Rs.23/- as either Rs.10/- continued or they could claim the same from the Mutual Fund. It is in this context, the authorities have clearly held that the said loss is not per year, but it is roughly for about 6 years and therefore, the assessee would be entitled to the benefit of 1/6th of Rs.13/- and nothing more and therefore, he submits that no case for interfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribute to the scheme at the initial stage. In other words, no investment was made by the Bank in the scheme initially. Money so raised by the mutual fund was invested in securities, shares and other fiscal instruments. On the date of maturity, the maturity value of CANSTAR Unit was to be paid to the investors. The scheme also provided for a declaration of an annual income distribution of not less than 12.5% in a year. The said return was not payable but was to be ploughed back on investments. This high fixed assured return for the investment was the specialty of the scheme. Substantial sums had been collected even from institutional investors. One such institutional investor was Oil and Natural Gas Commission (ONGC) which had purchased 5.4 crore units of the face value of Rs.54 crores. The Scheme over the years could not generate an income which would yield 12.5% annually. Operations were poor for number of reasons beyond the control of Mutual Fund. Each of the schemes floated by the Mutual Fund including CANSTAR units was self-contained and in water tight compartments. Thus, no consolidated fund was being operated for all the schemes. Diversion of funds thus from one scheme to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may contact the nearest branch of Canara Bank for a copy of the said letter for the purpose of sale of their Canstar units . 18. The said decision was taken in pursuance to the pressures brought in by the Finance Ministry, Reserve Bank of India, SEBI and the imminent threat of SEBI to debar Canara Bank from dealing in Capital Market forced the bank to take a decision to bail out CANSTAR scheme. The controversy was affecting the name and reputation of the Bank and consequently threatening to erode the goodwill of the customers which it had earned over the years. Such erosion of goodwill would have affected the business. Thus, from the point of view of commercial expediency the bank decided to repurchase the units at the applicable committed price of Rs.23/- per unit despite NAV being Rs.10/- only. The Department including the Tribunal has treated the transaction of re-purchase of CANSTAR units as capital investment. The scheme had run nearly 5-6 years when the bank stepped into bail out the scheme. The scheme was to run for the balance period of 4 years. That being so, it cannot be treated as capital investments much less permanent investment. The said investment was in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. 21. The Apex Court in the case of Sassoon J. David Co.P.Ltd. vs- Commissioner of Income-Tax, Bombay reported in ITR 1979 Vol.118 = (2002-TII-36-SC-INTL) page 261, at page 275 has held as under: . . . . the expression wholly and exclusively used in s.10(2)(xv) of the Act does not mean necessarily . Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. It is relevant to refer at this stage to the legislative history of s.37 of the I.T. Act, 1961, which corresponds to s.10(2)(xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the necessity of the expenditure as a condition for claiming deduction under s.37. Section 37(1) in the Bill read any expenditure .. laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed . . The introduction of the word necessarily in the above section resulted in public protest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. Expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s.10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s.10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. In deciding whether a payment of maney is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party . The only limitation is found in Explanation, which was inse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r purpose and the assessee is entitled to the benefit of Section 37 of the Act. It is well settled that in every case, it is a question of fact whether the expenditure were expended wholly and exclusively for the purpose of trade or business of the assessee and therefore, keeping in mind the aforesaid principles, the same has to be applied to the facts of the particular case and then we are to come to the conclusion whether the assessee is entitled to the benefit or not. 25. In the instant case, the undisputed facts are: The assessee is a nationalized Bank. It has acquired goodwill and name in the financial sector. It is to give effect to the Government policy, they set up a mutual fund as a Trust and acted as a principal Trustee. The mutual fund also bears the name CANBANK Mutual Fund Trust. The Management of the said Trust was entrusted to CANBANK Investment Management Services Limited. Therefore, the trade name finds a place even in that Company. The Scheme, which they formulated, was given the name CANSTAR. Again the name of the assessee is predominantly mentioned in the scheme also. The assessee except contributing a sum of Rs.1,00,000/- at the stage of formation of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee knew in law they are not liable to pay these unit holders but to mitigate the hardship of these investors, as a gesture of goodwill and in reality to preserve the goodwill of the assessee, they came forward to purchase these units at the agreed price of Rs.23/- though the face value and NAV on the date of purchase was only Rs.10/-. The expenditure incurred by the assessee for the purchase of these units was not prohibited by law or it is an offence under any law. Similarly, it was not purchased for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business. On the contrary, as the assessee is in the business of banking, having branches all over country and continues to carry on the business of banking, in order to preserve their fair name in the society, they came forward to purchase the shares with the sole object of mitigating the hardship caused to the public investors in their mutual fund company. The object was not to evade payment of tax nor was there any other oblique motive behind this purchase. They had to protect the Goodwill in the name CAN Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the facts of the case as was submitted by the assessee, even before the CIT(A), the claim of the assessee is in fact alternative to its claim of depreciation with regard to the said units. The assessee had shown the units to the extent of its investment as purchases and had claimed depreciation in some years, shown sales of certain units and shown appreciation in certain years. It is when the depreciation claim is not allowed, then the claim of the assessee to the extent of Rs.499.05 crores is as under: If depreciation claim is not allowed (Rs.in crores) Asst. Year Particulars Amount 1998-99 Purchases 972.12 1999-00 Purchases 20.96 2000-01 Purchases 5.63 2001-02 Purchases 0.45 Total 999.16 Less: 1998-99 Sales 0.18 1999-00 Sales 0.88 2000-01 Sales 0.00 2001-02 Sales 499.05 Total 500.11 Loss 499.05 27. In view of what is stated above, it would be appropriate to look at al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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